Tuesday, December 17, 2019

How Trump lost his trade war

By Paul Krugman


17 December, 2019

Trade wars rarely have victors. They do, however, sometimes have losers. And United States President Donald Trump has definitely turned out to be a loser.

Of course, that’s not the way he and his team are portraying the tentative deal they’ve struck with China, which they’re claiming as a triumph. The reality is that the Trump administration achieved almost none of its goals; it has basically declared victory while going into headlong retreat.

And the Chinese know it. As The New York Times reports, Chinese officials are “jubilant and even incredulous” at the success of their hard-line negotiating strategy.

To understand what just went down, you need to ask what Mr Trump and company were trying to accomplish with their tariffs, and how that compares with what really happened.

First and foremost, Mr Trump wanted to slash the US trade deficit. Economists more or less unanimously consider this the wrong objective, but in Mr Trump’s mind countries win when they sell more than they buy, and nobody is going to convince him otherwise.

So it’s remarkable to note that the trade deficit has risen, not fallen, on Trump’s watch, from US$544 billion in 2016 to US$691 billion in the 12 months ending in October.

And what Mr Trump wanted in particular was to close the trade deficit in manufactured goods; despite giving lip service to “great Patriot Farmers,” it’s clear that he actually has contempt for agricultural exports.

Last summer, complaining about the US trade relationship with Japan, he sneered: “We send them wheat. Wheat. That’s not a good deal.”

So now we appear to have a trade deal with China whose main substantive element is … a promise to buy more US farm goods.

Mr Trump’s team also wanted to put the brakes on China’s drive to establish itself as the world’s economic superpower. “China is basically trying to steal the future,” declared Peter Navarro, a top trade adviser, a year ago.

But the new deal, while it includes some promises to protect intellectual property, leaves the core of China’s industrial strategy — what’s been called the “vast web of subsidies that has fuelled the global rise of many Chinese companies” — untouched.

So why did Mr Trump wimp out on trade?

At a broad level, the answer is that he was suffering from delusions of grandeur.

America was never going to succeed in bullying a huge, proud nation whose economy is already, by some measures, larger than ours — especially while simultaneously alienating other advanced economies that might have joined us in pressuring China to change some of its economic policies.

At a more granular level, none of the pieces of Mr Trump's trade strategy have worked as promised.

Although Mr Trump has repeatedly insisted that China is paying his tariffs, the facts say otherwise: Chinese export prices haven’t gone down, which means that the tariffs are falling on US consumers and companies.

And the bite on consumers would have gone up substantially if Mr Trump hadn’t called off the round of further tariff increases that had been scheduled for this past Sunday (Dec 15).

At the same time, Chinese retaliation has hit some US exporters, farmers in particular, hard.

And while Mr Trump may quietly hold farm exports in contempt, he needs those rural votes — votes that were being put at risk despite a farm bailout that has already cost more than twice as much as Barack Obama’s bailout of the auto industry.

Finally, uncertainty over tariff policy was clearly hurting manufacturing and business investment, even as overall economic growth remained solid.

So Mr Trump, as I said, basically declared victory and retreated.

Will Mr Trump’s trade defeat hurt him politically? Probably not. Many Americans will surely buy the spin, and the trade war was never popular anyway.

Furthermore, voting mostly reflects the economy’s direction, not its level — not whether things are good, but whether they’ve been getting better recently.

It may actually be good political strategy to do stupid things for a while, then stop doing them around a year before the election, which is a fair summary of Mr Trump’s trade actions.

There will, however, be longer-term costs to the trade war. For one thing, the business uncertainty created by Mr Trump’s capriciousness won’t go away; he is, after all, a master of the art of the broken deal.

Beyond that, Mr Trump’s trade antics have damaged America’s reputation.

On one side, our allies have learned not to trust us. We have, after all, become the kind of country that suddenly slaps tariffs on Canada — Canada! — on obviously spurious claims that we’re protecting national security.

On the other side, our rivals have learned not to fear us. Like the North Koreans, who flattered Mr Trump but kept on building nukes, the Chinese have taken Mr Trump’s measure. They now know that he talks loudly but carries a small stick, and backs down when confronted in ways that might hurt him politically.
These things matter.

Having a leader who is neither trusted by our erstwhile friends nor feared by our foreign rivals reduces our global influence in ways we’re just starting to see. Mr Trump’s trade war didn’t achieve any of its goals, but it did succeed in making America weak again. 



Paul Krugman has been an opinion columnist at The New York Times since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography.

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