Who loses most from the U.S.-China trade war?

You are hearing claims, hints, implications, or outright statements that the full burden of the trade war is falling on American consumers.  (Maybe some of the commentators are too wrapped up in the “Trump’s action have no merits whatsoever” game?)  I strongly believe that is wrong, as outlined in my latest Bloomberg column.  Here is one bit:

…there are well-done studies showing that the recent tariffs have translated into higher prices for U.S. consumers. I am not contesting that research. The question is whether those studies give sufficient weight to all relevant variables for the longer run.

To see why the full picture is more complicated, let’s say the U.S. slaps tariffs on the industrial inputs (whether materials or labor) it is buying from China. It is easy to see the immediate chain of higher costs for the U.S. businesses translating into higher prices for U.S. consumers, and that is what the afore-mentioned studies are picking up. But keep in mind China won’t be supplying those inputs forever, especially if the tariffs remain. Within a few years, a country such as Vietnam will provide the same products, perhaps at cheaper prices, because Vietnam has lower wages. So the costs to U.S. consumers are temporary, but the lost business in China will be permanent. Furthermore, the medium-term adjustment will have the effect of making China’s main competitors better exporters.

And:

China has an industrial policy whose goal is to be competitive in these [branded goods] and other areas. Tariffs will limit profits for these companies and prevent Chinese products from achieving full economies of scale. So this preemptive tariff strike will hurt the Chinese economy in the future, even if it doesn’t yet show up in the numbers.

Most generally:

In my numerous visits to China, I’ve found that the Chinese think of themselves as much more vulnerable than Americans to a trade war. I think they are basically correct, mostly because China is a much poorer country with more fragile political institutions.

I should note that I am not trying to defend Trump in this column, rather we need to get the economics right if we are to understand what is going on and why America can exert any pressure at all.  On Twitter, Christopher Balding is one who is getting these matters right.

Returning to the bigger picture, to the extent you wish to criticize Trump’s policies, focus on what China may do as a result of its vulnerability, not America’s supposed lack of bargaining power in the struggle.

Comments

The US stock market certainly seems to think that it will hurt the US as well as China.

On your point that the Vietnamese will pick up the slack - maybe but they probably won't have the same economy of scale as the Chinese and won't be so far down the learning curve. I can imagine that if the tariffs were not in place China would have been continuing to innovate and moving further and further down their learning curve, this progress is now lost somewhat and restarted if production is shifted to another country.

Truth is that neither side will win this fight and it is a stupid fight to have.

1) China loses the most.
2) US loses the second most.
3) Everybody else gains in trade.
4) The world's two most innovative countries innovate less.

Given these rather basic facts, I can't help but think we haven't made a clearheaded decision. Literally, cutting our nose to spite our face.

To your point about Vietnam, the Vietnamese don't need to expand their capacity all that much. They just need more rubber stamps to mark 'Made In China' goods to say 'Made in Vietnam' and play middleman. The same with other countries including Mexico. Trump simply doesn't know how to win against China. Even Kudlow couldn't cheerlead this one on.

Why would Vietnam want to help China? It would do better by taking that business away. That would also serve to show China it's being more and more isolated internationally due to it's current posture with their 9-dash line claims.

China thinks long term, as in decades and is prepared for all scenarios
China’s growth prospects are solid and will soon overtake the US economy in size
China is not politically or economically dependent on the US
China does not depend on the US militarily
China is the largest buyer of US debt and can target the US financial markets

IMO, it is no longer a trade war but something deeper. I am less and less optimistic and more pessimistic. Because of Trump's China Tweets, the USA now views China as an economic predator. China, in turn, views the United States as a model of Western power trying to humiliate China as in the 18th century. IMO, China will resort to more severe measures if Trump goes forward with more tariffs.

"China thinks long term, as in decades and is prepared for all scenarios."

This is a myth that was also said of the Japanese in the 80s and early 90s.

Unlike the Japanese, China is not dependent on the US either politically, economically or militarily and China’s exports contribute only one-fifth to its GDP. Japan was an easy mark, China is not.

Japan isn't dependent on America economically or politically. Not even militarily apart from the nuclear umbrella.

Japan's exports are 17% of its GDP.

If you see anyone claiming that transshipping products is easy to do, won't get caught, and doesn't add a ton of cost, you know they have no idea how trade works.

That kind of stuff is tried when its Iran trying to buy aircraft or missile parts. Sure, you can do a little of that if its very close. But no, Northern Chinese fatcories can afford to ship products to another country, offload them, relabel, them then re-export them.T

The fixed costs per container are expensive! And you have risk and delay! This isn't free.

Soybeans might be a bit more untraceable than missile parts.

Could be, or might not be. May be a function of GM sophistication.

>3) Everybody else gains in trade.

Only in the aggregate...There are certainly many people who are not helped in the abstract. And there are certainly many more people who were not helped / hurt by the specific bargains that embody MFN, GATT, etc.

The second group is quite sympathetic, imho. GATT more-or-less traded access to the U.S. market for foreign intellectual property protection. That's great if you're a Hollywood actress. It's horrible if your vocation was a machinist.

>access to the U.S. market for foreign intellectual property protection

For clarity, this is not the same as trading access to the U.S. market for access to the foreign markets.

A better question is who gains the most. Americans gain the most; more jobs, more products to be manufactured here, less China stealing of methods and secrets.

But the really big benefit is this may well stop or seriously disrupt China's attempt to take over world trade (i.e. the Silk Road Economic Belt). THAT would be a great win for the U.S. and the world.

MAGA

It seems like this argument can be made as a whole for trade between developing countries that are copying and learning, and developed countries.

Say that trade with China over the last 40 years has shunted trade from Germany to China, the same arguments around blunting innovation would apply (from trade shifting the Germans, high up their learning curve and innovating, to China).

It's not obvious why this would be a bad thing when it involves China when it wouldn't be when it doesn't. Why is it a good thing when trade is shunted from developed:developed to developed:China, but not then to developed:"less developed than China"?

Slightly off the topic from your comment, but on the topic of other countries, this whole argument gets phrased about fairness between the USA and China. But the other argument is how trade that allows China to avoid WTO rules, or at least take strongly protectionist and developmental actions, is fair on less developed countries that actually comply with more liberalized. Why should they comply with the rules and practice more liberalized economic models and still lose out on trade and development? How can libertarian economists who'd believe these countries are right to practice these sort of models support China to 'cut in line'?

You can understand how that part of "mainstream economics" that espouses a much more managerial state with industrial and developmental policies can support China, despite authoritarianism and ethnic nationalism and Marxism and predatory behaviors to all their peers. Even to the extent, like Rodrik and Ha-Joon Chang of presenting China's behavior as normal for countries during development. (While glossing over that other countries that behaved like this got tariffs and got trade wars in return. Guess the 'norm' only applies one way, huh?). They view China as a stalking horse for an escape from the "neoliberal" state. But for libertarian economists, it is a harder questions because they are faced with the dilemma of being liberal on trade and this undermining the neoliberal set of rules and willingness to play by them.

China is both an economic competitor and a totalitarian state with no path to democracy. The US could tolerate one but not both. China continues to press ahead with both so they will get the "treatment". Who knows how well the "treatment" will work since the status quo even with tariffs will still favor China. Tyler says that China's institutions are weak but with today's surveillance technology and China's experience using it in certain areas, you realize you don't need institutions since technology-enabled law enforcement and concentration camps are viable options (unthinkable in the West but very thinkable in the East). It is almost like the USSR was born just a bit too early. If only they survived into the age of Facebook, Palantir, and smartphones. From a trade standpoint, once China is able to export cars that rival Detroit and planes that rival Boeing, then the US will ironically be forced to become a socialist state to provide welfare for the masses or trade wars will become real wars. Will China make the US socialist or will the US make China a democracy?

