With President Trump threatening large-scale trade wars against multiple trading partners simultaneously, it’s time to explain, in terms of cause and effect, just why trade wars are terrible for the United States and world economies. With such threats, Trump risks plunging the whole world into a depression.
The entire global economy is integrated. With modern communications and rapid transport options, it cannot be otherwise. Goods and services, both raw materials and manufactured, flow across borders and become essential components of other goods and services, in an almost seamless web. The United States can no more be both self-sustaining and economically vibrant than it can fly its entire territory to the moon.
Wealth is created as economic activity increases, and is destroyed as activity decreases. Trump seems to believe in an 19th Century mercantilist system. But economics is not a zero sum game. For one nation to “win,” it is not necessary for another to “lose.” If the pace of activity speeds up, everybody wins. If it slows, everybody loses.
When Trump lays heavy tariffs on goods from China and Europe, here’s what happens: First, it is the American importer who directly pays the tariff. Not the Chinese, not the Europeans. This is incontrovertible. But what happens next? Well, either the importer eats the extra cost — meaning he has less money with which to pay workers, invest in new equipment, or buy other goods and services — or he passes the cost on to his consumers. They experience the tariff, in that case, as price inflation. And if they in turn use the goods as part of another business, they in turn pass the inflated price on to their consumers too. And so on. The American economy suffers bad ripple effects throughout.
Trump is trying to make the Chinese feel the heat. If their goods no longer sell so inexpensively, Americans may stop buying as many of them. Chinese suppliers suffer. Trump seems to think this is a good thing. He’s wrong.
If China’s economy slows down, the velocity of its trade with other nations also can slow down. Those other nations suffer too. Their economies falter. And, presto, suddenly they can afford to buy fewer goods and services from throughout this integrated world economy — including fewer goods and services from the United States. Guess who suffers then? Americans, just like everybody else.
Worse, if other nations retaliate by placing higher tariffs on American products, then our suppliers suffer the same way Chinese suppliers suffer from our tariffs. Again, the result tends toward the recessionary on our end.
Trump seems to think this is all a short-term game of chicken. If China “behaves” in order to avoid the tariffs, then he seems to think we “win.”
But why should China behave as Trump desires? Unlike Trump, Chairman Xi does not need to face reelection. As a dictator, he, not Trump, is the one with room to maneuver.
Meanwhile, as David Goldman brilliantly explained at PJ Media, China actually enjoys all sorts of economic advantages over us in terms of the ability to withstand a trade war: “China has 1.4 billion people and has a domestic market big enough to replace most of the demand lost in a trade war; China has become self-sufficient in virtually all the important technologies it needs to dominate high-tech manufacturing as well as advanced computation; Washington’s failure to dissuade its allies from buying Huawei’s 5G mobile broadband technology shows that China can’t be stopped.”
In sum, everybody loses in a trade war, but China loses less than we do.
As for trade wars with Europe or Mexico, those, too, would hurt U.S. interests, and they make even less sense. Trade wars with allies make them less willing to remain allies. Even as the world’s most powerful nation, the United States needs allies. To fight terrorists, contain Iran and Russia, and, yes, to unite diplomatically if needed against China itself, the U.S. cannot succeed alone. One-way sanctions, for example, merely drive our targets to other nations’ markets if those other nations won’t join the sanctions regime.
All in all, then, Trump’s trade wars are dangerously misguided. His hand is full of jokers, and China holds the trump cards.
