You know I refrain from a discussion of politics, which may appear odd given the highly political nature of my adopted nation this week. My political or moral choices are no more valid than yours in the democracy we all cherish. I am a student of emerging global economics, though. I have also traveled to a few dozen countries on five continents, including China, the fifty states, and all the Canadian provinces and territories. In my travels I am more interested in the economic vitality I witness than in their politics. And, when I want to learn more about something, I sometime opt to write a book on the subject to indulge my curiosity. One such book is “The Rise and Fall of an Economic Empire.” The observations in that book seem increasingly apt.
The next four years will be interesting on the economic front. We have discussed at length in this blog the negative consequences to U.S. consumers should President-Elect Trump follow through with his threats to impose high tariffs on Chinese goods. That will ratchet up the price of just about everything we buy at Walmart and Harbor Freight, and much of what one purchases on Amazon. In the end, punishment for perceived China trade transgressions will be paid by American consumers. Significant inflation is the net result.
Of course there are reasons to be frustrated with China. Its human rights record is abysmal for the world's second largest economy, the second most populous nation, and the third largest country (after Canada). In the western world we have the expectation that with membership to the club of dominant nations comes a certain responsibility to protect human rights. China’s culture is much more centered on the collective rather than the individual, and is far more willing to constrain or imprison individual wants that challenge perceived collective needs. That is not a value shared among most all other developed nations. We find the principle of the state over the individual baffling and problematic, but, then again, they probably find our tolerance for antisocial individuals baffling as well.
This sociopolitical difference also creates perhaps the biggest economic tension between the US and China. Chinese corporations are willing to appropriate western intellectual property without paying for the research and development or the royalties justly earned by inventors. In a collective society, such theft of intellectual property is not an aberration as the creativity remains in the family. However, it violates a premise of western world economies in which personal property is paramount, even our creative property.
A global trade pact was negotiated after the Second World War to ensure allies cooperate in trade rather than pursue the beggar-thy-neighbor policies that helped precipitate the isolationism and hostilities of WWII. Nations at the Bretton-Woods Conference enshrined the economic concepts of private property and free trade. We now find rightly objectionable China’s policy of taking from the General Agreement on Trade and Tariffs (GATT) what suits them the best and ignoring the rest. However, the solution is not a go-it-alone strategy. Rather, we should all be vigilant in the promotion of a united front to collectively deter China's violation of the preservation of intellectual property and free trade principles.
Else, we will be isolated and suffer the brunt of China’s successes. To impose tariffs unilaterally and potentially force our allies to pick sides in a trade war will only isolate the U.S. further and may even push some of our allies into the arms of China. While tariffs are often rationalized as the stick that will correct China’s errant ways, they are unproductive in the long run. Yes, such tariffs will hurt China in the short and medium run, and cost American consumers greatly, but China may find them a blessing in disguise in the long run. Meanwhile, the other side of that coin, somehow improved American competitiveness and manufacturing jobs will simply not materialize.
When then-President Trump last tried to punish China with punitive tariffs at the beginning of 2018, China’s exports to the U.S. faltered, but that decline was more than made up with trade surpluses with other partners. Overall, as today’s graph shows, China’s trade patterns almost doubled while the U.S. trade deficit worsened significantly following the U.S.tariffs of 2018. Boy, we taught China a lesson. .
Reduced trade with China ultimately meant that jobs to fuel US consumerism instead went to countries producing similar products but not subject to the tariff. Vietnam and Thailand, Indonesia and Germany, Cambodia, Mexico, Brazil, and others already have the necessary productive capacity, wage structure and/or efficiencies to fill the gap China left. In anticipation of further ratchetted-up tariffs, the American shoe manufacture Steve Madden has already announced they will discontinue production in China, but these jobs aren’t coming back home. They will go to Cambodia, Vietnam, Brazil and Mexico instead.
Should we double down on this failed strategy because we somehow expect different results, and if we compound the problem by simultaneously deporting millions of essential workers, we won’t have the people anyway to fill the hoped-for jobs that President-elect Trump argues will be generated here following a trade war with China.
The threatened tariffs will also impose 100% duties on Fords and GMs made in Canada and Mexico, and similar tariffs on Europe. There is no argument that these nations are somehow cheating the U.S. Such an obliteration of a generations-long agreement with our strongest ally that has worked well for both countries makes no sense from an economic perspective. I sense President Trump does not much like Prime Minister Trudeau, perhaps resentful of the quality and quantity of Trudeau's mane, but that is no reason to isolate ourselves further from our allies across the longest undefended border in the world.
Such tariffs will also result in retaliation from whatever nation at the sharp edge of them. China cannot stand idly by. Instead, it will impose tariffs not on the finished goods Trump hopes to block, but of the agricultural goods and resources the US sells to China. We seem little concerned about those low value-added jobs. Maybe it is because we know we soon won’t have the workers toiling in the fields to bring in the harvest anyway. Again, prices go up for American consumers.
