Trump’s Trade War Makes Us All Losers

President Trump thinks foreign policy works like the New York real estate industry. In The Art of the Deal he recalls how he used to obtain profitable agreements from competitors by intimidating them, raising his bets to the limits of suicide, or beating them out of fatigue. Relations between states do not work like that because there are political considerations that cloud the boundaries between the rational and the irrational, because the consequences are suffered by actors who are not on stage as much as those who are, or because no government can control everything.

Trump thinks he can push China to the brink of despair and force a demoralized Xi Jinping into a trade deal. He doesn’t understand that the Chinese dictator, no matter how much his economy may hurt, owes his legitimacy to the nationalist ethos on which he has built his control over the Communist Party. He also seems oblivious of the fact that China still has several weapons at its disposal that could wreak havoc in the United States, including $1.2 trillion in U.S. bonds it could sell, a near monopoly on rare earth and, of course, the ability to devalue the yuan much further, regardless of how much these measures could also hurt China. (Remember: power politics is not a rational game.)

The commercial war between the world’s superpower and the Chinese dictatorship has affected the U.S. economy, which has dropped from an annual rate of growth of 4 percent to 2 percent and brought the world closer to a recession that, without being too distant, was not imminent. Chinese direct investment in the United States fell 83 percent in 2018 as a result of the start of the commercial war with tariffs placed on $50 billion worth of imports. The subsequent protectionist measures against $200 billion worth of Chinese products, taken in May of this year, made many imports more expensive in the U.S. and hit American farmers because of China’s reprisals. That is why Trump has decreed various forms of aid to farmers totaling more than $40 billion. None of this has prevented the president from recently announcing tariffs of 10 percent on another $300 billion worth of Chinese imports (the application of the tariff on some of those goods has been delayed).

The United States has succeeded in causing China some problems. Although growing at 6 percent, the Chinese economy is expanding at its lowest rate in thirty years. But the effects are also felt across the rest of the world, such as Africa and Latin America, where many countries export commodities whose largest marginal buyer is China.

Washington justifies the trade war by accusing China of devaluing its currency to favor its exports. Actually, the opposite had happened before Trump recently announced another batch of punitive tariffs. Since May, when the previous protectionist measures were applied, China had intervened to prevent a precipitous fall of the yuan that would otherwise have been inevitable. Now, after the latest protectionist measures, Beijing has decided to let it drop somewhat.

China has manipulated its currency for decades, of course, as have most governments, including the United States and Europe (monetary manipulation was a central cause of the 2008 debacle). In fact, Trump had been attacking the Federal Reserve for a year for not lowering interest rates before the U.S. central bank recently decided to do just that. In the case of Europe, what are negative interest rates on bonds worth trillions of euros if not a symptom of currency manipulation?

To these economic and monetary misfortunes, a philosophical one is added. I mean that, in the eyes of the globe, Washington, the capital of the free world, has turned Beijing, a police state, into a victim. And the communist hierarchy is now giving liberal democracies petulant and hypocritical lessons in free trade!

Alvaro Vargas Llosa is a Senior Fellow at the Independent Institute. His Independent books include Global Crossings, Liberty for Latin America, and The Che Guevara Myth.
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