10◼ REMARKS Bloomberg Businessweek September 16, 2019problems. “For each intended consequence of the tariffs,
you probably get 10 unintended consequences,” says Stephen
Myrow, managing partner of Beacon Policy Advisors LLC in
Washington, who worked in Bush’s Treasury Department.
The rationale for Trump’s trade war isn’t always clear. At
times, he justifies tariffs as a temporary measure to force China
to the negotiating table; at other times he sees them as a force
for bringing jobs and production back to the U.S. The latter
ambition is a mirage. Self-sufficiency sounds like a good thing,
but in practice it’s a recipe for slow growth or worse. No econ-
omy, even one as big as the U.S.’s, can do everything well. Free
trade allows each country to specialize in what it’s best at and
to buy the rest from others.
There’s always been a security angle to free trade. In 1860,
France and Britain signed the first modern trade pact, known
as the Cobden-Chevalier Treaty. That was less than half a cen-
tury after the end of the Napoleonic Wars and arose from the
brilliant observation that trading is better than fighting. Many
nations that weren’t a party to Cobden-Chevalier adhered to
its spirit. That lasted until the Great Depression, when nations
raised tariffs in a fit of beggar-thy-neighbor rivalry. After the
Depression came the even deeper breakdown of World War II.
Those twin catastrophes renewed interest in promoting free
trade in the name of prosperity and security. In October 1947,
two years after the war’s end, 23 nations signed the General
Agreement on Tariffs and Trade. But the Soviet Union opted
out, forming a rival trading bloc with its Eastern European sat-
ellites called the Council for Mutual Economic Assistance. That
self-isolation, combined with the pernicious effects of commu-
nism, sowed the seeds of the Soviet bloc’s demise by retarding
technological progress and economic growth.
A high point for free trade came in 2012, when Russia joined
the GATT’s successor, the WTO. But now, a couple of decades
after the Soviet Union’s dissolution, the world may be sliding
back into a bipolar trading regime.
Some of Trump’s advisers, including Navarro, appear to
regard the rivalry with China as a replay of the long twilight
struggle with the Soviet bloc. China is successful only because
“they steal stuff,” Navarro said in a discussion last year at the
Center for Strategic and International Studies. The Chinese
“take the technology of the world and avoid the 10, 20, or
30% R&D expenditures that other companies have to spend
every year,” he said. Deprived of free access to Western tech-
nology, he said, China “would be left with an economy that
would effectively lose its edge.”
But hawks like Navarro may be underestimating China. It
is a more productive, more competent player in technology
than the Soviet Union ever was. It’s also more integrated into
global supply chains, meaning that the rest of the world needs
China almost as much as China needs the rest of the world.
Trump is trying to get China to abandon its Made in China
2025 program, a 10-year government plan to make the coun-
try a world player in 10 key sectors from aerospace to arti-
ficial intelligence. Trump argues accurately that China has
broken free-trade rules to advance the project. But getting Xito stop working on the 2025 project altogether is unrealistic.
While it’s easy to imagine the trade war worsening, there
are grounds for hope that it will return to something nearer
the status quo ante bellum. David Jacks, an economist at Simon
Fraser University in Vancouver, says influential U.S. businesses
may push back harder against Trump’s agenda. He expects
“pretty significant lobbying on the part of very large U.S. corpo-
rations that have made very significant investments in terms of
fixed capital in global value chains over the past 30, 35 years.”
One reason for corporate pushback would be that the U.S.,
in trying to isolate China, could isolate itself instead (page 34).
That would happen if other nations choose to keep doing busi-
ness with China on favorable tariff terms, leaving only the U.S.
to pay high prices for Chinese goods without any concomitant
benefits. “I don’t see how one can set up global supply chains
excluding China if companies from other countries include
them,” Brookings’s Bader wrote in an email. “We are not going
to persuade the Europeans and Japanese to exclude them. That
puts a ceiling on how far decoupling can go.”
Another cause for hope is that Trump or more likely who-
ever succeeds him in the White House will take notice that
China has on many fronts performed as a responsible world cit-
izen. Yes, its record on human rights is inexcusable, and its mil-
itarization of the South China Sea is destabilizing. On the other
hand, it stopped manipulating its currency. It’s become a world
leader in renewable energy and, unlike the U.S., has joined the
Paris climate accord. The Chinese, far from being inscrutable,
have the same hopes and aspirations as Americans. “Chinese
society is more similar to American society than Soviet society
ever was,” Yale historian Odd Arne Westad writes in the latest
issue of Foreign Affairs magazine. America’s relationship with
China can be positive, not purely a zero-sum game in which
one side’s gain is the other’s loss.
Writing under the pseudonym “X” 72 years ago, American
diplomat George Kennan laid out a plan for the U.S. to compete
with the Soviet Union. As Westad writes, Kennan stressed that
the U.S. needed to “create among the peoples of the world gen-
erally the impression of a country which knows what it wants.”
Self-knowledge is equally key today. The alternative is blun-
dering into a bitter divorce that’s in no one’s best interest. <BW>2000 2018 7/2014 7/$ 50b2 502 0%0-2 0Impacts of the Trade War
Value of foreign direct
investment
U.S. investment in China
Chinese investment in the U.S.Change in value of U.S. goods
trade since July 2014
Imports from China
Exports to ChinaDATA: RHODIUM GROUP, FEDERAL RESERVE BANK OF ST. LOUIS10
◼ REMARKS Bloomberg Businessweek September 16, 2019problems. “For each intended consequence of the tariffs,
you probably get 10 unintended consequences,” says Stephen
Myrow, managing partner of Beacon Policy Advisors LLC in
Washington, who worked in Bush’s Treasury Department.