I am sure China wished for a different outcome in this election. But, from an economic perspective, the outcome may be a blessing in disguise that could bode well for China for generations. Here’s what I would do if I were China.
As the second largest economy in the world, but the only one of the top two that aims for tariff-free trade, they will quickly reach out to Europe (which is also frustrated by NATO rhetoric), Mexico, South America, and the rest of Asia to argue for an enhanced trade bloc. China would be wise to promise true and beneficial investment, not the investment in nation-building driven by short term imperial interests, but that sows the seed of prosperity a generation from now. In other words, China should take the long view by showing its commitment to free trade and to a “rising tide lifts all boats” philosophy rather than a your-loss-is-my-gain perspective.
China might also send productive capacity abroad. Perhaps for different reasons than we experienced in the US, it is struggling with a labor force that is expected to shrink. If it could instead export jobs it may be unable to full anyway, but then repatriate profits, it can maintain its national income but also secure leverage and loyalty in nations that benefit from its technology and investment.
We should not engage in old-think that China does not have the necessary manufacturing sophistication to pull that off. Think of the investments we make. We buy cars that are increasingly electric. We purchase power that increasingly comes from solar panels. We like our gadgets that are already mostly made in China. Even our processing power, and artificial intelligence equipment are often manufactured in China, or Taiwan, which China seems determined to bring more completely into its fold, probably sooner rather than later, given the President-elect’s anti-interventionist attitudes.
In these various areas of technologies the world demands, China is the leader. It has the world’s biggest, most innovative, and most cost-efficient electric cars (sorry, Elon), it is the undisputed world leader in solar panels, it now publishes more articles in leading science journals than any other nation, it has one of the world’s most sophisticated telecommunications companies, rocketry second only to the U.S. (for now), and China learned a few years ago that it must home-grow its own state-of-the-art semiconductors following the last round of Trump tariffs. I don’t doubt China could soon be world leaders on that front too, given the rapid advances they are currently making.
If China can emerge as a co-leader in advanced manufacturing, they can leave to the US the financial industry, the legal industry, and education, all of which will soon be done significantly with AI soon anyway. Instead, China can use its greater capacity to borrow to invest in global partnerships. Despite its very large programs for domestic investment over the next five years, China’s debt is projected to be around $29 trillion. By then the size of its economy will rival the U.S. But, by then, the U.S. was projected to have debt of around $47 trillion. That is before we realize the debt that must be incurred for all the giveaways Trump promised to secure his election. With about half the debt, China has a great capacity to invest because the savings of their households is not eaten up to cover borrowing for an ever-accelerating national debt as it is in the U.S.
China’s investment won’t be American-style. Our government spending is typically based on the belief that dropping cash into the pockets of consumers is an investment. It gives us more cash to buy Taylor Swift tickets, spend more on existing homes, take vacations, buy a bigger boat, and pay for the exorbitant cost of tuition at elite schools. We can go out to restaurants more often, and even take trips abroad, maybe even to China. But, our government spending translates little into global competitiveness because we are a nation that too often looks inward already, and shall do so on a grand scale in the future, if campaign promises mean anything.
No, China will not make that mistake. They will try to shore up domestic income, and some of that will translate into domestic consumption, but a lot of it will also result in more domestic savings. China saves, and hence reinvests, almost 46% of its national income, while the U.S. saves about 3.6%. No, that is not a typo. China saves and reinvests at a rate about 13 times more than we do. Our low savings rate will not go up substantially from promised tax breaks, unlike what happens in China. And, while we abhor the notion of a government that invests directly in such infrastructure as sustainable energy, a modern electric grid, or even a modernized manufacturing sector or technical training, China’s government is all too happy to invest in its own competitiveness.
So, while China may cry into its Tsingtao for a few days while it comes to grips with Trumpian rhetoric that may soon translate into anti-China policy, I imagine they will quickly realize the Chinese proverb: “A crisis is an opportunity riding a dangerous wind.” Our simplistic view of international affairs may well come back to bite us in the behind. While we oscillate and vacillate on our political philosophy every four years, China never takes its eyes off the ball. They so want to knock the US off the perch as the largest and most powerful country in the world. Meanwhile, our lack of self-awareness that for some borders on narcissism may well be our undoing.
I'll leave it to other commentators to speak to the nuances of the other facets of President-elect Trump's platform. My concern here is the long run economic health of our nations and a return to international principles of world trade and of respectful negotiations among countries that have served us well for mutual prosperity and the avoidance of hostilities since World War II. In fact, that was once the avowed tradition of the Republican party, especially under President Reagan. This is a role for creative destruction but we can do it without the collateral damage to other valued institutions. And I lament the severe headwinds we are leaving for our children. It’s not too late to reestablish our position as a global leader respectful of allies and always willing to expand the tent in the interest of mutual prosperity, but it is the eighth or ninth inning, and we are not even aware of the scoreboard or the fact that the bases are loaded.