Trade wars are rarely good and never easy to win, but they’re a lot costlier and harder to win when we’re going against a country like China.
The People’s Republic of China is an undemocratic state with a centrally planned economy run by the Communist Party. Most importantly, the Chinese regime doesn’t care much about the welfare of its people.
Trump should not go head-to-head against such a regime in a trade war.
Trump loves tariffs. Tariffs, though, are taxes. So Trump’s conservative allies have defended his tariffs as means, not ends. If we slap enough tariffs on China’s exports, they’ll cave to our demands.
When China retaliates, the thinking goes, we escalate. Ultimately, we can escalate more than they can because our economy is bigger and more robust.
To put this trade war in terms of actual war: Trump’s strategy is a blend of Cold War-era Mutually Assured Destruction, and a Czar-era war of attrition. The big problem is that Mutually Assured Destruction works only, to borrow from Sting, if the other guys “love their children too.” And a war of attrition against a ruthless rival amounts to mass sacrifice of your own people.
China on Friday announced new tariffs, hitting $75 billion worth of U.S. goods. For instance, the U.S. sells billions of dollars worth of cell phones to China. Those phones will now face a Chinese tariff, and so the sales are likely to fall. Plenty of other U.S. exporters of electronics will also suffer from other Chinese tariffs.
Of course, China’s government is hurting its own people by taxing the goods Chinese consumers want to buy. And yes, our tariffs hurt Chinese exporters. In turn, our tariffs hurt our consumers.
That’s why it’s such a shame that Trump on Friday announced a massive escalation in his tariff war in retaliation to China’s new tariffs. On Oct. 1, the U.S. will raise the tariff on $250 billion of goods coming from China from 25% to 30%, and the remaining $300 billion of Chinese goods will be taxed at 15% on Sept. 1 instead of 10%.
Since our economy is larger and less precarious than China’s, it’s conceivable that we could outlast China in this war of attrition, and force them to take down their protectionist tariffs, cut off their export subsidies, and stop their theft of intellectual property.
But a government willing to spy on its own people, bar them from social media, detain its religious minorities, and jail its dissidents will also have high tolerance for harming its manufacturers and consumers through an ever-escalating trade war.
China has been doing this for years. Long before this particular trade war, China has been subsidizing its exporters to the detriment of the broader Chinese economy. One economic study concluded “that by stopping this type of trade policy, China stands to experience a 3% gain in real income.”
So why does China do these things? The subsidized exporters tend to be owned and run by the family members of Communist officials, or by the state itself. In short, China’s economic policies that impoverish the Chinese people empower China’s ruling class, and the rulers are the ones who make the rules.
Similarly, economists have concluded that China is harming its middle class through its aggressive efforts to build infrastructure in the developing world. Yet these efforts expand the government’s power.
In general, taxes, subsidies, and regulations reduce economic efficiency, but increase the political class’s power—and ultimately the wealth of the powerful.
Trump shouldn’t play China’s game. In that game, the losers are always the people.
