https://www.bradford-delong.com/2019/02/a-rant-on-trump-trade-and-china.html
I'm still trying to come to terms with my Commonwealth Club event with Steve Moore last month. As therapy, I took some of my less-than-coherent ravings and tried to turn then into proper rant:
Steve, what you are saying is simply delusional.
You keep saying that Xi needs to deal because Trump is deadly serious on China and will not back down. Do remember that Trump declared victory on reforming NAFTA, "the worst trade deal in the history of the world", with small adjustments on autoparts rules-of-origin. Small adjustment on auto parts were enough to transform NAFTA, in Trump's mind, from the worst trade deal in the history of the world into something he is now very proud of. Xi has to to be thinking that he should deal with Trump the same way that Mexico did—hang tough, provide a few symbolic concessions only, and Trump will cave and go back to business-as-usual. What is there in the situation that would keep that from being the obvious strategy for Xi?
The United States in the nineteenth century did not pay a cent to Britain for its intellectual property in textiles and steel. Japan industrialized without paying a lot of attention to claims about who owned intellectual property. Now China is doing the same thing—this is what rising powers always do. We did not pay a cent in royalties to Charles Dickens for all of his novels in the nineteenth century. In fact, as late as the 1950s we used a loophole to steal J.R.R. Tolkien's copyright to The Lord of the Rings. We did it to Britain. Japan did it to us. Now China is doing it to us and Japan. This is a source of annoyance. This is a thing to negotiate about. We push, we pull. But that does not change the fact that international trade relationships—whether between Britain and the United States in the 19th century or Japan and America in the mid-20th century or the U.S. and China today—are all enormously valuable win-wins. We are arguing about the division of an enormous surplus from the global division of labor. Letting that argument turn into a trade war that wrecks the joint is hte definition of stupidity.
The Obama administration sought leverage over China with respect to intellectual property issues. It wished take a harder line with China on intellectual property. The Obama administration sought to get as many as possible of China's other trading partners on our side. It formed this organization called the Trans-Pacific Partnership to set up a common negotiating position on what the international trade régime in the Pacific should be. The plan was for the TPP countries to then confront and negotiate with China. And back then you thought this was good—you and Art Laffer wrote a number of pieces about how great the TPP was, and how much leverage it would have—and, indeed, when the bulk of countries from which China might seek to buy from or sell to are on board, you have a lot of leverage. You wrote about how Marco rubio was to be praised because he had been willing to become a decisive Senate vote to grant Obama the power to negotiate the TPP.
Then, lo and behold, suddenly someone convinces trump that the TPP is the second-worst trade deal in American history—"it's almost as bad as NAFTA!"—and you switch sides: all of a sudden you are there on Trish Regan's show claiming the TPP is a horrible deal for America.
Donald Trump... is not a terribly wise person. Jared Kushner finds a guy Peter Navarro who seems to be simply delusional and brings hin into the White House, Robert Lighthizer—who was an effective pro-free trade technocrat back in the Reagan and Bush 41 administrations—as now adopting positions that I can only understand as driven by corruption. Trump, Navarro, and Lighthizer appear to be running this China trade war. And I cannot find a single person in the White House who approves of what they are doing.
Trump was—it appears Trump still is—insisting on bilateral balance with China. That is not going to happen. Balanced trade inevitably requires bilateral surpluses and deficits because for no country in the world is the set of countries it wants to export to identical to the set of countries it needs to import from. Balance is always triangular and more complicate patterns of balance, not bilateral balance. Moreover, low-savings countries run trade deficits. The United States is a low-savings country. And the United States is a country that wants to import from China but sees other countries as more attractive export targets.
Consider how things look from Xi's perspective, sitting there in Beijing. Xi has got to conclude that somebody who truly cared about and was genuinely serious about the intellectual property issues would not have blown up his leverage on day 1 by nuking the TPP. Someone who cared about trade issues at all would not be damanding something—bilateral trade balance—that is never going to happen both because the U.S. is a low-savings country and low-savings countries run trade deficits, and because the way trade would balance would have China running bilateral deficits with its materials suppliers, its materials suppliers running bilateral deficits with us, and our running a bilateral deficit with China.
Xi has got to conclude 's going on, um, that either this is all a big bluff because someone who was genuinely serious about intellectual property would not have thrown away his leverage to start with and would not be demanding something that simply ain't going to happen no matter what balanced bilateral trade, either it's a bluff or this is simply someone who cannot be reasoned with. Um, and so we're going up kind of have to do what other people do. What the mexican government, the mexican government was faced with trump who thought that naft claimed to think proud. Nafta was not the second worst, but the worst trade deal in american history. And lo and behold, change the name of nafta to what is it canadian us mexican free trade agreement or something and have some very minor adjustments. In what counts as domestic auto parts, production adjustments that us auto manufacturers didn't really want them don't really care about, and all of a sudden, instead of being the worst trade deal in american history, naf does something perfectly fine that trump is way competent to happy to sign and is extraordinarily proud of those ge thinks is betting that trump will fold here again as he folded with nafta and ge thinks if trump doesn't fold well, this isn't really a rational agent we're dealing with.
From Xi's perspective, it has to look like he is negotiating with somebody who is (a) bluffing or (b) flunking his Turing Test.
So Xi and his advisors have to conclude that (a) Trump is probably bluffing—as he bluffed on the shutdown, as the bluffed on NAFTA—and that (b) even if Trump is not bluffing, there is no point in offering concessions because the people running policy—Trump, Navarro, Lighthizer—are not wise, are delusional, appear corrupt—and they have no support either inside or outside the White House. So we had better hope this is another Trump bluff.
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