July 26, 2018, by Noah Smith
There are two kinds of trade wars: dangerous ones, and dumb ones. The former is the kind that risks hurting the economy, but has the chance of winning valuable concessions from trading partners and ultimately increasing the gains from trade. The second is the kind that hurts the country, even if it succeeds.
So far, unfortunately, much of President Donald Trump’s trade war has been of the latter variety. He has done two very unwise things — imposed tariffs on intermediate goods, and directed the trade war at U.S. allies.
Intermediate goods are materials and parts that manufacturers buy in order to produce things — for example, steel and aluminum are used to make cars, appliances, machinery, buildings and lots of other things. Tariffs on steel and aluminum give a boost to domestic producers of those metals, but at the same time they hurt other domestic manufacturers by raising the prices they have to pay. Unsurprisingly, Trump’s tariffs have made life harder for U.S. manufacturers, increasing prices for metals and helping drive up manufacturing costs:
As a result, some U.S. manufacturers will be driven out of business by the tariffs, while others will be forced, rather ironically, to shift production overseas as motorcycle maker Harley-Davidson Inc. recently said it would.
Trump’s other big mistake has been to go after U.S. allies. Fortunately, Trump seems to trying to work out a trade deal with Europe and avert a clash, but tariffs and threats against Canada, Japan, Mexico and others remain.
Rich countries like Canada and Japan don’t take U.S. jobs or force down U.S. wages via trade, because their labor costs are also high. Trade with rich countries strengthens the U.S. economy, partly because it increases the variety of products available to consumers, and partly because companies from those countries employ workers in the U.S. They also are important markets for American-made products. In addition, if the economies of major American allies take a hit, it weakens the U.S.’s global position.
So if Trump is smart, he’ll shift gears, scrap all tariffs on intermediate goods, drop all tariffs against allied nations, and focus his effort on the real issue: China.
China is the only real trade threat that the U.S. faces — it is qualitatively different from every other challenge. Until China entered the World Trade Organization and emerged as a major trading power in the 2000s, most U.S. workers who were displaced by foreign competition managed to get other similar jobs. But the China shock, as economists call it, pushed large numbers of U.S. workers into lower-paying occupations or onto the welfare rolls. China was so huge, and competed in so many industries at once, and its factories had such low costs for labor, energy, environmental protection and financing, that the U.S. economy just couldn’t adjust in time.
China’s assault, aided by an intentionally weakened currency, is probably a reason U.S. total manufacturing employment — which had held steady during previous decades, even in the face of competition with Europe and Japan — plummeted in the 2000s:
And U.S. manufacturing output, which had been increasing steadily, suddenly leveled off:
The U.S. wasn’t the only country that took a hit — most countries in Europe and East Asia saw their shares of global manufacturing output shrink even more. The very allies that Trump is now attacking were also victims of China’s rapid ascent to manufacturing supremacy.
Unfortunately, the U.S. has mostly missed its chance to make China play fair in manufacturing. China’s wages and energy costs have risen; its currency is no longer nearly as undervalued as it once was. Even if the U.S. manages to bring back manufacturing, it will now likely be done by robots rather than human hands.
But there are still ways that the Chinese government distorts trade. It steals vast amounts of intellectual property from American companies and it tilts the playing field against U.S. and other foreign companies in the Chinese market.
A concerted campaign by rich countries could potentially force China to honor intellectual property rights and allow more foreign access to its markets, making global trade both freer and fairer. In fact, other rich countries such as Japan have already been pushing in this direction.
Trump, to his credit, has now begun to focus his fire on China, threatening to put tariffs on all Chinese goods. He’s also focusing on the intellectual-property issue, which is good. Of course, such an aggressive approach is still fraught with dangers — Chinese retaliation could deeply wound U.S. agriculture, and China’s authoritarian government might be better equipped to endure the pain of a trade war.
But at least Trump is now pointing his guns more or less in the right direction. Now he needs to start fighting smarter. Tariffs on Chinese goods shouldn’t include intermediate inputs that U.S. companies use to make their products — they should only be put on consumer goods like phones, laptops, cars, washing machines and refrigerators. Also, Trump should make common cause with rich allies in Europe and East Asia, dropping all of his tariffs against them and enlisting them in a united front to force China to play fair.
Trade wars are never easy to win. Taking on China will be fraught with peril. But if Trump is going to do it, he might as well do it in ways that aren’t guaranteed to hurt his own country.