Home > Uncategorized > Trump’s trade war with China is waged to make the rich richer

Trump’s trade war with China is waged to make the rich richer

from Dean Baker

Donald Trump seems determined to double down and keep pressing forward on his trade war with China. He promises more and higher tariffs, apparently not realizing that U.S. consumers are the ones paying these taxes — not China’s government or corporations.

While tariffs clearly impose a cost on people in the United States, this cost could be justified as a weapon to change a trading partner’s harmful practices. During his campaign, Trump pledged to wage a trade war with China over its currency policy. He said he would declare China a “currency manipulator” on day one of his administration, putting pressure on China to raise the value of its currency against the dollar.

The value of China’s currency matters, since it determines the relative price of goods and services produced in China and the United States. Ordinarily, the currency of a rapidly growing country with a large trade surplus like China would be expected to rise against the currency of a country with a large trade deficit like the United States. However, China’s government intervened in currency markets to keep its currency from rising, thereby keeping down the price of China’s goods and services.

This was ostensibly the behavior that Trump was determined to change in his China trade war. But now that we are in the war, the currency issue has largely disappeared from the conversation. According to the published accounts, the big issue is over China’s respect for the intellectual property claims (i.e., patent and copyrights) of U.S. corporations.

The most bizarre aspect of this turn is that Trump’s demands in this area have the support of economists and commentators across the political spectrum. We repeatedly hear the line that we have to stop China’s theft of “our” intellectual property.

The problem with this argument is that it is not “our” intellectual property that Trump is protecting. After all, very few people have any patents or copyrights that we are worried about China using without compensation.

The intellectual property that Trump and his allies across the political spectrum want to protect belongs to major corporations like Boeing, Pfizer and Microsoft. Their goal is to make China pay more money to get access to technology these companies have developed. That’s great for their profits — sort of like Trump’s tax cut — but does not help the vast majority of people who do not own lots of stock in these companies.

In fact, if China has to pay more money to these corporations for their technology, it is likely to hurt most U.S. workers for several different reasons.

First, if companies like Boeing and General Electric don’t have to worry about being forced to transfer technology to Chinese companies when they outsource to China, they will have more incentive to outsource to China. That’s about as straightforward as it gets.

Second, the more money that China has to pay for the technology of U.S. companies, the less money they have to pay for other exports from the United States. This means that we will have a larger trade deficit in everything other than technology.

In the same vein, this is yet another policy the U.S. government is pursuing that will increase inequality. If we increase the returns to various technology sectors, then we expect that the highly educated people doing this work will see their pay rise relative to everyone else. As is more generally the case, it is not technology that creates this inequality in wages, it is the policy on inequality.

There is an argument that we should not allow China to just take, at no cost, the technology that we spent hundreds of billions of dollars to develop. That is a reasonable argument, but that hardly implies that we need to force them to respect patent and copyright protection.

We need to ensure that China and other countries share in the cost of developing new technologies. There are far more modern and efficient mechanisms than patent monopolies, which are a relic of the medieval guild system. While negotiating sharing mechanisms may be a difficult process, it is no more difficult than preserving the patent system. President Obama likely would have had the Trans-Pacific Partnership completed and approved by Congress before he left office if it had not been for haggling over terms of drug patent-related protections.

It is also important to recognize that we will likely have far more to gain from having access to China’s technology than the other way around. China is already far and away the global leader in clean technologies, with as much installed solar and wind energy as the rest of the world combined, and an electric car industry that now produces as many cars as all other countries put together.

China currently spends roughly the same share of its GDP on research and development as the United States. Its economy is already 25 percent larger than the U.S. economy and will be more than twice as large in less than a decade. Rather than focusing on bottling up U.S. technology, a forward-thinking trade agenda would be focused on ensuring our access to Chinese technology.

Unfortunately, trade policy is not crafted in the national interest, it is crafted with the goal of making the rich richer. This is what Trump’s trade war is all about. And, as is the case with so many other wars, it is about working-class people being forced to sacrifice by paying high tariffs to advance the goals of the rich.

See article on original site

  1. Rob
    May 21, 2019 at 12:52 pm

    However, China’s government intervened in currency markets to keep its currency from rising, thereby keeping down the price of China’s goods and services. This was ostensibly the behavior that Trump was determined to change in his China trade war. But now that we are in the war, the currency issue has largely disappeared from the conversation.

    Dean the data is out there; you are writing about it, why not include the data. I read in the news that when Trump was making these claims the they were not at the time manipulating their currency, making his threat contextually silly. Is that true? You are the economist. C’mon, give some context.