Thread winner. Consistent with this thesis, the American "Progressive" movement of the early last century was in response to the Marxist union movements of Europe and even the USA (anarchists). To save capitalism, along the same lines, Keynes had to advocate socialism in fiscal policy. The difference between communism and so-called "mixed market" capitalism in the West is simply the difference between SOEs (State Operated Entities) and highly-regulated nominally private entities in the democratic First World. Sometimes hardly a difference. Add market prices to an SOE and you have your basic heavily regulated industry in the USA (think utilities, or even refineries).

My ideal world? A libertarian Magic Kingdom where property rights are respected, natural monopolies accepted, and better patents. Especially patents.

This mixed economy has been awesome.

And berry berry good to me.

It is a bit of a contradiction, and loss of western confidence, to think China is a terrible county, which might end up more successful that us.

We are supposed to believe in our system because it works better than the rest. Not because the freedom of a market economy comes at some efficiency cost.

You are right that this is an echo of the cold war .. and fearing the 5 year plans.

I am not sure how you are measuring whether one economy works better than another economy.

Obviously stealing intellectual property "works better" (is far less costly) than creating it, so long as you can get away with it, but does it follow that a country that steals "works better"?

I'll be the first person to cheer China on if it becomes more successful WITHOUT preying on its trading partners.

While I think we are a bit too IP focused in this modern age, there is a place for it. One good place is border inspections of bulk wholesale imports. The random eBay sneaker purchase is less of a big deal.

But even with a leaky IP system, execution matters, and it takes well run companies to actually manufacture and deliver a reliable product at a reasonable price.

Foxconn, IP theft or execution?

You go the heart of the question. Foxconn is not the problem.

Foxconn is caught in the crossfire. If Trump's tariffs hurt Foxconn and its workers -- and US consumers -- that has got nothing to do with Foxconn. The company just provides a point of leverage for Trump's pressure on China.

In a free world trading system, Foxconn would likely go on assembling iPhones sold in the US, because it is the best at what it does.

> I'll be the first person to cheer China on if it becomes more successful WITHOUT preying on its trading partners.

What you're going to get is both. China will be -- already is -- a highly innovative country that steals. It is also highly innovate in its stealing, and will continue to innovate in it, both in private enterprise and all the state kinds. This is simply winning by any means necessary. Moral quibbling is a luxury. It got a foothold in the West while abundant low-hanging fruit meant it wouldn't exact much in the way of consequences, but old one-hundred names hasn't suffered from those luxuries/illusions in a long while.

Some new Trump-onomics, maybe finding the contrarian libertarian bright side can be a new game:

"China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a “match,” it would be game over, we win! In any event, China wants a deal!"

"The truth is that neither side will win this and it is a stupid fight to have."

What is it about no pain, no gain, that you don't get? In a trade war, like in any other war, both sides take casualties. But, as Tyler says, "[t]he question is whether [that analysis] give[s] sufficient weight to all relevant variables for the longer run." If the trade war (eventually) induces China to play by the rules (and the spirit) of the world trading system and to respect intellectual property, the US will win, the ROW will win and, in the long run, even China will win. Why doesn't everyone see this?

Where Trump has blundered is in effectively closing the off-ramp for China. The fight has become personal -- it has become framed as two alpha males facing off and neither daring to back down.

But in fairness to Trump, he did give quiet diplomacy a shot, along with his trade-mark cooing and billing with a foreign leader, but as we have just seen, that got misconstrued as weakness and led to China's reckless gamble that it need only offer cosmetic concessions.

This was always the most likely outcome. But that doesn't mean it was wasted. Least of all was it stupid. A trade war would be a terrible thing to waste. So long as the issue is in the klieg lights, there can be no substantive solution. But Trump has completely changed the conversation. Let's just say that the next President -- whoever he or she is -- is going to find more favorable conditions for getting a deal.

That is just so long as the whiners and nervous Nellies don't throw it all away.

Indeed rather than imploring higher prices and Trump trying to hide this, public discussion should be about whether or not the sacrifice might be worth something we have not thought about yet.

Fear not. Decisions about your sacrifice have already been made with or without your input. Dear Leader knows you better than you know yourself.

That’s a constant. To make the best of it during this term, all I can think of is hoping that dumb decisions create opportunity to find new unexpected ideas or insights.

The core principle behind capitalism is sacrifice, isn't it?

At least it was when I was in public school back in the 60s when civics was a core requirement in Indiana public schools. Capitalism and patriotism required sacrifice. No free lunch.

Now everyone, even Chinese restaurants, flower shops and girl scouts selling cookies, are all going to use those Trump trade tariffs as an excuse to try to increase their prices.
So, at long last, the Fed might be able to reach its inflation rate target.
Hurrah? :-) or :-(

Good point. How much of inflation is "demand induced" (by say hoarding or waiting in line at a gas station) and how much is "supply induced" (oil shortage)? If people expect inflation, expectations change, and inflation will go up?

I think this chart tells the story:

https://www.gzeromedia.com/graphic-truth-who-wins-from-a-us-china-trade-war

In other words, everyone who is not US or China gains at the expense of the two powers. I agree that China takes the bigger hit but the fact that many US businesses become friendly fire shows a lack of discipline which is endemic to Trump's policymaking. His inability to build stronger alliances outside the US with Australia, Canada, Mexico, the EU, Japan, Vietnam, etc. to form a united bloc against China ultimately limits his foreign policy to options that cause a huge amount of self-inflicted casualties. He doesn't have to do TPP but you don't go at China alone like an idiot. His unilateral action means the US alone pays the cost of containing China. Makes Trump's earlier ask of allies to pay more for defense look cheap and silly. Trump is not playing 3D chess, he's barely playing tic-tac-toe. Putin gains here as the clear winner.

Nice graphic, but why Putin wins? Russia is not even in the graphic you linked to as a clear winner from a trade war. Trade war seems good for my international stocks ex-US.

"Putin wins" is an all-purpose shibboleth from a certain strain of Trump opponent.

"[Trump's] inability to build stronger alliances outside the US ..."

Is that an attempt at humor? How should Trump build stronger alliances outside the US when those countries themselves (even when they are nominally alliances) have proven unable to do so?

As I see it, those countries "outside the US" have many of the same grievances that the US has, but they have been too fragmented and too weak to confront China. Now that America has taken the lead, they are likely to follow suit. Trump's tariffs will give them leverage over China that they didn't have before.

So, if it's alliances you want, maybe your wish has come true.

Isn't the whole point of tariffs to cause higher prices so domestic consumers subsidize domestic industry? That's the point as far as industrial policy goes. The fact that nobody is emphasizing this point suggests that nobody actually cares about industrial policy and actually moving manufacturing back to the US. It's really just about foreign policy against China. Everybody still wants cheap stuff, they just want it built outside of China in places like Vietnam, which just so happens to have even cheaper labor.

Zactly. The coverage takes on the sort of horse race coverage we see for elections, rather than analysis (beyond short term price impacts)

+1

Great point! See my comment below. I am getting at the same thing. Everyone wants to think about issues as a horse race these days and very few people even understand what it means to analyze and contextualize facts. To most people these days, facts are the ultimate understanding of an issue. If its a fact, it must be true and that must be all you need to know.

Propoganda is turning our brqins to mush. I guess its perfect for the new class of human species that will live in a Technocratic, biomorphic biologically engineered society.

+1.

