The method behind the madness of Trump’s trade policy

There is a recurring criticism of President Trump’s trade policy: it is badly designed to obtain its ostensible ends. The tariffs against China are supposed to pressure Beijing into changing its intellectual property policy. But the strategy is poorly designed for that end. Consider:

1. Instead of heavily taxing employment-heavy Chinese sectors, like toys and textiles, you moderately tax the intermediate and capital goods used by American industries;
2. Instead of building a coalition against China, you start trade conflicts with your allies ... once again over intermediate goods like steel and aluminum;
3. You further alienate our allies by threatening automobile tariffs* ... that won’t affect China;**
4. You don’t give the Chinese government any face-saving way out of the trade war. 

As a policy designed to change Chinese development policy, this is stupid. 

But as an exercise, my MBA and undergraduate students separately walked through this policy, and they came to a different conclusion: if you want to make sure that high tariffs on Chinese exports are hard to reverse, then the strategy makes sense. Hurting American industries and forcing them to rework their value chains is a feature, not a bug. Making it hard for the Chinese to back down is a feature, not a bug. And alienating the rest of the world, to further insure that the Chinese won’t compromise, is a feature, not a bug. 

It might not be the best way to insure that high tariffs stay around for the next few decades regardless of the electoral outcomes in 2018 and 2020, but it isn’t a terrible one either. Especially if causing collateral damage to American industries is the point.

In other words, there is method to the madness. High tariffs are not a tool, but the outcome. The trade war is not meant to be won, but to be continued forever.

* The new USMCA (oh God, do I have to change my NAFTA tag now?) is said to have a side agreement exempting Mexico and Canada from those potential tariffs. More on this when I have it. 

** Ford did announce that it was not going to start making cars in the People’s Republic, so it is not impossible to imagine that threatened auto tariffs might have some effect. But then you aim the car tariffs at China, not the world. 

Comments

[J.H.]

The trade war is not meant to be won, but to be continued forever

So....it's The Forever War....of trade and Trump?

[J.H.]

Also, don't change the NAFTA tag. It's still NAFTA. Even if Trump did deed poll the name to USMCA.

ALso, good work on calling the outcome in essence over a year ago:

I now suspect that the much-ballyhooed NAFTA renegotiation is going to end with stricter rules of origin, say 80% instead of 62½. There may also be some weakening of the dispute-resolution mechanism and higher labor standards. But I increasingly think that the Trump administration will refrain from blowing it all up.

[Bruce A Munro]

Another eternal war, to be added to the War on Terror, the War on Drugs, and the War on Christmas.