Fans of free-market capitalism, you have reason to rejoice. Break out those green Adam Smith neckties hanging in the back of your closet. Party like it’s 1999 — or, even better, 2000 when the internet-fueled Nasdaq hit a record high of 5000 and the U.S. normalized trade relations with China.
The cause for celebration today is President Trump signing a “phase one” trade deal with China. After two years of back-and-forth tariffs that marked the world’s worst trade conflict in a century, Beijing and Washington have reached a historic agreement that accomplishes … not so much, really. It doesn’t create balanced trade between the United States and China. It doesn’t disentangle the two mega-economies. And it doesn’t force China to alter its “state capitalist” economic model built on central planning and subsidies. China doesn’t even concede that it has a history of forcing American firms to hand over their technology.
But “not so much” isn’t nothing. The singular achievement of President Trump’s protectionist experiment is to vividly demonstrate on a global stage that protectionism doesn’t work. And for that welcome-if-unintentional result, free marketeers should be delighted — though not really surprised. After all, Trump’s fundamental economic observation about trade is flat-out wrong. Big trade deficits are not the result of dumb trade deals by corrupt or dumb politicians. They’re the result of too much spending and too little saving.
While China might buy more stuff from America as a result of the deal, the overall near-term benefit to the U.S. economy will probably be limited. Increases of farm and energy exports to China might be mostly offset by declines in shipments to other countries. That’s sure how Goldman Sachs sees things: “Much of the reduction in the trade deficit with China will probably be offset by an increased trade deficit with other countries.” Despite all of Trump’s trade machinations, the U.S. likely finished 2019 with an overall trade deficit only a bit smaller than the more than $621 billion gap in 2018. So, according to Trumponomics, the rest of the world continues to “bleed America white.”
The Trump trade war also showed the futility of trying to employ tariffs as a broad instrument of economic nostalgia. Modern-day protectionism didn’t bring back those long-departed Rust Belt manufacturing jobs. Economists predicted that while import protection might provide favored sectors a shield from foreign competition, it would also raise their input costs and subject them to foreign retaliation. And that’s just what happened. A Federal Reserve study out last month concluded that “the 2018 tariffs are associated with relative reductions in manufacturing employment and relative increases in producer prices.”
Or just listen to what the manufacturers themselves have been saying. The CEO of Allegheny Technologies told the Wall Street Journal that while he supported Trump’s 25 percent tax on imported steel, he also wanted a special exemption from it. Turns out the tariff has made the importation of nickel-bearing stainless steel slabs — which the company then uses to make high-performance alloys — “unreasonably expensive” and put the jobs of “hundreds of Pennsylvanians” at risk. In other words, Econ 101 for the win.
There’s no doubt that those cold-hearted, hypercapitalists on Wall Street like the China trade deal. But that’s not because most investors think it will cause GDP to accelerate or make the economy more competitive. They just think it greatly reduces the chance of further escalation into truly dangerous territory. It’s another situation where Trump is solving a problem he started or worsened. And the only reason the tariffs haven’t been more damaging is that their impact was lessened by the Trump tax cuts and a looser Federal Reserve. The downside there is it works both ways. The tariffs also made the tax cuts look ineffective in boosting investment and productivity. Definitely not something for market capitalists to cheer.
Going forward, the big job for policymakers is to learn from the protectionist failure and fashion a more-or-less bipartisan approach — heavy on targeting specific trade abuses and boosting U.S. science investment — to tackling China’s economic, political, and ideological challenge. And understanding what doesn’t work should be helpful in accomplishing that.
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