  2. May 21, 2019 at 5:34 pm

    Sorry, I have to disagree with this article.

    “apparently not realizing that U.S. consumers are the ones paying these taxes”

    This is nothing more than a neoliberal, right-wing talking point, in the same class of ideas as Mankiw’s famous “efficiency increases are the only thing that can ever grow an economy”. The truth is that the cost of a tariff is split between the consumers, the workers, and the owners and determining how much of the burden goes to each of these requires some very difficult analysis. To understand the simple version, notice that if the market supported current demand quantity at current cost plus tariffs then the market would already be offering that price.

    “However, China’s government intervened in currency markets to keep its currency from rising, thereby keeping down the price of China’s goods and services.”

    I would agree with this with a caveat. My understanding is that the crucial ingredient of China’s currency manipulation is not really the standard “country buys foreign currency in opposition to normal supply and demand forces”. George Soros showed the folly of this in his famous raid on the bank of England. They buy currency, but they do it in a way that works naturally with supply and demand forces. The crucial ingredient is a required exchange of their exporting companies’ dollar profits for local currency at the official exchange rates. Once this is done, a weak currency is the natural free market result and there is no huge “short” player willing to bet against you based on imbalance.

    “The problem with this argument is that it is not “our” intellectual property that Trump is protecting.”

    Actually it is. The strength of our currency and our nation is the wealth that can be generated from our productivity and our treasury guarantee is the tax that can be levied against that wealth. The fact that we are too stupid to tax that wealth doesn’t change the fact that we have significant national assets. Of course, we have to keep our taxes on that wealth lower than the tariffs we charge if they move their HQ to the Bahamas and export to our rich customer base.

    “First, if companies like Boeing and General Electric don’t have to worry about being forced to transfer technology to Chinese companies when they outsource to China, they will have more incentive to outsource to China. That’s about as straightforward as it gets.”

    That is actually not straightforward at all. If they have better IP protection for their Chinese subsidiaries, but then have to pay a tariff on each component or good that enters the US, then that is a positive and negative incentive for outsourcing wrapped up together. So, which is bigger? It is extremely difficult to measure or to analyze the situation in the context of trade with China, but here is a little hint. They can make the IP issue but not the tariffs problem go away by simply swapping out another developing nation for China that we already have this sort of relationship with.

    “It is also important to recognize that we will likely have far more to gain from having access to China’s technology than the other way around. China is already far and away the global leader in clean technologies, with as much installed solar and wind energy as the rest of the world combined, and an electric car industry that now produces as many cars as all other countries put together.”

    And this helps us how? Are we going to offer them dollar an hour workers to build these technologies in exchange for their IP? I strongly recommend you read the discussion of England vs Scotland in “Free trade doesn’t work” when the high technology of the day was textiles.

    “Rather than focusing on bottling up U.S. technology, a forward-thinking trade agenda would be focused on ensuring our access to Chinese technology.”

    Again, this is crazy talk. Fundamentally economic activity, at its roots, is the combination of a “making habit” with a “buying habit”. To generate the “making habit” you *have to have* economic incentives that make taxes for local companies that sell to local consumers be lower than taxes that foreign companies pay for access to the local consumers. To generate the “buying habit” you have to have enough of the profits of local consumption cycle back to consumers to make increases in sales in the next cycle possible. What you are talking about is giving up our “making habit” to china in the hope that some of that prosperity will somehow “trickle down” back to the US.

    “Unfortunately, trade policy is not crafted in the national interest, it is crafted with the goal of making the rich richer.”

    This requires context.

    “Making the US rich richer at the expense of China” —>> useful.

    “Giving the US rich free access to our consumer market to get richer even if they move to China” —>> not so much.

  3. Patrick Newman
    May 22, 2019 at 10:10 am

    The longer view about the short-sightedness of Trump is that China does not need the USA market or technology. China has a potential internal advanced market of 1.3bn consumers. The USA it’s 360M – do the maths! How long do you think it will take the Chinese to produce their own Android equivalent – a year, six months?

  4. Yok
    May 23, 2019 at 8:12 pm

    Of course: tariffs raise the cost to consumers. But if the flow of tariff money is directed back into the economy, as in direct and indirect subsidies to those very businesses competing, then we can expect a rejuvenation in manufacturing and industry, more jobs, and greater overall domestic production and consumption. Face it – tariffs can be a boon to an economy. History shows us that. Maybe that’s why employment here continues to rise.

