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    Trump is still not realizing that trade wars are plainly unwinnable

    July 2019

    Donald Trump’s declaration that “trade wars are good and easy to win” will surely go down in the history books as a classic utterance – but in my opinion not in a good way. Instead it will go alongside Dick Cheney’s prediction, on the eve of the Iraq War, that “we will, in fact, be welcomed as liberators”.

    That is, it will be used to illustrate the arrogance and ignorance that so often drives crucial policy decisions. For the reality is that Trump isn’t winning his trade wars.

    True, his tariffs have hurt China and other foreign economies. But they’ve hurt America too; economists of the New York Fed estimate that the average household will end up paying more than 1,000 US Dollar a year in higher prices. And there’s no hint that the tariffs are achieving Trump’s presumed goal, which is to pressure other countries into making significant policy changes. What, after all, is a trade war? Neither economists nor historians use the term for situations in which a country imposes tariffs for domestic political reasons, as the US routinely did until 1930s. No, it’s only a “trade war” if the goal of the tariffs is coercion – imposing pain on other countries to force them to change their policies in the favour of the US. And while the pain is real, the coercion just isn’t happening.

    All the tariffs Trump imposed on Canada and Mexico in an attempt to force a negotiation of the North American Free Trade Agreement led to a new agreement so similar to the old one that you need a magnifying glass to see the differences. And still, the new one may not even make it through US Congress. And at the recent Group of 20 summit, Trump agreed to a pause in the China trade war, holding off on new tariffs, in return, as far as we can tell, for some vaguely conciliatory language.

    But why are Trump’s trade wars failing?

    Mexico is a small economy next to a giant, so you might think – Trump in my opinion almost certainly did think – that it would be easy to browbeat. China is an economic superpower in its own right, but it sells far more to the US than it buys in return, which you might imagine makes it vulnerable to US pressure.

    So why can’t Trump impose his economic will?

    There are in my opinion, I’d argue, three reasons.

    First, the belief that the US can easily win trade wars which reflects the same kind of solipsism that has so disastrously warped the US-Iran policy. Too many Americans in positions of power seem in my opinion unable to grasp the reality that the US is not the only country with a distinctive culture, history, and identity, proud of their independence and extremely unwilling to make concessions that feel like giving in to foreign bullies.

    “Millions for defence but not one cent for tribute” isn’t a uniquely American sentiment. In particular, the idea that China of all nations will agree to a deal that looks like a humiliating capitulation to the US in my opinion is just crazy.

    Second, Trump’s “tariff men” are living in the past, completely out of touch with the realities of the modern economy. They talk nostalgically about the policies of William McKinley. But back then the question, “Where was this thing made?” generally had a simple answer. These days, almost every manufactured good is the product of a global value chain that crosses multiple national borders. This raises the stakes: US business was hysterical at the prospect of disrupting NAFTA, because so much of its production relies on Mexican inputs. It also scrambles the effects of tariffs: when you tax goods assembled in China but with many of the components from Korea or Japan, assembly doesn’t shift to America, it just moves to other Asian countries like Vietnam.

    Finally, Trump’s trade war is in my opinion unpopular – in fact, it polls remarkably poorly – and so is he and his family.

    This leaves him politically vulnerable to foreign retaliation. China may not buy as much from the US as it sells, but its agricultural market is crucial to farm-state voters Trump desperately needs to hold on to. So Trump’s vision of an easy trade victory is forcing into a political war of attrition that he, personally, is probably in my opinion less able to sustain than China’s leadership, even though China’s economy is feeling the pain.

    So how will this end?

    Trade wars almost never have clear victors, but they often leave long-lasting scars on the world economy. The light-trade tariffs the US imposed in 1964 in an unsuccessful effort to force Europe to buy US frozen chickens are still in place, 55 years later. Trump’s trade wars are vastly bigger than the trade wars of the past, but they’ll probably have the same result. No doubt Trump will try to spin some trivial foreign concessions as a great victory, but the actual result in my opinion will just be to make everyone poorer. At the same time, Trump’s casual trashing of past trade agreements has badly damaged American credibility, and weakened the international rule of law. Oh, and did I mention that McKinley’s tariffs were deeply unpopular, even at the time? In fact, in his final speech on the subject, McKinley offered what sounds like a direct response to – and rejection of – Trumpism, declaring that “commercial wars are unprofitable,” and calling for “goodwill and friendly trade relations”.

    To me, Trump’s politic is an absurdity but that seems not to be a handicap in the US these days. When the wind of change blows, some people build walls, others build windmills. Reality is a historical process – only the once who read history have a clear understanding of reality.