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China won the trade war

Summary:
A year ago, Tyler Cowen claimed that President Trump won round one of the trade war with China: I’m not entirely convinced we won even the first round of the trade war, although the claim might be true.  The stated goal of President Trump and his advisers was to reduce the US trade deficit with China.  A secondary goal may have been to slow the growth of China’s economy.  A third goal might have been to weaken the position of Xi Jinping, who has been moving China in a more repressive and nationalistic direction. Today, we know that the US failed spectacularly on all three counts.  Indeed the last year has been an unmitigated disaster for Trump administration protectionists.  Today’s Bloomberg has an article arguing (correctly) that China ended up winning the trade

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A year ago, Tyler Cowen claimed that President Trump won round one of the trade war with China:

China won the trade war

I’m not entirely convinced we won even the first round of the trade war, although the claim might be true.  The stated goal of President Trump and his advisers was to reduce the US trade deficit with China.  A secondary goal may have been to slow the growth of China’s economy.  A third goal might have been to weaken the position of Xi Jinping, who has been moving China in a more repressive and nationalistic direction.

Today, we know that the US failed spectacularly on all three counts.  Indeed the last year has been an unmitigated disaster for Trump administration protectionists.  Today’s Bloomberg has an article arguing (correctly) that China ended up winning the trade war:

China won the trade war

The trade deficit has risen to record levels in 2020:

China won the trade war

The goal of slowing the rise of the Chinese economy has also failed.  The Chinese economy (in dollar terms) is now expected to overtake the US in 2028, five years earlier than estimated just a year ago.  (In PPP terms they overtook us years ago.)

And the prestige of Xi Jinping has risen dramatically relative to the prestige of President Trump, even before the recent fiasco on Capitol Hill.  In China there’s a widespread view that our botched handling of Covid-19 shows the superiority of an authoritarian system, at least on questions of public health.  (That’s not my view, as Taiwan did better than China.)  The prestige of America has never been lower.

Here’s what Tyler said a year ago:

A third set of possible benefits relates to the internal power dynamics in the Chinese Communist Party. For all the talk of his growing power, Chinese President Xi Jinping has not been having a good year. The situation in Hong Kong remains volatile, the election in Taiwan did not go the way the Chinese leadership had hoped, and now the trade war with America has ended, or perhaps more accurately paused, in ways that could limit China’s future expansion and international leverage. This trade deal takes Xi down a notch, not only because it imposes a lot of requirements on China, such as buying American goods, but because it shows China is susceptible to foreign threats. . . .

It is too soon to judge the current trade deal a success from an American point of view. Nevertheless, its potential benefits remain underappreciated, and there is a good chance they will pay off.

It’s no longer too soon to judge.  Perhaps without Covid-19 the outcome would have been more favorable to the US, but as of today the trade war looks like an own goal for the US.  The correct policy would have been to join the TPP back in 2017.  And increase high skilled immigration from China (including Hong Kong.) Let’s hope the Biden Administration learns the right lessons.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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