  5. Ken Zimmerman
    June 3, 2019 at 11:07 am

    Jeff1089, I can’t agree with many of your positions. First, every consumer is more than a consumer. Some are also workers. Some are also owners. So, yes, the cost of tariffs is split between the consumers, the workers, and the owners. Most consumers, however, don’t have a large ownership position to fall back on. These consumers are just ordinary workers. I submit to you that consumer-workers are hardest hit by trade tariffs. As if someone in the White House didn’t tell Trump this. Since his expertise is hurting people, particularly those with the least means to fight back, Trump may even have figured it out on his own. Second, since there really are no “official” exchange rates anymore, if the economists I read on the web are correct, then what rate do the Chinese use? Third, it’s not the total of US national wealth that’s my concern. It’s the need to increase the level of taxation of that wealth progressively and the need to ensure that the income generated from that wealth is distributed in accordance with a national consensus that concern me. Fourth, assuming American companies in China already will be allowed to leave. And why would Chinese subsidiaries have better IP protection? China’s policy seems to be the opposite. Forcefully so. What “developing” nation would accept American subsidiaries moving out of China after these nations have had a long, private talk with Chinese representatives? Fifth, seems pretty simple to me. The US can trade for Chinese technology, particularly in areas like EVs. Then using that technology and the US industrial base build EVs incorporating Chinese technology. On EVs Chinese and American technologies have different but complementary strengths. Seems like a good situation for trade. Actually, I think Dean is saying just the opposite. The US can “make” better products by combining its and China’s technologies in the areas where emerging and needed new technologies are concerned. Such as renewable energy, EVs, and microgrids. China is making deals around the world on such technologies. Unless the US wants to be forced to re-invent technologies China is already perfecting, it needs mutually beneficial deals with China. Since the end of WWII there has been only one economic and technological powerhouse in the world, the US. Now China is eclipsing the US in both areas. To stop this happening the US needs to negotiate compromises with China in any sort of technological, informational areas possible, while at the same time keeping China at arm’s length in military and security areas. Not a new cold war, but a relationship of mutual respect and defined limits on each of the partners.

  6. Craig
    June 3, 2019 at 5:09 pm

    The problem with Trump’s or anyone else’s trade war is twofold. It’s both dis-integrative and old paradigm. The current/old paradigm is a power struggle while the new paradigm evolves and changes the game in a way that all nations can benefit. The old paradigm is internationalist, the new is integratively empowering of each nation state.

    Trump and other anti-wisdom advocates like Steve Bannon believe in disruption, chaos and collapse and that god or somebody will sort it all out afterward. No! Wisdom is the integration of truths, workabilities, applicabilities and highest ethical considerations in opposing perspectives with the intent of creating a separate thirdness greater oneness. Wisdom is both philosophy and policy, thought and action. Trump and Bannon have no real thought and their actions are merely bashing ideas and norms and hoping something positive comes of it. Most posters here and most economists and economic pundits have lots of good thinking and virtually no acting, most probably because they see no policy insight that truly enlightens and shows the way forward to positive problem solving change.

    Abundantly Direct and Reciprocal Monetary GIFTING emphasis GiftING. Think about it, about all of the problems it resolves, how beneficial it would be for all agents, how it could end the financial and structural barriers to eco-sanity. When in doubt integrate…and keep on integrating.

  7. June 18, 2019 at 1:11 pm

    China is currently the biggest holder of U.S. government debt. It currently owns $1.12 trillion in U.S. Treasury bonds. You can find out more about this massive trade war by just visiting on this site.
    https://www.smilingcanada.ca/chinas-nuclear-option-in-trumps-trade-war-explained/

    • Ken Zimmerman
      June 19, 2019 at 2:05 am

      China is the largest foreign nation holder of US debt. The largest, as has been the case for decades is, in descending order, US individuals and institutions (33.5%), US Social Security Trust Fund (14.3%), US Federal Reserve (12.7%), US Civil Service Retirement Fund (4.5%), US Military Retirement Fund (3%), All other foreign nations (14.7%), Japan (5.8%), China and Hong Kong (6.9%), all other (4.6%). If we count only US debt not owned by government divisions, then US individuals and institutions (55.9%), China and Hong Kong (9.5%), Japan (8%), and All other foreign nations (26.6%). China has certainly increased its purchase of US treasuries over the last 30 years. But it’s still a minority not much larger than Japan. The trade war between China and the US was fairly routine till Trump got involved. It involved all the actions that up and coming industrial-technological nations take to get bigger and all the push back of the already big nations to stop them. Then Trump implemented the one trade policy he had heard of and could implement without Congressional approval, tariffs.

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