You now understand how dangerous PROPOGANDA can be. It completely confuses and distracts people from seeing the broader context of their thoughts and decisions.

It even sucks good thinkers into its vortex by forcing them into arguments like tyler presented above - whether or not a trade war affects both nations. Duh! Of course it does...

But as you said, what gets lost and minimized in this propoganda society that we live is that tarrifs are not a tool of economic warfare. They are a tool of self defense. They protect industries and give them a chance to grow.

Using tarrifs as an offensive weapon to bludgeon the enemy is like shooting through your own foot to hit China in the knee.

But alas, this society is so turned about and confused and racist and bloodthirsty that it cares not. It just wants to see some action. Btw.... in the fergeson protests and in the baltimore protests after freddy grey died, i heard many trumpers talk about how dumb black people were for "burning and destroying" their own cities. They asked, how in the world could burning your local store be helpful or effective? Yet, when trump employs the same strategy at the macro level...as he is figuratively burning up sections of certain industries just to deliver a blow to China...they suddenly see the wisdom in such a strategy and support it.

Anyways, thank you for your comment anon.

Trump campaigned on this. Use tariffs on China to bolster manufacturing in America and increase American jobs. Is there any evidence this is happening?

While valid, this makes an assumption that we have the tools and time (and will!) to actually drive industrial progress!

We live in a country where trains systems take YEARS to build (when China builds them in months) and plants take as long. We're not going to have built our own industrial base built up in the next six years after having spent the last 100 years exporting.

"focus on what China might do as a result of its vulnerability"? Based on my knowledge of and experience with China and Chinese in China is "not much" or at least not any time soon. Too much pride and bad memories of Opium Wars and Japanese invasion and so on. This looks to last some time, and while China may be hurt worse than the US, I do not see the gains that may happen in the US outweighing the losses in the US.

What Cowen and Rosser don't seem to understand is that neither country will be hurt since so little of either economy has been in play. China has a $25 trillion economy and the U.S. is at $20 trillion. A few billion lost here and there because of a "trade war" is chump change.

I'm not sure I buy that. There are a number of politically important groups hurt by this so it will have an impact larger than the headline numbers will suggest. One, farmers, who will get their billions in bailout money for retaliatory tariffs. Two, the poor and middle class, who will see higher prices at Walmart and Amazon. Three, the port economies, who probably hated Trump to begin with but will see even less coming their way. Four, and this is a big one, the oh-so-important supply chain to corporate America, which will very much hurt all Americans. Automotive vehicles, capital equipment, datacenter equipment, laptops, smartphones, and other complex products with complex supply chains will need have a lot of unnecessary work made expensively necessary by these moves. Also, the $25 trillion and $20 trillion numbers you cite is a leveraged number. A dollar of real economy is worth hundreds to thousands of notional dollars.

Some prices at Walmart and Amazon will be higher but just a little higher. The estimate I have read is that Trumps tariffs, including the latest, will cost consumers $66 billion a year. Total consumption was $16,000 billion in 2017 so roughly 0.4% will be shaved off.

"Morgan Stanley estimated that Trump's tariffs on steel, aluminum, washing machines, and solar panels, as of March 2018, covered 4.1% of U.S. imports." - Wikipedia

I think Trump's trade policies have bad but not materially harmful in any significant way.

We may simply see massive Chinese state-sponsored buy-ups of factories in the Phillippines and Indonesia to skirt the tariff. China is already looking to cheaper labor markets to keep production costs low; this may accelerate that process, shrouded by shell companies and political corruption.

I think you are suffering from same confusion that Trump sometimes seems to be guilty of. You appear to think that the point of Trump's tariffs is to bring back relatively low-skilled manufacturing back to the US -- which obviously won't happen if those jobs migrate to Vietnam or the Philippines.

But, no, no, no. The point of the tariffs is not to bring back those jobs. The tariffs on those goods are simply a means to pressure China to respect the rules and spirit of a fair and open world trading system.

+1

I think Trump's personal argumentation is being too much of the focus.

We are also missing all of the opportunity cost arguments we'd have with a different administration.

In a conventional setting, folks like Tyler Cowen would be comparing proposed policy to better, more rationally designed, alternatives.

Rather than stringing together shady silver linings.

I thought the whole point was for manufacturing to return to the U.S. If other lower cost overseas suppliers are going to pick up the slack, then what is the point of this? Is Trump going to slap tariffs on imports from every county?

Now, supposed Chinese companies, which have better connections in Asia and maybe even Africa, are the ones who setup export shop in these countries?

" Is Trump going to slap tariffs on imports from every county?"
That's pretty much what Trump has been doing since he got into office. Trump is performing geopolitical theater to the American public but in reality he is playing whack-a-mole with these tariffs. The public will realize if they haven't already that tariffs are really taxes that take from their pockets.

Blue-collar manufacturing income is indeed up significantly under Trump. Tariffs help to secure that bae from drifting over to Biden in 2020, and the costs to the general public just get lost in the noise of the media's indiscriminate opposition to everything Trump does.

Hate to break this to you, Tyler and other mainstream economists, but businesses enter China knowing full well that their IP will be reappropriated. That is not only a fact but it was built into their business models for a couple decades now. Low costs trumps all including IP because of the way Wall Street and American middle management works. Trump can do whatever he wants to protect American IP but the truth is almost any enforcement mechanism will be too onerous for China to follow and as a result won't happen. Short of that the only thing that can be done to some effect is exactly what is being done--tariffs. Make Chinese goods more expensive and Wall Street's quarterly shortsightedness will just look elsewhere to chase money like as you mentioned Vietnam or Mexico. The thing though is that you can't tariff your way to victory and there hasn't been any long term vision from Congress or the White House on what to do here on out. Trump really needed something like TPP even if it means creating another international bureaucracy that the US does not have total control over. Unfortunate that TPP was treated suspiciously by the American public because it put too much emphasis on IP so Hollywood, tech companies, and pharmaceuticals looked to benefit too much at the expense of everybody else. That sunk TPP publicly. Another angle to play, rather than strictly economics, would have been moving China towards more democracy (keeping Hong Kong free from interference, opening up the Great Firewall, freedom of the press, etc.) but Trump is literally the worst guy to do it given how little he cares about democracy internationally and he behaves with Saudi Arabia and other dictatorships.

@POL - not really true. From my perspective of having worked in Silicon valley until about 15 years ago, the US IP was not sold to China but licensed to be made in China. If IP was stolen it was against the wishes of the American company. The fact that it was done was 'tolerated' as a cost of doing business, perhaps, in the same way shoplifting is 'tolerated' in retail as a cost of doing business. But the business owners don't like it. Things may have changed today but I doubt it.

It was more than tolerated in that very little was done to stop it. Not in any robust way at least

The land rush was on, people were making their bonuses slashing costs, and complaints about ip theft were limited to academics and golf courses and half hearted kvetching not backed by action

Most of this comes into focus after one finds the correct answers to the question: "why do no one at the American Chamber of Commerce in Shanghai complain?"

The easy and wrong answer is "they didn't want to stop the gravy train." Closer to the truth was "the didn't want to stand in the way of the gravy train that was going to start any day now." But closest to the truth was they were avoiding death by a thousand cuts. Doing business in China was assumed necessary back home, so the dozens of bad "little" things that happened to you along the way were just swallowed in the hope they wouldn't turn into thousands.

"TPP was treated suspiciously by the American public because it put too much emphasis on IP so Hollywood, tech companies, and pharmaceuticals looked to benefit too much at the expense of everybody else."

Trump was against TPP because Obama was for TPP.