The rationale for Trump’s trade war isn’t always clear. At
times, he justifies tariffs as a temporary measure to force China
to the negotiating table; at other times he sees them as a force
for bringing jobs and production back to the U.S. The latter
ambition is a mirage. Self-sufficiency sounds like a good thing,
but in practice it’s a recipe for slow growth or worse. No econ-
omy, even one as big as the U.S.’s, can do everything well. Free
trade allows each country to specialize in what it’s best at and
to buy the rest from others.
There’salwaysbeena securityangletofreetrade.In1860,
FranceandBritainsignedthefirstmoderntradepact,known
astheCobden-ChevalierTreaty.Thatwaslessthanhalfa cen-
turyaftertheendoftheNapoleonicWarsandarosefromthe
brilliantobservationthattradingis betterthanfighting.Many
nationsthatweren’ta partytoCobden-Chevalieradheredto
itsspirit.ThatlasteduntiltheGreatDepression,whennations
raisedtariffsina fitofbeggar-thy-neighborrivalry.Afterthe
DepressioncametheevendeeperbreakdownofWorldWarII.
Thosetwincatastrophesrenewedinterestinpromotingfree
tradeinthenameofprosperityandsecurity.InOctober1947,
twoyearsafterthewar’send, 23 nationssignedtheGeneral
AgreementonTariffsandTrade.ButtheSovietUnionopted
out,forminga rivaltradingblocwithitsEasternEuropeansat-
ellitescalledtheCouncilforMutualEconomicAssistance.That
self-isolation,combinedwiththeperniciouseffectsofcommu-
nism,sowedtheseedsoftheSovietbloc’sdemisebyretarding
technologicalprogressandeconomicgrowth.
A highpointforfreetradecamein2012,whenRussiajoined
theGATT’ssuccessor,theWTO.Butnow,a coupleofdecades
aftertheSovietUnion’sdissolution,theworldmaybesliding
backintoa bipolartradingregime.
SomeofTrump’sadvisers,includingNavarro,appearto
regardtherivalrywithChinaasa replayofthelongtwilight
strugglewiththeSovietbloc.Chinais successfulonlybecause
“theystealstuff,”Navarrosaidina discussionlastyearatthe
CenterforStrategicandInternationalStudies.TheChinese
“takethetechnologyoftheworldandavoidthe10,20,or
30%R&Dexpendituresthatothercompanieshavetospend
everyyear,”hesaid.DeprivedoffreeaccesstoWesterntech-
nology,hesaid,China“wouldbeleftwithaneconomythat
wouldeffectivelyloseitsedge.”
ButhawkslikeNavarromaybeunderestimatingChina.It
is a moreproductive,morecompetentplayerintechnology
thantheSovietUnioneverwas.It’salsomoreintegratedinto
globalsupplychains,meaningthattherestoftheworldneeds
ChinaalmostasmuchasChinaneedstherestoftheworld.
Trumpis tryingtogetChinatoabandonitsMadeinChina
2025 program,a 10-yeargovernmentplantomakethecoun-
trya worldplayerin 10 key sectors from aerospace to arti-
ficial intelligence. Trump argues accurately that China has
broken free-trade rules to advance the project. But getting Xito stop working on the 2025projectaltogetheris unrealistic.
While it’s easy to imagine the trade war worsening, there
are grounds for hope that it will return to something nearer
the status quo ante bellum. David Jacks, an economist at Simon
Fraser University in Vancouver, says influential U.S. businesses
may push back harder against Trump’s agenda. He expects
“prettysignificantlobbyingonthepartofverylargeU.S.corpo-
rationsthathavemadeverysignificantinvestmentsintermsof
fixedcapitalinglobalvaluechainsoverthepast30, 35 years.”
OnereasonforcorporatepushbackwouldbethattheU.S.,
intryingtoisolateChina,couldisolateitselfinstead(page34).
That would happen if other nations choose to keep doing busi-
ness with China on favorable tariff terms, leaving only the U.S.
to pay high prices for Chinese goods without any concomitant
benefits. “I don’t see how one can set up global supply chains
excluding China if companies from other countries include
them,” Brookings’s Bader wrote in an email. “We are not going
to persuade the Europeans and Japanese to exclude them. That
puts a ceiling on how far decoupling can go.”
Another cause for hope is that Trump or more likely who-
ever succeeds him in the White House will take notice that
China has on many fronts performed as a responsible world cit-
izen. Yes, its record on human rights is inexcusable, and its mil-
itarization of the South China Sea is destabilizing. On the other
hand, it stopped manipulating its currency. It’s become a world
leader in renewable energy and, unlike the U.S., has joined the
Paris climate accord. The Chinese, far from being inscrutable,
have the same hopes and aspirations as Americans. “Chinese
society is more similar to American society than Soviet society
ever was,” Yale historian Odd Arne Westad writes in the latest
issue of Foreign Affairs magazine. America’s relationship with
China can be positive, not purely a zero-sum game in which
one side’s gain is the other’s loss.
Writing under the pseudonym “X” 72 years ago, American
diplomat George Kennan laid out a plan for the U.S. to compete
with the Soviet Union. As Westad writes, Kennan stressed that
the U.S. needed to “create among the peoples of the world gen-
erally the impression of a country which knows what it wants.”
Self-knowledge is equally key today. The alternative is blun-
dering into a bitter divorce that’s in no one’s best interest. <BW>2000 2018 7/2014 7/$50b2502 0%0-2 0ImpactsoftheTradeWar
Valueofforeigndirect
investment
U.S.investmentin China
Chinese investment in the U.S.Changein valueofU.S.goods
tradesinceJuly 2014
ImportsfromChina
Exports to ChinaDATA: RHODIUM GROUP, FEDERAL RESERVE BANK OF ST. LOUIS