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Who can say what weapons and tactics may be adopted in a trade ware, or who is a fair target in a currency war?

Too Late to Back Down

Aug. 1, 2019
The turn to tariff policies surely is hypocritical, but if so it’s only a more forthright hypocrisy than the one which ignored global trade violations for decades.

It’s been more than a year since the Trump Administration made it known that U.S. trade policy would be defensive about U.S. manufactured products and combative, if not punitive, against the nations producing goods that compete with domestically sourced products. The initial reaction from most economists and financial reporters and commentators was alarm: protectionism would hurt the U.S. economy by depriving U.S. businesses and consumers of economic opportunity. (U.S. businesses and consumers have been getting along very well during the 18 months or so of this change in direction.)

The initial reaction was mostly in concord with that of major foreign trade partners and the business interests in their slipstreams — Mexico, Canada, the European Union, and China, just to give a quick tour. There has been some financial disruption around the world, but it’s not obvious in most cases that this is directly related to the shift in U.S. trade policies.

So, after the initial alarm about the change in U.S. policies, the actual effects have been mainly inconsequential — with one exception.

From the start in early 2018, the change in U.S. trade policy has been directed at China and its trade policies. Other problems or potential problems have been resolved in negotiation, but China has avoided any new trade agreement that would end its subsidies to domestic businesses, protection of domestic economic sectors, disregard for intellectual property rights, and policies that compel foreign businesses to transfer technology to local enterprises. All these things have been accepted as facts, as the price of doing business, by businesses anxious to operate in China and by the rest of the world’s governments hopeful that China would be integrated into the global economy and over time give up controlling impulses.

Thus, the change in U.S. trade policy may be seen as a negotiating position — for it drove negotiation with various other trading partners and the negotiations with China are ongoing.

Let me acknowledge here my own belief: tariffs are unfair and counterproductive. A tariff is meant to punish the party selling a product, but it punishes the buyer (or would-be buyer) too. He or she pays a higher cost, or loses the chance to buy that product. Tariffs are a blunt instrument in negotiation, one that had more salience some decades ago, when domestic and regional markets had more than just one or two suppliers in any product or service category — as we have now. Before 2001, the issue of tariffs lingered in U.S. politics, with labor and some business groups regularly demanding market protection, arguing against other businesses and consumers urging open markets.

The rise of China as a global industrial force, following its entry to the World Trade Assn. in 2001, changed our debates. Since then, industrial and consumer markets together have been effectively internationalized, and most of the one-time advocates of tariff protection have little or nothing to preserve. Free and open markets prevailed. Or so we believed.

The remaining proponents of tariffs generally represent industries producing commodity-grade goods (like steel) that prosper when some competitors are blocked or hampered. Or they are renegade investors and economists who have gravitated to tariffs as a contrarian strategy, because just as the global economy has been fully realized and standardized, the principle of free and open markets has become conventional, in the U.S., in Europe, and across most of the world.

But the anomaly of tariffs in the era of globalization also underscores the intractability of China’s non-compliance with fair trade principles. Thus, we may realize the U.S. turn to tariff policies are hypocritical, but if so it’s only a more forthright hypocrisy than the one which ignored the Chinese trade practices in recent decades. We may wish we had a more just cause to fight for, but the conflict is already engaged. It’s too late to back down.

As I write there is renewed concern that China’s next response to the tariff standoff will be to cease buying U.S. currency – aiming to provoke an inflation crisis that would turn impoverish U.S. businesses and consumers (and voters.)

Who can say what weapons and tactics will be applied in such a conflict? A currency war is certainly possible, and much more personal than a trade war. But it’s still a conflict: the contestants need to dispirit their enemies, to reduce their will to fight, and to dissuade them from further combat. 

The reality of global economics is that individuals are a widely available resource. It’s not surprising that many of us may be sacrificed to the cause of victory.