Not to mention abdicating democracy and sovereignty to a trade death panel

"Vietnam will provide the same products, perhaps at cheaper prices, because Vietnam has lower wages. So the costs to U.S. consumers are temporary,"

That doesn't seem right? To the extent Vietnam's lower wages lead to lower prices, wouldn't that switch have happened without tariffs anyways? The right comparison is not between Chinese prices now and Vietnamese prices in the future but between Vietnamese prices in the future with and without the tariffs on Chinese goods. Shouldn't the effect of the tariff itself be to raise both Chinese and Vietnamese prices: tariff leads to upward shift of supply curve for Chinese goods and *upward shift of demand curve* for Vietnamese goods as consumers switch from Chinese to Vietnamese goods. Shouldn't the end permanent result be lost business in China, increased business in Vietnam, but higher prices for American consumers of both Chinese and Vietnamese goods (compared to what would have been the case without tariffs)?

I think Vietnam is only an example. There are lots of countries competing to be low cost suppliers.

Yes, by why would tariffs on Chinese goods lead to those other countries producing goods at lower costs than they would have without the tariffs?

Tyler's point is that the impact of the trade war is not simply a zero sum game of wins and losses to China and the USA. There are other parties, and so in his example, China loses, USA consumer loses for a bit, and then a new player replaces the Chinese producer. It's an argument from logic.

I think that those other countries will not collude. They will compete to be the lowest cost supplier. They might compete so much that they become cheaper than China even before the tariffs (!) especially if you throw in low-level automation and all the Chinese expertise that will be advising them.

I didn't read Tyler as arguing that Vietnam (at least initially) would produce goods at a lower cost -- or they would already be doing so. He said the cost difference would be small enough so that, after the transition, US consumers would barely notice.

Maybe, Tyler is suggesting that the shift to Vietnamese goods leads to greater efficiencies, such as efficiencies of scale, and thus a downward/outward shift of the Vietnamese supply curve. I'm not sure why that would correspond to lower Vietnamese wages though.

Regardless, I thought it is now generally recognized that the *removal* of protective tariffs in the US over the last few decades induced improved efficiency of US manufacturers. It would seem at best ambiguous whether tariffs on one country's goods leads to improved or worsened efficiencies in other countries' production of non-tariffed goods.

I had the same response.
I'm not convinced that handicapping their largest competitor would do anything to make Vietnam a better exporter. I don't quite follow that reasoning.
And why would Trump not then accuse Vietnam of unfair trade practices and impose tariffs on their exports ?

Interestingly, Vietnam is forecast to export more to South Korea than to the US by 2020.

Mistyped - it's South Korea that will export more to Vietnam than to the US by 2020.
(Which will no doubt continue to drive Vietnamese exports to the US.()

Who suffers most depends on how easy it is to substitute imports and exports. The US imports manufactured goods, and exports commodities and tech. Commodities like soybeans are trivial to replace from other countries, tech is harder but the Chinese were trying to reach self-sufficiency anyway, this will only increase their efforts and give business an incentive to fall in line. Conversely, the Chinese exports are not so easy to substitute in the short term due to the complex supply chains, which is why US consumers will bear the most costs.

The other 2 relevant exporters of soybeans are Argentina and Brazil, expect volatility in prices.

Yeah, it is not enough to sate Chinese demand. The US with its GMO technology was uniquely positioned to do this. The Chinese will have to live with less soy sauce in their fried rice.

Commenters are much focused on short-term impacts. But is it possible that the US pressure may succeed

Who loses the most? The TSLA narrative of growth in China. Goodbye.

'but the lost business in China will be permanent'

Why? Or to put it differently, the Chinese have been more than willing to move up the ladder - and take advantage of their economic power as required. Vietnam is getting quite concerned about this, by the way, as seen by this happening less than a year ago - 'China has warned its citizens in Vietnam after protesters clashed with police over a government plan to create new economic zones for foreign investment, which has fuelled anti-Chinese sentiment in the country.

More than 100 protesters were arrested and dozens of police injured at a protest in central Vietnam on Sunday, one of several national demonstrations against the special economic zones, which opponents fear will be dominated by Chinese investors.

"The Chinese embassy in Vietnam is paying close attention to the relevant developments and reminds Chinese citizens in Vietnam to pay attention to security when travelling," read a notice on its website.

Vietnam’s National Assembly agreed on Monday to delay a vote on the draft bill, which would allow foreign investors to lease land for up to 99 years and provide greater incentives.' https://www.businesslive.co.za/bd/world/asia/2018-06-11-vietnam-hit-by-violent-protests-amid-fear-of-chinese-economic-encroachment/

And this observation - 'It remains to be seen whether the European Union will adopt additional protectionist measures, but China must consider that the possibility is more than zero.' is funny, since if the Chinese and EU can work out a trade framework that satisfies both parties, the Chinese and EU will benefit from all the gains that increased trade brings. Assuming that one still believes that trade brings benefits, when one is only trying to get the basic economics straight.

If we wanted to trade more with non-China parters, we could have done TPP. But instead we take the route that is better for Trump's ego.

As we all know, both Trump and Clinton were opposed to the TPP, so no, we could not have done the TPP under any set of facts. Suggesting otherwise is simply misleading.

Clinton would have done TPP after being elected on being opposed to it.

Seems to be self proclaimed Centrist defenders of democracy against Trump would have preferred. Somewhat curiously, they tend to defenders of elected representatives "exercising their own judgment in office" rather than implementing any manifesto results they were elected on.

Cowen is both right and wrong, right in that thus far the tariffs have mostly affected businesses, wrong in that this new round of tariffs will mostly affect consumers. https://www.nytimes.com/2019/05/13/business/toys-phones-and-sneakers-the-chinese-goods-trump-wants-to-tax-next.html

If you agree that the Chinese have taken advantage of America for the last thirty years - and if you don't agree with that premise, we will never agree on anything - than, what should be done? Tariffs may not be optimal, but are they better than the status quo? That's the only question that matters. For all the "tariffs are bad because XXXXX", so was the status quo. And the status quo hurt the lower classes the most. So, if not tariffs...what?

+1

What would happen if we did nothing?

One thing that would happen is China would see that the US is folding. So it have even less incentive to try to accommodate US concerns about pirated technology. As a result, investment in R&D by the US tech sector (including pharma) would be far lower than otherwise (and far lower than optimal for the world) because Chinese rivals would simply copy its innovations and undercut its sales in China and much of the world (think Huawei).

China would likely wind up taking over the US tech sector because only that way could US firms get a degree of protection against predatory practices by Chinese firms and the government.

That does not address the potential national security implications of the gutting the tech sector.

US inflation was 2 percent in April so those short term price increases during supplier transitions are not exactly shaking the foundation of the US economy. Also, tariffs are bringing revenue into the US treasury and the US still has $20 billion plus in debt. It’s quite amusing that the same people who engaged in so much wailing and gnashing of teeth over the reduction in the US corporate income tax rate are now wailing and gnashing teeth over a tax increase. It is funny how the dominant economic orthodoxy posits that taxes on imports are completely translated into higher consumer prices whereas taxes on domestic producers are solely borne by “the wealthy.” Economics would be a complete waste of time if it were not so silly.

Tariffs are akin to sales taxes, not corporate income taxes, and it is widely accepted that sales taxes are regressive taxes borne primarily by consumers.

Taxes on corporate income are akin to taxes on capital which are ultimately borne by consumers in the form of higher prices.

Edgar, where was inflation from 1947-1968? CPI averaged less than 3%. Corporate tax rates ran as high as 52% v. Trump's rate of 21%.

