October 18, 2019
(This post originally appeared on my Patreon page.)
Back in the late 1960s, when it was clear that the United States was losing in Vietnam, Vermont Senator George Aiken came up with the plan to declare victory and leave. It seems that Donald Trump has stolen the senator’s playbook.
While we don’t know much of the details of Trump’s partial deal with China, it seems almost certain that he has not won most of his demands. According to press accounts, China will commit to buy a large amount of U.S. agricultural products. This is a highly visible, but largely pointless victory for Trump.
All the major agricultural commodities, such as wheat, corn, soybeans, and beef, sell on massive world markets. If China commits to buying some amount from U.S. producers, for the most part, it will come at the expense of producers from other countries. It will not be an increase in world demand. This means that the displaced producers will be dumping their now surplus commodities on world markets, leaving the market price received by U.S. farmers little changed.
Anyhow, it was hardly a surprise to some of us that Trump would go the declare victory and leave route. My colleague at the Center for Economic and Policy Research, Mark Weisbrot, made exactly this prediction a couple of weeks ago, as did I, a few days earlier.
This outcome was easy to see. Trump could not care less about U.S.-China trade policy. He does care about not looking weak and he very much wants to be re-elected. The obvious answer is to say that he won. It doesn’t matter that he may have gotten almost nothing of what he demanded. His followers will believe him and when the media raise questions after seeing the deal, we all know the Trump response: FAKE NEWS.
Just as was the case with the U.S. in Vietnam, the trade war was not going well for Trump. Rather than going down, our overall trade deficit has been rising. This also has been the case with the countries that Trump designated as foes in his trade war.
In 2016, the last year of the Obama administration, the trade deficit was $518.8 billion, or 2.8 percent of GDP. The trade deficit expanded in both 2017 and 2018, reaching $638.2 billion in 2018, or 3.1 percent of GDP. It looks to come in slightly higher in 2019, with the deficit averaging $648.3 billion in the first half of 2019. This is clearly going the wrong way.
There are many factors behind the rise in the trade deficit. Growth in the US has been somewhat faster than in major trading partners like the EU and Japan. The dollar has also risen in value, although most of that rise predates Trump. But we know that Trump wouldn’t be interested in excuses, the bottom line is the trade deficit has gotten worse on his watch.
The story does not look any better if we look at his major nemeses. Starting with China, in the last year of the Obama administration, the trade deficit in goods with China was $346.8 billion. This had increased to $419.6 billion last year. It looks like the trade deficit is coming down somewhat in 2019, with the deficit for the first eight months at $231.6 billion, compared to over $260.0 billion in the same months last year. Nonetheless, we are still likely to end up with a higher deficit with China in 2019 than we had in the last year of the Obama administration.
It is also worth remembering that it is difficult to calculate bilateral trade deficits with rigor. Suppose that iPhones, which had previously been assembled in China, are instead assembled in Thailand. If we imported the iPhone from China, the full value of the iPhone would have been recorded as an import from China, even though the assembly may have counted for less than 10 percent of the value added.
When the assembly shifts to Thailand, the reduction in our reported imports from China is equal to the full cost of the iPhones that we previously imported from China. The actual hit to China is just the small share of the value added that is attributable to assembly.
It’s also worth noting that contrary to Trump’s claims, China is not paying for the tariffs. There is a very simple way to measure the extent to which suppliers in China have been forced to absorb tariffs in lower prices. We can look at the change in the price of our imports from China.
The Bureau of Labor Statistics publishes data on import prices monthly. In the year from September 2018 to September 2019, in which tariffs on many items have been raised to 25 percent, the price of items imported from China fell just 1.8 percent. This means that virtually all of the tariff is being paid either by consumers in the United States or being absorbed by retailers or wholesalers here.
If Trump’s battle with China is not going well, he seems to be doing even worse with other trade combatants. The trade deficit in goods with Mexico was $63.3 billion in 2016. It hit $80.7 billion last year and is virtually certain to come in even higher in 2019. The trade deficit in goods with the European Union was $146.7 billion in 2016. It had risen to $168.7 billion last year and is on a path to come in $10-$15 billion higher in 2019. The deficit with Canada rose from $11 billion in 2016 to $19.1 billion last year. It is likely to be roughly $1 billion higher in 2019.
In short, Trump is doing really awful in his trade war. It is as though after Pearl Harbor, Japan went on to seize Hawaii and was threatening California and the rest of the west coast.
But apart from the theater surrounding the trade deal, the rest of us should be happy that Trump is waving the white flag in his trade war. His agenda would have actually been negative for the vast majority of America’s workers.
While Trump does have a point in complaints about currency valuations, this issue has taken a back seat in his trade war, especially with China. Instead he has made demands about respecting the intellectual property of U.S. corporations front and center. This is an agenda that is detrimental to the interests of U.S. workers.
At the most basic level, if Boeing and GE know that they can outsource operations to China, and don’t have to worry about being forced to transfer technology to Chinese partners, they will be more likely to outsource jobs than if they do have to worry about being forced to transfer technology. Making it more profitable for U.S. corporations to outsource jobs is not in the interest of U.S. workers.
More generally, longer and stronger patent monopolies have been a major factor in the upward redistribution of income over the last four decades. They mean higher prices for items like prescription drugs, medical equipment, and software, and more money for the people who design these items. Only an economist can stand by and watch the U.S. make patent and copyright protections ever stronger and then wonder why we have an upward redistribution of income.
Perhaps even more importantly, the demand for stronger protections for the patents and copyrights of U.S. corporations is incredibly anachronistic in a world where China has an economy that is already 25 percent larger than the U.S. economy and is likely to be more than twice as large within a decade. With China spending roughly the same share of its GDP on research and development as the United States, it is virtually certain that it will have far more innovations that we want from them, than U.S. innovations they will want from us.
A forward thinking trade policy would look to pool research spending and make it open to all, especially in areas like prescription drugs and clean energy. We should want technology to advance as quickly as possible in these areas. And, once developed, we should want innovations to spread as widely as and quickly as possible.
Hopefully this will be the trade agenda of our next president, but Donald Trump’s trade agenda was going 180 degrees in the opposite direction. For this reason, his defeat by the Chinese in the trade war should be cause for celebration. This was Donald Trump’s trade war, not a trade war fought for to benefit the people of the United States.
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