Confusing the Lightning Bug With the Lightning

The Economist says that at least looking at the early returns, the U. S. is winning Trump’s trade war with China:

WHEN Donald Trump tweeted on August 5th that tariffs were working “big time”, American media sprang into action to test the claim (see article). In China, editors were more circumspect. No major Chinese-language newspaper reported his tweets. One of his claims—that China’s stockmarket has fallen 27% in the past four months—was an exaggeration. But why would any self-respecting propagandist in Beijing dwell on that? Chinese stocks have indeed fallen sharply (see chart), which officials do not wish to emphasise.

And this is just one of a series of awkward facts for China as its trade war with America deepens. The yuan is down 8% against the dollar since April, and near its weakest in more than a year. A shrinking trade surplus produced a current-account deficit in the first half of 2018, China’s first such gap in at least two decades. More broadly, China’s growth is slowing at a time when America’s economy is expanding at its fastest pace since 2014. No wonder Mr Trump feels that he is on the right path, and that Chinese investors are jittery.

Making matters worse for China is a whiplash effect. Until recently officials and executives believed their own declarations of technological prowess. Privately, advisers were confident that Mr Trump could be placated with promises to ramp up imports from America. Now both views look wanting. An agreement for China to buy more American natural gas and soyabeans collapsed in June. Chinese officials are keenly aware of vulnerabilities; had America maintained its sanctions on sales of semiconductors to ZTE, the Chinese telecoms giant might well have gone out of business. Those with a conspiratorial mindset see things in a darker light. “The Americans don’t want a deal. They want to screw us,” says a fund manager.

The asymmetry in the trade war is another uncomfortable fact. Since America buys far more from China than vice versa, America has more scope to impose tariffs. This imbalance, long discussed in theoretical terms, is close to becoming a hard reality. Mr Trump has instructed his trade team to consider 25% tariffs on $200bn of Chinese imports as early as September, taking the total affected by its tariffs to about $250bn, with room for twice that amount. China’s threatened retaliation, announced on August 3rd, will be tariffs on $60bn of American imports. This would take the total under its tariffs to $110bn, with little room for more.

I can make no claim to understanding President Trump’s thinking. His patterns of thought are completely alien to me but that has been true for the last three presidents. For all I know it may be true that Mr. Trump is looking at trade in the strictly zero-sum manner his critics allege and that has clearly been the assumption of China’s leaders but if so they’re missing the major impact of the tariffs.

Whether or not the the tariffs change the behavior of the Chinese, they will change the behavior of Americans. Americans will consume less. They might save more although rapidly increasing state and local taxes will quickly put an end to that for all but the richest Americans.

And those tariffs may encourage entrepeneurs to invest in American productive capacity rather than in Chinese productive capacity. That is what has been missing for the last several decades and what our economy needs. We cannot flourish as a country by being a nation solely of financiers, software designers, and health care workers with all of the builders and implementers living in China, India, Vietnam, etc. For all of us to flourish we need a broader as well as deeper economy and in my opinion that should be the objective of any policy.