"....so much wailing and gnashing of teeth over the reduction in the US corporate income tax rate are now wailing and gnashing teeth over a tax increases."

Or. the same people who were celebrating over a reduction in the corporate tax rate and yet not one word about tax increases.

Perspective is everything.

So why would these tariffs be a big deal when the consumer already must obediently bend over and pay 8 or 9 percent state/local sales tax on just about anything he buys? That's like a silent tariff on everything except oxygen.

Well, the tariffs are higher than 8-9%. They also aren’t applied to all goods so there is a higher chance of distorting consumer choices.

The who loses from the trade war is possibly a dead horse type question. It might be more interesting to think about it from a who wins.

I think a related aspect here is the article on Zero Hedge about the tendency to move away from globalization; that theme, trend has peaked and may well be in decline is the speculation. It's a good question I think and seems to fit into a lot of what we see in the world today.

If companies could get products cheaper from Vietnam, they’d already be there. There are more components to product costs than wages. In the long run, the costs of tariffs would actually increase as companies make business decisions that are less efficient to account for tariffs. This is true of any tax—if no one changes their behavior due to the tax, then the tax is just a transfer to the government with no net loss to society. The deadweight loss of taxation occurs when people change their behavior.

Also, while China aspires to sell more branded goods in the future, most of the branding on Chinese goods today is done by American companies. These American companies have more pricing power than some random supplier in China no one has heard of, so they will end up bearing more of the costs of any tax than their suppliers.

China is vulnerable too, arguably even more vulnerable than America, but the fact that the other guy will be hurt a little more than you is no reason to pick a fight that hurts both sides.

The products aren't cheaper in Vietnam without the tariffs. With the tariffs, they're cheaper. Once Vietnam gets experience manufacturing, their costs will be reduced as their efficiency/productivity rises.

Interesting theory, but businesses usually become more complacent and less efficient when the government hobbles their competitors.

Different Anonymous here. Certain products are cheaper in Vietnam, and that's why they are already there.

Sometimes in Chinese owned Vietnamese factories!

This may come as a surprise to readers who don't know history, but Steve Jobs envisioned creating a manufacturing mecca in Silicon Valley, much like Henry Ford had made one in Detroit. What he learned was that Silicon Valley does not have a manufacturing culture: it has a soft(ware) culture. Upon his return to Apple in 1997, Jobs hired Tim Cook to create a supply chain in Asia to manufacture Apple's products. Cook had done the same at IBM and Compaq. The boy wonders in Silicon Valley have talent, but not the talent to build hardware, as was evident recently when they tried to build a car for the driverless software, an effort soon abandoned as impossible in the soft(ware) culture of Silicon Valley. https://www.nytimes.com/2018/12/15/business/apple-california-manufacturing-history.html

That NY Times article misses part of the history: US government policy shooting itself in the foot.

Way back when, the George H.W. Bush administration imposed a 62.67% tariff on importing LCD flat-panel displays from Japan. But there was no similar high tariff on importing complete laptops that incorporated those flat-panel screens! And Japan was the sole maker of those displays.

The money quote from a September 1991 Washington Post article: "A Compaq official estimated it would cost about $950 in duties to import an active matrix color screen to build into a computer in Compaq's Houston plant. But if Compaq builds the same computer using the same screen at its plant in Singapore, the total import duty for the whole computer, including the screen, would be about $140."

$950 in 1991 = about $1750 today, adjusted for inflation

An LA Times story from the same month gives a bit more background.

Needless to say, this blunder was a factor in a massive shift of computer manufacturing out of the US.

This is dangerous logic. The logical conclusion for protectionists will be that we need tariffs on those goods against everyone. No trade war freeriding for Vietnam on Trump's watch!

#solveForTheEquilibrium

I think Prof. Cowen used Vietnam as example to avoid the controversy of acknowledging Mexico and Canada are the winners in this trade war.

Duely noted. "No trade war freeriding for [insert new protectionist boogeyman country here] on Trump's watch!"
All I'm saying is that the only thing worse than a trade war between the US and China is a global trade war, which is where such logic may lead protectionists.

If Mexico is a winner, then we are winners too. Fewer of them will be coming here and overwhelm welfare and turn precincts blue.

Jobs.
Beijing will pay any price for jobs for its citizen, otherwise high unemployment will result in revolution. Poor people who stay poor don't revolt, people who go from poor to better off then fall back down, tear shit up. Beijing knows this, that is why the "waste" money on both domestic and foreign projects for the job creation alone (hint its not a waste from Beijing's perspective just form a return on investment perspective). Beijing MUST have a soft slow landing to their growth, or china will split in two.

+1, This is an economics blog but people should try and look at things from a more intimate 'on the ground'/domestic perspective instead of pure figures. Young people in China grow up believing in a 'China Dream', take hope away from them and a similar thing to how (young) people in the US talk about dismantling the system will occur. Except in China such matters are many orders of magnitude more dangerous and therefore taken seriously by the political elite, unlike chants to "eat the rich" here stateside.

I believe Trump only needs to afflict enough damage to change the zeitgeist inside China's youth (a psychological change), instead of actually winning a trade war (an economical change). Or rather, that to get the economical change one must first shatter their psyche.

You do realize China is a communist country where any organized dissent will be instantly crushed. If you have ever lived in China, you will understand Chinese sentiment that they have no doubt that they can easily tolerate any degree of suffering far better than what they view as "soft Americans." Americans have no concept of what suffering is but ask any Chinese individual 40 years or older and they will remember going to bed hungry as a child.

Crushing organized dissent has costs (corrupt politicians and bureaucrats can use it to disenfranchise opponents, you kill the intellectuals, you have to pay those soldiers etc.). It's not something that will strengthen China if they have to do this.

Chinese may be able to tolerate backsliding more than the US, but data on life satisfaction and living standards don't really tend to bear that out too much. China's living standards as measured by what people say when you ask them have transformed in the last generation or two. The US's haven't. While China may have a greater level of tolerance for living standards decline, the chances they'll experience any real decline at all are much higher.

The Chinese regime also depends on performance for legitimacy, while the US government depends much more on popular acclaim. The Chinese do not credit the government with improvements in their living standards, which they credit to their hard work, but if they decline, they'll certainly blame the centre. Tolerating suffering is one thing, but you suggest that those who tolerate suffering will also be easily put off by a government that crushes dissent - perhaps they will not be.

It is a battle of wills and America will capitulate well before China will. The American consumer will let the political class know they have had enough. Chinese mentality is I will suffer as long as it is required. Americans don’t have the requisite constitutional makeup to suffer beyond one election cycle. They will vote for change while China does not have that problem.

GoPro just announced that production of its US-destined goods will be moved from China to Mexico.

Hopefully, that will keep Mexicans on Mexico.

Unfortunately, we thought the same thing with NAFTA and clearly that didn't happen.

Ross Perot heard the one big sucking sound, which was just enough for the serial rapist to win the 1996 election. It's been all downhill ever since. Under the Lolita Express president, we gave "most favored nation" status to China.

The race to the bottom is on - devil take the hindmost.

Yeah, Juarez is a real garden spot

One very small point: as someone active in the global automotive supply chain, and as someone related to a global garment supply chain executive, the only quibble I have with TC here is the assertion that tariff action might prevent Chinese companies from achieving full economies of scale. In the two industries I am close to, the Chinese got there (full scale economies) a long, long time ago.

That feeling when you are so contrarian, you end up with the President.

Here's the thing I don't get. Tyler and Trump both say we can still get cheap stuff, just shifting production to Vietnam.

#MVGA?

Because I'm not sure how this wraps around to help US workers, which I recall as the original goal.

