Trade (and other) Wars

We begin with a truism. Wars are not a vehicle for negotiation. War inflames sentiments on both sides, so the only resolution is victory or defeat. Victory settles pre-war issues only in that the winner can dictate terms and stands ready to enforce them with the barrel of a gun.

Our trade war with China fits that picture better than we want to believe.

It was kicked off with the idea that the war would be “easy” and that the trade imbalance meant there was little the Chinese could do to resist. Once the war got underway, however, the Chinese did not jump to negotiate. The trade war played into the hands of hardliners, who took it as proof of the folly of cooperating with the West. One symptom was that diminished intellectual property theft under Obama was replaced by a dramatic increase in all-out attacks. Nonetheless the daily diet of Chinese IP theft never mentions our role in encouraging it.

Our lack of progress with China is not because of any intrinsic weakness in our negotiating position. As we’ve noted here before, we represent 18% of Chinese exports, and the EU has another 18% with essentially the same grievances. China is no longer a developing country, and everyone expected its change of status to be negotiated at the WTO. We instead chose war (and also attacked the potential EU allies), leaving us in extended limbo.

There’s another factor too. Victory may settle everything with real wars, but trade wars are different. There is no enforcement mechanism after the fact-other than starting the whole thing over again with a better-prepared opponent. Conqueror’s terms are simply unenforceable-something will always go wrong. Viable terms are negotiated based on mutual self-interest. Trade wars are fought for a chimera.

It’s not easy to pull back from war. Nationalism doesn’t die quietly, and in the Chinese case there is a collective memory (forgotten here) of horrendous Western imperialism. The only good answer is strengthened international institutions and rules of economic fair play. That is the antidote for arbitrary wars and the basis for worldwide prosperity.

As to the future there are a few points worth noting:

1. One of our major goals with China has been opening their markets for American products. That can only happen if people want to buy the stuff. Regularizing relations is a good step.
2. Intellectual property theft is a real issue the needs real changes in behavior. However we don’t need to be fighting hardliners forever, and the Chinese have been willing to pull back before. Also we shouldn’t overreact and hamstring our own scientists with restrictions that do more harm than good.
3. Finally we shouldn’t get too hysterical about the power of Chinese state-run enterprises. Historically the state-run enterprises were most emphatically not the foundation of Chinese success. And the traditional openness and dynamism of the US economy have won this kind of contest many times before. We need above all to recognize and build to our strengths.

Originally published at http://ontheoutside.blog on September 26, 2019.