In the old competitive economy, trade wars might be easy to win for a country with a large trade deficit. But, in the emerging winner-take-all economy, a war designed to force the rest of the world to open up, thereby allowing the aggressor’s own winning firms to earn higher rents, is an altogether different proposition.
With President Donald Trump’s new trade tariffs, the United States has been transformed from the global multilateral trading system’s leading champion and defender to its nemesis. But it would be very difficult for an erratic politician suddenly to overturn long-established structures and mechanisms, were it not for a more fundamental economic shift.
The first formal manifestation of today’s trade tensions occurred in the steel sector – an “old economy” industry par excellence, one that is plagued, especially in China, by enormous excess capacity.
Excess capacity is a recurrent phenomenon in the steel sector, and has always produced friction. Back in 2002, President George W. Bush’s administration imposed steep tariffs on steel imports, but relented when a World Trade Organization dispute-resolution panel ruled against the US. Although Trump administration trade hawks remember this ruling as a loss, most economists agree that it was ultimately good for the US economy, which does not gain from taxing a major input for many other industries.
In any case, today’s tariffs differ from Bush’s in a crucial way: they specifically target China. Under section 301 of the US Trade Act of 1974 – which empowers the president to act if US industry has been damaged by a foreign government’s unjustified actions – Trump has imposed steep tariffs on some $50 billion worth of Chinese imports. And China has already hit back, introducing steep tariffs on imports of 128 US-made products.
So why is Trump risking a trade war? His administration’s main complaint is that China requires foreign companies to reveal their intellectual property (IP) as a condition of access to the domestic market. And it is true that this requirement can do serious damage to US tech companies – as long as those companies are dominant in their industries…