Or per Andre's example, #MMGA.

American consumers paying a premium, to move jobs to Vietnam and Mexico..

Perhaps. Seems to me that quite a bit of manufacturing was already going on in Mexico even when tariffs were low.

Also, Chinese incomes are 10x what they were 30 years ago; those in Mexico haven't gone up nearly as much. In fact, a just now Google check shows that GDP/capita is now the same between China and Mexico (and China is probably on a faster trajectory).

So the move might have happened anyway...

In other words, I'd be more confident in this "win" if it had been stated, at the launch of this trade war, as a goal.

Mouse,

The POTUS is doing what his voters elected him to do, and he is doing it out in the open. Maybe it's good, maybe it's bad. We shall see. Admit to yourself that you are upset that your standard bearer - the notorious " you say one thing to one audience and something else to another" and "basket of deplorables" witch - blew it and lost. She was a lousy candidate.

I'm very sorry for your loss.

That any defender of a trade policy would have to invoke "deplorables" is an answer in itself.

Your shoe is on the other foot.

TC doing his contrarian shtick can be simultaneously cliche yet interesting.

But we all know he does not actually believe this and should knows trade wars are not one sided and will have many negative downstream unintended consequences like any centrally planned action.

The US has won every complaint against China they have taken to the WTO. It never changes the way China does business. So the US either needed to accept the way the Chinese do business or step up the fight.

One issue that Professor Cowen didn't address is what does China do with their excess production. India is already getting ready to impose tariffs on Chinese steel in anticipation that China will need to "dump" steel into non-USA markets. China will either need to cut production, cut prices, move into new markets, or subsidize domestic producers. This could lead to rounds of higher tariffs around the world. China especially could see doors close around the world and see a serious downturn in its economy. How will China react to falling real wages and negative growth? They could try to offshore some production to avoid tariffs but what happens to domestic wages and employment?

If I was Trump, I would announce a conference with India, Vietnam, Philippines, etc to expand trade agreements to replace China as more dependable trading partners. I wish that South America had governments that would encourage economic growth. China should know that production shifts will cut into Chinese margins and slow its growth.

I am confused about how it affects American farmers. Will Chinese tariffs affect the world price of soybeans? While South American farmers may increase production and make infrastructure improvements to increase soybean sales, how much will that change the world price of soybeans short term, long term? For example, Argentia has seen a 708,999.22% increase in the purchase of American soybeans so far in 2019. Would seem like a lot of repackaging going on. Overall US soybean sales are down 31% because China sales have dropped dramatically, but US sales to almost every other country are increasing. Changing distribution channels could make the issue mute long term. Are soybean prices going to drop long term because the Chinese economy is suffering an economic downturn?

How this will work out long term is hard to say. Free trade is a good thing, and fair trade is a term that is almost useless. Forcing China to compete with other countries should be a win for the US. But not without some short term trade as markets adjust.

"Free trade is a good thing, and fair trade is a term that is almost useless. Forcing China to compete with other countries should be a win for the US."

It seems to me that these two sentences are in contradiction.

In "free trade" do you "force" anything?

In "free trade" do you "force" anything?

Yes. The enforcement of contractual agreements is the use of force, it is right in the middle of the word. Agreeing to remove tariffs. even the hidden ones in the form of forced technology transfers requires the ability to enforce the agreement when one side breaks the rules.

In addition, force can mean to propel against resistance i.e. force China to compete even if they would prefer not to.

A unilateral free trade policy is easy. Just allow free imports to and exports from your own country.

"Forcing" trade policies on other countries sounds like the thing you say you don't like, a demand for "fair trade" along your definition of "fair."

(A free trade policy might have a low tariff, but I would think it would have to be uniform. A few percent on Chinese jeans, and Mexican avocado, and Saudi oil. For revenue and economic efficiency.)

If one side is imposing taxes on your goods, saying that you will seek a new partner who will agree not to tax you, is forcing the other side to reduce barriers. That is consistent with a free trade agreement. It is also a use of force, or persuasion, or whatever you want to say.

Getting China to stop the theft of IP, a tax of another form, by threatening to find other partners is making a threat, use of force, to encourage greater free trade.

Politicians often use the term "fair" trade in search of equity or some goal secondary to economic efficiency. It is highly subjective and often seems to be based on a mindset that if you win, I lose. One side is taking advantage of the other and it is not mutually beneficial. Third world countries feel exploited, developed countries want to protect some group, etc

On net, I think Trump is wrong on trade. But I understand the view that China "cheats" on agreements that are not really "free" trade but a second-best solution. Looking at other potential partners as a way to improve trade deals, is a way to achieve greater "free" trade.

The textbook examples of free trade are never seen in the real world. Countries almost always carve out exemptions for various reasons. Forceful negotiations to minimize these issues is just the mechanics of how it is done. Even in the United States trade between states is limited to a degree by regulations and local laws. (Regardless of what the Constitution claims)

If you want to claim that the only free trade is unilateral free trade, fine. Than free trade doesn't exist in the real world. It is a unicorn that dances across the pages of introductory textbooks.

I'm done playing word games with you on this.

Why is forcing tech transfer in exchange for access to China's labor supply and scale any less "free"?

In some cases, it could be.

In this case, Trump and Schumer are arguing that third persons are harmed. The American workers and American manufacturers who refuse to transfer technology. The President and the Senator feel that they must represent them in any negotiations. The gains to American consumers are diffuse but the pain is often very concentrated. That is the reason that voters often oppose free trade - the gains are potentially large but spread out in small amounts while the losses are often a severe burden on a sector of the economy.

I remember some years ago talking with a group about when the Japanese auto manufacturers agreed to voluntary quotas under President Reagan. Works much the same as a tariff. You have a transfer from consumers to domestic producers, some deadweight loss, but instead of revenue to the government, you have a transfer from consumers to the foreign builders. For simplicity, let's assume the American consumers transfer $750 to the domestic producers, $250 to foreign producers, and $100 in a deadweight loss. This group said that they were willing to pay that to help save good-paying American jobs. I was a bit surprised but is it any crazier than the income redistribution plans of the current Democratic party? I mentioned that they could have a higher standard of living, buy other goods and help other people get jobs, but they liked the idea of protecting higher paying jobs. It would appear many voters in both parties still think the same way.

Also, look at what happened in the long term. The fear of future tariffs helped convince foreign producers to bring manufacturing plants to the United States. Protectionist policies did not fully protect the domestic industries, and it did impose substantial costs on consumers in the short run, but in the long run, it created a lot of American jobs in foreign-owned plants. It couldn't prevent the shrinking of the domestic industry but it sort of worked. Would the foreign firms have moved that much production to the US without the threat of tariffs or other sanctions? The American plants are often said to be as productive as the foreign plants.

You can also argue that the Chinese are predatory. That once they get the IP they can gain a dominant position that gives them the ability to engage in predatory pricing. Combined with the view that Chinese wages can be kept artificially low by the state with profits to the elites. (Sounds like AOC) Can predatory pricing work in the long run? In general, it fails. But in some industries having a dominant position at an early stage can give you a competitive advantage at later stages. You can increase the risk and capital needed to enter at a later stage. Especially in electronics, steel, etc where the MC is low and fixed costs are high. In the United States, such firms will start to share their monopoly profits with the workers. (Traditionally through unitization etc) That opens the door for firms that can duplicate the large firm minus the high labor costs. That is less of an issue in China for the foreseeable future.

Simply, it depends on how you view third parties and if you are negotiating whom are you representing.

