Economists’ tunnel vision in the current trade conflict: What does Trump really want?

Economists’ tunnel vision in the current trade conflict: What does Trump really want?

Commentary



Outside the White House, no one knows what Trump is really after. However, betting on Trump just being impulsive without any strategic aims might prove very costly in the end.

Economists and newspaper columnists have preached restraint in the recent trade dispute between the United States and the rest of the world. Do not retaliate quickly against Washington, they have urged, even if the Trump administration is blatantly violating the spirit, if not the letter, of world trade rules.

Instead, they argue, negotiations are the instrument of choice. After all, a trade conflict is hurting all parties, and a full-blown trade war might well end the current global upswing. Hence, there should be room for a win-win (or rather, no lose-no lose) negotiation solution. Give the Trump administration something which is valuable to it, and you can prevent damage to your economy.

Economists for Commerzbank, for example, urged the European Union to lower tariffs for passenger cars. China was recommended to make market access for US products easier. This would allow Donald Trump to publicly claim a victory without severe costs for the Europeans and call off the trade war.

In standard economic textbook models, this solution inherently makes sense: US producers would gain from being able to sell more easily abroad. In the EU and China, producers competing with imports from north America would be somewhat hurt, but this would be more than compensated by the gains of consumers, who would pay lower prices for American goods. Everyone could live happily ever after.

Yet, the question is whether standard economic textbook considerations are really behind Trump’s policy. If you read carefully the writings by Trump’s trade adviser, Peter Navarro, you will see that he is not arguing with standard economic models (see, for example, his recent op-ed in the Financial Times, “Donald Trump is standing up for American interests”).

Instead, Navarro is making the case that China’s economy has grown very rapidly in recent years, and that the country is trying to “capture emerging high-tech industries”. He explicitly singles out the “Made in China 2025” strategy under which the Chinese government wants to promote sectors such as artificial intelligence, robotics, and quantum computing to self-driving vehicles, automated machine tooling, and advanced medical devices.

With regard to the World Trade Organization, Trump and his team have repeatedly argued that they believed that the WTO is detrimental to the interests of the US (even though the US has won more cases than it has lost). Hence, it is not inconceivable that the Trump administration is toying with the idea of leaving the WTO, or at least crippling the organisation. The fact that they have blocked the nominations of judges to the appellate body is difficult to explain with standard textbook economic theory. Interestingly, Navarro recently dodged a question about whether the US might leave the WTO under the Trump administration.[1]

Both the aim to cripple the Chinese economy and the WTO are not completely irrational: There has long been talk of the coming geopolitical confrontation between China and the US. Many observers of China report that the Chinese leadership strongly believes in the country’s role as one of the global powers, if not the main power, of the 21st century. Delaying Chinese development would secure America’s dominant position for longer.

On the WTO, even standard economic theory comes to the conclusion that for large countries, not being bound by rules about when and how to implement tariffs can be beneficial. Introducing tariffs in markets for important import goods (such as steel in the case of the US) can change the world market price for these products and allow large countries to lower their import bill. While the US has in the past supported a rules-based global trading system with equal access, one could easily argue that the country could maximise its own narrow economic interest better if world trade were ruled by the right of the strongest.

The problem for China and the EU is that if these more strategic aims are behind Trump’s trade policy, negotiations might not get them very far. For China, policies to halt the country’s catch-up development are non-negotiable. And while the EU might also do better in a power-based world trading system than smaller independent countries, a demise of the WTO would fundamentally go against the EU’s stated interest in a rules-based global trading system with equal access for all.

Worse, if Trump’s goal is to cripple the Chinese economy and to destroy the WTO, any concessions in negotiations will only lead to the next round of provocations from Washington. Short-term economic gains will then only strengthen the administration’s resolve to further push for their strategic goals.

Of course, outside the White House, no one knows what Trump is really after. However, betting on Trump just being impulsive without any strategic aims might prove very costly in the end. After all, one should never underestimate one’s adversary.

 

Sebastian Dullien is a senior policy fellow at the European Council on Foreign Relations and a professor of International Economics at HTW Berlin, the University of Applied Sciences.

 

Footnotes


[1] Shelbourne , M. (2018, April 3rd). White House trade adviser dodges over US leaving World Trade Organization. Available at: http://thehill.com/homenews/administration/376633-white-house-trade-advisor-dodges-over-us-leaving-world-trade 

 

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