President Donald Trump is starting a trade war against China at the same that he's starting one against the countries the US needs help with against China. And he's doing this while also trying to undo sanctions on a Chinese company that bipartisan majorities in Congress think might be a real national security threat.
If any of that makes sense to you, odds are your last name is Trump.
For everyone else, though, it's difficult to discern any method to the madness that is Trump's trade policy. Indeed, he's alternated between announcing that he's instituting new tariffs and that he's putting them on hold, like a reality-TV show host trying to gin up ratings by keeping people guessing about what's going to happen next. Which, when you put it that way, actually makes more sense than anything else. Even then, however, we're still left with the question of why, other than maybe force of habit, Trump seems to be trying to run the global economy as if it were just a slightly more involved episode of "The Apprentice."
And the answer is that, against all evidence, he really does believe, as he's put it, that trade wars are good and easy to win - and that this is how you do it. In particular, Trump seems to think that the brewing confrontation with China, a country that really is doing abusive things like forcing foreign companies to transfer over technology, will be such a piece of cake that he doesn't need to enlist our allies in the fight, but can rather launch a simultaneous economic attack on them to try to make them end the very few tariffs they do have on things like our . . . dairy products? Actually, yes.
This is a strategy, if you want to call it that, born of three misconceptions. The first is that countries that buy more than they sell overseas have little to lose from a trade war. The idea is that it's easier for American consumers to switch over to buying non-Chinese goods than it is for Chinese companies to switch over to selling to non-American customers, therefore the Chinese will capitulate first.
Now, there's actually a kernel of truth to this, but only a kernel. An all-out trade war which, after Trump proposed putting tariffs on almost everything China exports to us, is what we're talking about here -- might hurt the US a little less than it would hurt China.
But it would still hurt a lot. It's not just that China could make life impossible for companies trying to do business over there; or even that, despite our trade deficit, the US still sell a lot of things to the Chinese that it no longer would sell to them after they put up even more retaliatory tariffs.
It's also that the US would be harmed by the country's very own tariffs in cases where its businesses are building things with parts they bought from China (economists Chad Brown, Eujin Jung and Zhiyao Lu estimate these kind of tariffs make up estimate make up half of the ones Trump has announced so far). In other cases the US would end having to pay higher prices for Chinese goods because there wouldn't be any ready-made American substitutes.
The real question, then, is whether a dictatorial government that can violently crush all dissent would give in before our democratic government would just because the former was facing a little more economic pain. The answer to this isn't obvious, no matter what Trump might think.
And that's why it would be nice to have Europe, Japan and Canada on our side in all of this. Without them also putting pressure on China with tariffs of their own, it's not clear that we'd be able to win the trench warfare that a tit-for-tat tariff fight could turn into. But we won't have that backup because of Trump's second mistake: He thinks that anything less than completely free trade is worth fighting over. Which, to use a technical term, is nuts.
Every country has a few politically sensitive products, usually in agriculture, that it uses high tariffs to protect. It simply isn't that big a deal - not when, as the World Bank points out, US exports as a whole only face average tariffs of 1.6 per cent in Europe, 1.4 per cent in Japan and 0.9 per cent in Canada. That's especially true when you consider that there are diminishing returns to cutting tariffs. One-hundred percent free trade, in other words, isn't worth getting rid of 99 per cent of free trade.
But Trump isn't likely to stop - because the biggest thing he gets wrong is that he thinks of trade as a zero-sum contest where the point is to sell more than we buy, and if we don't, it's ipso facto proof that things must be unfair. This is the kind of mercantilist mind-set that prevailed before people figured out that trade could make every country better off by letting them specialize in the things that, relatively speaking, they were better at.
More than that, though, this thinking betrays a profound ignorance of what even causes a trade deficit. It might seem like the US could narrow the deficit by just taxing imports more - wouldn't that make us buy fewer things from overseas and more from at home? But it wouldn't because the dollar would offset this by rising enough that the prices of imported goods would stay the same. That's because the US's current account deficit, which includes trade in both goods and services, is really the result of it needing to borrow money from the rest of the world. So if Trump wanted to do something about that, he'd have to make the US save more money as a country so that we would borrow less. Undoing his US$1.5 trillion tax cut for corporations, for example, would do just that.
But actually achieving his goals would make too much sense for Trump.