The mercantile solution
Maybe trade talks with China are back on, or so says Donald Trump. The Chinese want to talk, he claims. More likely he is the one that needs to find an out: the slowing world and American economies and sharp drops in the stock market are flashing alerts: by November 2020 we could be in recession. His re-election prospects would be dealt a big blow if that materializes. No doubt he got an earful about all this from his G7 colleagues over the weekend.
An early solution to the trade war appears unlikely. The American position in the talks advocates fundamental changes in the way the Chinese manage their economy and treat foreign investors. The American negotiators want no technology transfer requirements, a free-floating Chinese currency, and an end to state subsidies. These are so-called “structural” changes that are difficult for the Chinese to concede. China needs more than 6% growth to accommodate its population’s expectations.
President Trump couldn’t care less about all that. He is interested mainly in the bilateral trade balance. A mercantilist, he regards imports as bad and exports as good. What he wants is not complicated structural change–which takes time and attention to detail–but rather simple Chinese commitments to import more from the US. The Chinese have understood this and are likely willing to give him what he wants: they should not care less whether they get soybeans from the US or from Brazil.
Negotiating with the US is therefore a two-level game. The Chinese have understood this: they will do their best to satisfy Trump on reducing the giant bilateral trade deficit while stiffing his negotiators on the structural changes. They will hope this approach will bend the President towards lifting the tariffs he has imposed while Beijing avoids fundamental reforms.
It may work, but it may not. If Trump is a true mercantilist, he will want to make the tariffs permanent, or at least of indefinite duration. Only then could he hope for American companies to do what he “ordered” last week: return to the US, where he would need to protect them from foreign competition with tariffs. If this is Trump’s real ambition, you can expect any renewed trade talks to fail.
You can also expect a permanent decline in US competitiveness as other countries meet competitive challenges while the US is protected from them. Americans will be less well off, productivity will suffer, foreign investment will shrink, the economy will grow more slowly, and the stock market–hesitant now–will fall to new lows. The mercantile solution is a bad one, but hard to rule out with a President who is a mercantilist.
RSS - Posts
