Nouriel Roubini, dubbed “Dr. Doom” during the Aughts for his prophetic warnings of a global financial crisis, takes to the The Guardian to warn of an incipient global trade “Cold War”:
The US blames China for the current tensions. Since joining the World Trade Organization in 2001, China has reaped the benefits of the global trading and investment system, while failing to meet its obligations and free riding on its rules. According to the US, China has gained an unfair advantage through intellectual property theft, forced technology transfers, subsidies for domestic firms and other instruments of state capitalism. At the same time, its government is becoming increasingly authoritarian, transforming China into an Orwellian surveillance state.
For their part, the Chinese suspect that the US’s real goal is to prevent them from rising any further or projecting legitimate power and influence abroad. In their view, it is only reasonable that the world’s second-largest economy (by GDP) would seek to expand its presence on the world stage. And leaders would argue that their regime has improved the material welfare of 1.4 billion Chinese far more than the west’s gridlocked political systems ever could.
Regardless of which side has the stronger argument, the escalation of economic, trade, technological, and geopolitical tensions may have been inevitable. What started as a trade war now threatens to escalate into a permanent state of mutual animosity. This is reflected in the Trump administration’s national security strategy, which deems China a strategic “competitor” that should be contained on all fronts.
The global consequences of a Sino-American cold war would be even more severe than those of the Cold War between the US and the Soviet Union. Whereas the Soviet Union was a declining power with a failing economic model, China will soon become the world’s largest economy, and will continue to grow from there. Moreover, the US and the Soviet Union traded very little with each other, whereas China is fully integrated in the global trading and investment system, and deeply intertwined with the US, in particular.
We have been in a trade war for nearly 40 years; until recently it has been in essence a rout with the U. S. yielding the field to competitors. A response from the United States is long overdue. The decline in jobs from 1980 to 1990 reflects competition with Japan. The decline in jobs since 1990 and, in particular, since 2000 when China was admitted to the WTO reflects competition with China.
However, let’s change the story that Dr. Roubini is telling. In the United States trade has been portrayed as having practically nothing but benefits for the people of the United States. The truth is more complicated. There are winners and losers. Who has benefited from the status quo ante? In my assessment
- The Chinese leadership
- The Chinese people
- American top management and other stockholders
- Ordinary Americans
in descending order of gain.
Consider the chart at the top of this post. It illustrates the change in vehicle prices over the years. If you cruise over to the Bureau of Labor Statistics, its CPI tells essentially the same story. Whether in nominal or real terms the price of vehicles has not collapsed. The most you can say is that they’ve been pretty flat. Said another way consumers are not capturing most of the economic benefit of trade. I could go through a litany of other goods and it would tell a similar story. Consumer prices are not collapsing, they are rarely even declining. The economies of cost that are being realized through trade are not being realized by consumers.
Adding fuel to the fire the great ignored factor is that trade has risks as well as rewards as this graph illustrates:
Most of those who have lost their jobs as a result of trade or, alternatively, been rehired in jobs that paid less, have been ordinary Americans.
My proposal is that rather than considering developments through the metaphor of trade war we should be thinking in terms of risk and reward and those who are dismayed at the prospect of the United States trying to change the trend of prices that aren’t falling but wages that are by rebalancing trade need to propose alternatives to restricting trade that would have that effect. I think that Chinese mercantilism tells us that there are no such policies that won’t meet counter-moves from the Chinese but I have an open mind.