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President Trump’s trade war and the rise of China: Paul Heise

Posted 12/12/18

President Donald Trump has started a trade war with the world and particularly with China. He is opposing the tide of history.

Trump accuses the Chinese of stealing intellectual property, …

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President Trump’s trade war and the rise of China: Paul Heise

Posted

President Donald Trump has started a trade war with the world and particularly with China. He is opposing the tide of history.

Trump accuses the Chinese of stealing intellectual property, manipulating the value of their currency and maintaining a large export surplus in order to steal American jobs. No one doubts that the Chinese are doing all of this and more.

Chinese and American policies are both straight out of the mercantilism playbook. Mercantilism advocates government-managed trade. More exports and fewer imports provides a trade surplus and an accumulation of wealth, defined as, gold or monetary reserves. Trump is a mercantilist when he says he is a “tariff man.”

The United States and the major industrial powers all purportedly advocate free trade. China has committed itself to free trade but continues to maintain a planned economy. The United States and China in their trade war are acting like two mercantilist countries competing for trade, but the competition is more political than it is economic.

Trump cites American trade legislation as authorizing the president to retaliate against countries that cheat and subsidize imports. The president is also authorized to protect industries important to national defense. Most uses of this national defense provision are fraudulent.

But then this is a good place to make the point that no one really obeys the rules and most disagreements are settled privately.

The industrial countries don’t, until recently, go to the official mechanisms for dispute settlement. They recognize the political needs of their trading partners and they try to accommodate each other’s political needs.

The rules are used to fit a specific historical situation — the Rise of China. In the 19th century, Britain ruled the waves and everything else. This includes science, technology and the military as well as output, trade and finance. They were big and rich. Cape Town to Cairo was the Ring Road of its day.

But the United States was bigger and richer in population and in natural resource. Americans were also taking advantage of an undervalued currency, a freedom to steal intellectual property and high tariffs. The Americans were doing everything that the Chinese are now being accused of.

There is a pattern here. The developing country breaks all the rules as it plays catch-up; the developed country complains of job and trade theft. The power, in this case the United States, complained loudly of Japan’s closed markets and its deliberately undervalued yen. The yen was held at 360 to the dollar from 1949 to 1971. Japan did everything to strengthen its own economy at the expense of others especially America.

But Japan did not have the economy necessary to assume leadership role and had to concede to the United States demands to open their markets.

Now it is China’s turn to try to displace the United States as the world economic power. China has the population and the resources necessary to lead the world, and they have every intention of doing that. While the imposition of tariffs for a trade war may inconvenience the United States, it is unlikely that an economy the size of China (1.386 billion people) will be bothered with the pinpricks of this trade war. The Chinese believe it is their turn, their right, to lead the world. The 20th century was American. The 21st century will be China’s.

America is to China as Britain was to America. Trump can advocate an America First policy, but he can’t change the outcome.

Paul A. Heise, of Mount Gretna, is a professor emeritus of economics at Lebanon Valley College and a former economist for the federal government.