And that is without starting on issues of national defense and geopolitical concerns

It is a common choice to demand that trading partners have symmetrical tariffs, but is it really necessary? Especially for a large country with a lot of purchasing power?

They tend to have restrictions that are the most politically expedient in the respective countries. And I hate to sound like a Harvard person but it often comes down to a power relationship. i.e. major power exploits colony, etc

I should also note: especially as economists tell us that trade barriers are always and everywhere self-harming.

I want to reiterate because this is a rather critical point, and not a "word game."

If you believe free markets and comparative advantage provide the best total advantage to your country, then not only are free markets good, but any "competitor" who chooses trade barriers is creating an ADDITIONAL ADVANTAGE for you.

If you really believe that free market economics, they are burdening themselves.

From 2000 to 2007 we had a surge in imports that cost a million jobs. Most of those workers found work at lower wages. Some communities were nearly destroyed. Perhaps about 5% of the wage inequality growth in this country has been as a result of trade in the last 20 years.

While you can argue that people can now go to Walmart and fill up their carts with cheap goods from China, many have seen the drop in their wages leading to them being a net loser. Not everyone, but not an insignificant number.

The answer isn't simple. The pain is real.

In any case, I will state my case again. You have a choice of two groups of countries to trade with. Group A wants to impose taxes of 10% on your exports. Group B wants to impose taxes of 10% on your exports. Group A would like to impose 10% but they will reduce it to 5% if you agree to do the same. You tell Group B that you will give favored treatment to Group A unless Group B lowers their taxes.

Group B refuses and you trade with Group A. Absent the taxes in group A you are able to sell more goods at higher profits. You achieved that deal only because you used the threat of tariffs.

I seem to assume that game theory doesn't work. That the threat of retaliation can't get the other side to move. Ideally, both sides could go to zero tariffs. Trump said that once, that he was willing to negotiate down to zero if the other side would do it. But the danger is the other side would keep high tariffs and prevent me from selling in their country.

as an aside

If the US imposes tariffs on China the sale of Chinese goods will drop. US import businesses will have a nominal fall in income but the value of the dollar will rise to make them no worse off in real terms. (Assuming the Chinese do not start selling dollars.) China gets fewer dollars but they have a higher value so they are no worse off. So import taxes on Chinese goods have no financial impact. Import businesses are protected. Domestic firms grow as consumers shift to buying domestic goods. But the rising dollar makes companies dependant on exports see a decline in business.

Trivially true. And tariffs are idiotic and an act of self destruction. As TC implies, having the upper hand does not make tariffs less stupid as a policy choice. An economist should be able to comment on leverage without being accused by partisans of supporting tariffs.

The real issue is that China will be the largest consumer market in the world soon and Americans need to understand that and get over it. It’s a miracle; removing the boot stomping on a human face forever, at least economically, gave the world the largest improvement in human welfare that has ever occurred.

Unfortunately, this also means that in the long run we have no leverage. They can reinvent the gulag and we have no cards to play. They could even start mass murdering Uighers and no one can lift a finger.

But for all the Trumpists and liberals kvetching over manufacturing jobs, take heart! They will leave China as well soon enough. And it will be due to rising wages in China; another country will benefit from capitalism pushing opportunity to greener pastures and eager workers.

We used to call this progress.

Trump is very wrong on steel and aluminum tariffs. I think the push to force China to be more open is more complex. It is not a move toward protectionism, which is bad, but a desire for more open markets.

Higher wages in China does not mean the end of manufacturing in China. They can automate etc as well as anyone. Some labor-intensive manufacturing may migrate to lower wage locations but that is already going on.

The current rules of trade were constructed at a time when China had no economic power. Why do such rules have to persist and China now has every right to say, "these are the new rules we will use to do business with other countries. If you want to do business in China, share intellectual property otherwise we don't want you trying to sell stuff to our 1.4 billion citizens." Economic rules by a world order determined after WW2 might just be outdated?

And America has the right to refuse those "new" rules.

Let’s see what Europe and the rest of the world will do. I don’t see the EU following America on this one.

Well it seems to me that no person even halfway sentient can believe specialization into your comparative advantage, whether another country naturally has that comparative advantage or not, but especially when it does not, is always the right strategy.

Say countries A and B have no comparative advantages against each other (for the purpose of example), but B enacts some weird protectionism to ensure they subsidize and specialize in computers while A specializes in growing fruit.

Assume that then by fluke computers have waaay more spillover growth advantages into other industries compared to fruit, then barriers did help B, and A, even if trading freely, lost out.

Or say B did have a natural advantage in producing computers and no protectionism is practiced at all, A will still lose out on the spillover effects.

Obviously there is a degree of importance to comparative advantage, but you cannot advocate for following comparative advantage where ever it will lead you without thinking about the longer term possibilities of where specialization of different sorts will take your national economy. At an extreme, if country X's policies turn your comparative advantage into being agricultural, for instance, then it is very unlikely that by following that advantage your country will become, or remain, an industrialized, developed country with the technological capacity for a high standard of living.

All countries have a comparative advantage in something. They can produce something at a lower opportunity cost. If another country subsidizes goods that they sell you, they are giving you a free gift. Your economy will have the greatest growth if you allow investment and capital to flow to sectors that give you the greatest return. Industrial policy based on strategic objectives doesn't usually work that well at raising the living standards, see Russia.

Free markets and free trade are ideal.

No development economist believes that by dumping agricultural products on Africa we'd help them develop, despite everything you've said defining that as a "free gift". Works the same for tech.

Dumping food on Saudi Arabia so they can concentrate on oil production could work out.

Africa is dysfunctional regardless of what we do. Plus that is humanitarian aid, not trade.

Still, It is true that if we bail them out year after year you can create a culture of dependency that prevents them from building up their own markets. But often the situation on the ground is that the governments we aid need to concentrate manpower and money in an attempt to install something that resembles peace. They are often unable to protect farmers so that such markets could develop. We give them food so they can concentrate on a pressing need - finding peace. It is equivalent to military aid designed to help them develop an environment where markets could form.

In contrast, we subsidize pharmaceuticals to Africa all the time. Priced at a level where they can be widely used. You don't think that is hurting their development do you? I really doubt that Africa would be a center for pharmaceutical research if we stopped subsidizing pharmaceuticals.

In return, we don't get much. Perhaps we give them a chance at future development that might work out. But right now free food that competes with domestic production is a minor problem that could be quickly solved if the region was at peace and adopted market reforms.

Dan, Africa is not facing a labour shortage for oil production, nor does dumping of subsidized agricultural and textile overproduction help their capital stock for oil production. So it's not clear how dumping even more subsidized agricultural and textile overproduction helps them to achieve resource extraction.

Yes, we are talking humanitarian aid, but if we charged them a nominal cent for it and it nominally became (heavily) "subsidised trade", it wouldn't magically become a "free gift" with none of the negatives of inhibiting development.

The elements about how Africans need food aid even if it inhibits development because they need to feed and supply armies to ensure peace (and so promote development) is as far as I can tell your own creation without any backing and not a general topic of debate, so I will just pass over that than attempt to find any source that counters this. I find it unlikely to be true on any theory of how stable political order develops.

Re; subsidization of pharma, I don't propose that subsidization by foreign nations is always net negative, and that protected industries thriving is always possible (see Latin American import substitution), though it certainly is sometimes (or the developmental histories of China, Japan, Korea, Taiwan are all inexplicable, and any developmental theory in which these stories are inexplicable is a terrible theory). Just that it is not always a "free gift" with positive effects on the receiving economy, even if you consider only development and without getting into strategic concerns. You have to weigh up the effect of how the "free gift" may crowd out, inhibit and distort your country's development away from future growth and make a decision rather than simply sit there and proclaim agnosticism and that free trade will always work out. And this is before considering strategic concerns, which you should not ignore when you are dealing with states as different in fundamental political values as the United States and the People's Republic.

