Can Donald Trump’s ‘bully diplomacy’ resolve real problems with China’s trade practices?
Ken Davies argues that Donald Trump’s mercantilist views on trade reflect outdated thinking on the subject, but based on his approach to North Korea (and now Iran), it is possible that harsh words may give way to summitry, and perhaps the legitimate issues with China’s IP theft and domestic restrictions can be tackled
Will this approach work with China? Bluster and hostile trade measures might eventually produce another superficial summit with hugs and handshakes, even a framework agreement to continue negotiations on trade-related issues. But as currently implemented and conceived, they do not seem likely to lead to long-term changes that will benefit the US, China and the world as a whole.
This fallacy was rebutted by the classical economists of the late 18th and early 19th centuries, Adam Smith and David Ricardo. Smith showed that if countries specialised in what each did best, wealth would be greater all round. Ricardo developed this further into the theory of comparative advantage, which showed that international specialisation would benefit all countries even if some countries were better at producing everything.
The fundamental misconception of mercantilism is that trade is a zero-sum game, which is based on the curious illusion that global output is fixed. The classical economists argued for free trade on the grounds that it would allow total output to grow more rapidly than it would if countries remained closed or pursued a beggar-thy-neighbour mercantilist strategy, so making everyone better off.
So US consumers have been able to enjoy a higher living standard in the form of a plethora of low-priced goods of all kinds from China, while borrowing heavily from other countries, especially China.
Many of those exports from China to the US are produced by US companies or their subsidiaries in China, with most of the added value going back to the US. So China’s exports benefit the US in many ways and it is absurd to think of them as ways in which China is eating the US’ lunch.
Watch: US soybean farmers hope for an early end to trade war
The US does, though, have legitimate grounds for complaint about other elements of the economic relationship, more in the investment area than in trade.
The US and China should move sooner rather than later from “tariffry” to summitry, and the Xi-Trump summit should end with more than handshakes and anodyne press conferences: there should be a firm commitment to work on major issues identified by both sides and produce results within a reasonable time frame.
It is regrettable that resolution is not possible through dialogue within international institutions like the World Trade Organisation and the Organisation for Economic Cooperation and Development, but right now we live in the Trumpian world, where the best we can hope for is constructive bilateralism.
Ken Davies is the former chief economist, Asia and chief China economist with the Economist Intelligence Unit (EIU) in Hong Kong and senior economist in the OECD’s Investment Division in Paris, where he worked with the Chinese government on improving China’s policies towards investment