American Consumers Are Paying for Trump’s Tariffs

February 20, 2020

Back in the 1960s, when it had become clear that the Vietnam War was an endless morass, Vermont senator George Aiken suggested that we declare victory and leave. Donald Trump would be well-advised to take Sen. Aiken’s sage advice in his trade war with China.

Trump initiated this trade war with confused and shifting goals. Throughout his presidential campaign he had been on a tirade against China over its “currency manipulation.” He promised that he would declare China a currency manipulator on Day One of his presidency.

Trump actually had a pretty good case on this issue. China bought up trillions of dollars of US assets in the first decade of the century, in a deliberate effort to keep down the value of its currency against the dollar. The lower value of the Chinese yuan meant that China’s goods and services were relatively cheaper, giving them an advantage in international trade. This was a big part of the soaring US trade deficit in that decade, costing the US millions of good-paying manufacturing jobs.

In the last decade, China has stopped buying up US assets, but it still holds more than $4 trillion worth of foreign assets. These huge holdings continue to keep down the value of the yuan against the dollar in the same way that the Federal Reserve Board’s holding of trillions of dollars of assets helps to keep down interest rates. For some reason, virtually all economists accept that the Fed’s holding of assets affects interest rates, yet they ignore how the same logic would apply to the value of the yuan against the dollar.

But this point is now moot in the trade war because Trump has essentially left currency values aside as an issue. His Phase One deal requires substantial Chinese purchases of US exports but does nothing to raise the value of the yuan against the dollar.

That is unfortunate because a higher valued yuan would alter market prices in a way that would reduce the US trade deficit. Instead, Trump is demanding that China’s government make purchases that are not justified on a market basis.

To get to this point, Trump imposed tens of billions of dollars in taxes on the American people in the form of tariffs on Chinese imports. Trump claims that China paid for these tariffs, but the data are very clear. Virtually all of the cost of these tariffs was borne by consumers or intermediaries in the United States.

If Trump declared victory now, he could eliminate the tariffs he imposed, in effect giving a tax break to consumers in an election year. And, this one doesn’t even have to go through Congress. Unfortunately, Trump seems determined to continue with his trade war, making a series of wrongheaded demands backed by a threat of more tariffs.

Everything about Trump’s trade war effort is confused. His central goal now appears to be getting China to show more respect for the patent and copyrights of US corporations.

At the most basic level, this is hardly in the interest of the US workers for whom Trump claims to be fighting this war. If Boeing or other multinationals don’t have to worry about being forced to transfer technology when they outsource jobs to China, then they will be more likely to outsource jobs to China.

More generally, US workers have no stake in protecting Microsoft’s copyrights or Pfizer’s patents. Rather than trying to have technology bottled up with these archaic protections, it would make much more sense to try to open up technology for all to benefit.

Going forward, the US will want more technology from China than China will want from the United States. China’s economy is already 30 percent larger than the US economy and it will be more than twice as large by the end of the decade. Furthermore, it spends the same share of GDP on research and development.

Ideally, we would be working out trade deals where we shared innovations in clean energy, conservation and biomedical research so that we can make progress in these areas as quickly as possible. But that sort of cooperation is way over the head of Donald Trump and his trade team.

Given his confusion on trade issues, and the likelihood that any further Trump offensives in the trade war will backfire, we would be best off if Trump just followed the advice of Sen. Aiken: declare victory and leave the trade war behind.

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