Going back to Russia as well, I'd note that while you say "Industrial policy based on strategic objectives doesn't usually work that well at raising the living standards, see Russia", to evaluate that we'd need to understand that the counterfactual there is whether a strategically weaker Russia that concentrated less on strategic objectives would have significantly higher living standards. You seem to be suggesting Africa is a basketcase no matter what, but that Russia without a focus on strategy to the extent it has would end up like a larger Poland or something, in terms of living standards? It seems doubtful they would be much better off than they are at all, and at the "cost" of a much more unipolar world (which I as a citizen of a NATO state would probably believe to be a good thing but I can hardly expect them to agree on).

The comment about Saudi Arabia is just a shorthand way of saying that if each nation concentrates on their comparative advantage they both do better. It is better for Saudi Arabia to concentrate on oil production and import food.

I suggest any history of Africa and its history of warfare should do. Africa does not have a political structure that encourages development Widespread starvation because of warlords etc is a sad story that continually repeats itself.

Free trade is the most efficient path to growth. National defense may set other priorities but that is often just an invitation to wasteful spending. Suggest you read Eisenhower on the dangers of Military-Industry Complex. Infant industry arguments are often just a defense of entrenched special interest. They are inefficient.

The "free gift" comment is related to Milton Friedman's comments that if another country wants to have its citizens subsidize your purchases of their products that is not a bad thing for you. They are in effect sending you tax dollars from their citizens to buy their products. (Indeed defenders of infant industries often do this as they seek to export.) America subsidizes many of the products that we export. Many of the products America imports are subsidized by other countries. The subsidies often exist for domestic political reasons and within some limits, they are routinely a part of international trade.

As I said in previous comments, free trade is an ideal that doesn't really exist in the real world. But it is an ideal to work towards. In dealing with China, Russia, or the EU state actors will often seek to protect some industries for various reasons. You try to minimize them but realistically they will always be there. When they get out of hand you have conflict.

Countries that move to open economies grow faster with a higher standard of living. They also become societies that foster greater liberty. If you think communist Russia or crony capitalism Russia are models to follow, I don't have much to say. The gap between us is too vast.

Africa is a basketcase because it is often lawless, doesn't respect property rights, etc. Hard to grow corn in the desert, it just lacks the minimum required elements.

"One issue that Professor Cowen didn't address ...."

Great analysis! Just what I have (inarticulately) been wondering about.

Good article. Don't cut the country to spite the president. But why must tariffs be "slapped" always?

This is a very interesting oped. I suppose the big question is how quickly can Vietnamese firms develop the capacity and the know-how to supply US demands. Also, how fast will US companies start looking for supply alternatives? How costly is it for these firms to look elsewhere? And will the uncertainty over the length and severity of a US-China trade war discourage Vietnamese and American companies from developing alternative supply chains? Even if US consumers don't suffer permanently, they could suffer for a number of years.

>I should note that I am not trying to defend Trump

That's really not necessary. But I don't blame you for being nervous.

He absolutely did need to say this, and some of us still don't believe him

"I'm not trying to defend this thing, but here's a defense of this thing..."

As a side note you, as a long-time reader, have surely noticed that TC rarely expresses his true preferences re: politics (because doing so might cause him to lose status among people he seeks status from), but revealed preferences are a hell of a drug

I cannot read TC's political sentiments any more, but how is he supposed to react in response to "claims, hints, implications, or outright statements that the full burden of the trade war is falling on American consumers ... (which he) strongly believe(s are) wrong"?

Genteel silence? As even if wrong, such ideas are somehow useful?

I think commentators are underestimating the chance that tariffs kick off the next recession by giving the last shove to the teetering tower of physical American retail, leading to another chain cascade of failing loans that results in a liquidity crisis not unlike that of 2008. It's not like you need a lot of things to go wrong in a leveraged economy, and the retail apocalypse is in some sense already underway. The only real question is whether or not it will drag down the rest of the economy. So far, the answer has been, "maybe not." But the distance between "maybe not" and "maybe so" is not actually that great.

What’s really happening here is America is having a Captain Renault moment

This is the moment when the drug lord realizes his mule might actually be a rival.

Much reshuffling ensues

Balding has been vituperative and incoherent about this whole thing. He's positive about Vietnam, where he's living, and points to it as a successful and good model, despite the fact that it has basically the same authoritarian system and political economy. The only difference is that it's a lot smaller and weaker and can be used as a potential ally against a much larger and more powerful state, namely China. Clearly what this is all really about is simply foreign policy and power.

Unbelievable that the fact that tariffs are negative sum is being used by a prominent libertarian as a pro-Trump talking point.

This is a great case in how a mood-affiliated desire to be an iconoclast makes people lose sight of their original beliefs.

China obviously has more to lose. The change in China since joining the WTO has been astonishing, while American consumers get some cheaper crap. Nice, but I'm sure Americans could more easily go back to 1999 than the Chinese.

Yeah, the analysis is pretty weak and one sided: No mention of the proposed hundreds of millions in US tax aid to US farmers to offset the losses, dumping the unused produce on some developing country as a form of aid, effects of displacement of said countries markets, transportation/logistics costs associated with this dumping, no questions how to reasonably price the subsidy without causing further distortions...

Also, Team Trump MAGAtards have the attention span of squirrels so this will be another half-assed, drawn out, semi-forgotten, slow motion train wreck on his watch that will periodically erupt as the crises of the week he will take no responsibility for such as Afghanistan, Iraq, Syria, Venezuela, Iran, trade war with the EU, Mexico, etc..the only metric he goes for is the stock market, and if takes a hit for prolonged period of time he'll forgot it about or let it go on auto-pilot and let one of his “well-intentioned” appointees do as they please .

My brothers company has just changed his sourcing to Viet Nam from China. He was tired of the Chinese stealing his IP and competing with him around the world. He builds and sells vacuum cleaners by the way. Says he gets the same quality at a cheaper price by the way.

Why is the discussion over "who is bearing greater pain from imposing tarrifs?" rather than are we better or worse off from them. If we acknowledge that we are better off not getting in a fist fight, then isn't it childish/ridiculous to start pointing out that our broken nose is better than the other guy's broken arm? This is a pyyric victory at best, if it turns out to even be a victory. The movement of skill based trade to China took many years, the movement away from China due to tarrifs will take many as well. There is a nearly zero likelihood that the NPV of this trade war is positive versus the status quo from an economic perspective. Trump is simply adding frictions to the market, there is no sound reason to believe that prices will be lower if production moves to Vietnam or some other low wage country, that's not how tarrifs work in the ST or LT. Prices will simply return to the pre-tarrif price where profits were optimized. If there was a way to achieve higher profits by moving production elsewhere (pre-tarrifs) it would've already moved.

People do realize that China is a communist country with far greater political will than America. China could subsidize those industries affected by the trade war as well as devalue its currency to counteract the affects of American tariffs until there is a political change in America. America lacks the political will for a protracted economic struggle with China lasting years. Political survival and the eventual complaining of the American consumer will dictate the course America takes. If it becomes an issue of suffering, the American consumer will give in far sooner than the Chinese consumer.

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A fantastic article that I'm not sure accounts for factors such as the US's reliance on China's rare earth supply, for example, which further compounds China's posture as a geopolitical threat coupled with 'Made in China 2025'. Wouldn't you say that evens out the odds further than your article suggests? Still, it was an illuminating piece.

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