Trade Wars in a Winner-Take-All World

Apr 6, 2018 Daniel Gros

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.

BRUSSELS – 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.

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Kien Choong Apr 9, 2018

Hi, thank you for this interesting take. While I can understand that intellectual property rights should be enforced, I don't quite understand why it is "unfair" (as many commentators seem to assume) for governments to require foreign companies to transfer technology as a condition of investment.

After all, the role of governments is to protect the long-term wellbeing of consumers and workers, not to make life easy for firms. It is up to firms to decide whether they wish to invest, having regard to rules set by the country they wish to invest in. (I would welcome alternative points of view on this matter.)

I wonder if US commentators identify too easily with corporate interests. The real problems that confront the US and Western countries are unequal distribution of the gains of trade. Past Western governments have failed to ensure that the gains from global trade benefit all their citizens in an equitable manner.

Even today, the US government has ample means to address inequality within the United States. However, so long as Western commentators continue to point to "unfair" Chinese competition/policies for their ills, the US government will continue to neglect the real problems that confront their society and democracy. (Again, I would welcome alternative points of view on this point!)

Thank you, again, for your interesting take on the matter. Certainly something to think about!
- Scott McL Apr 26, 2018
  
  IP is not an "of course." IP is not property. Property cannot be used simultaneously by 2 or more parties. "Ideas" can be so used simultaneously by many parties. Copyright "royalties" (fictions) is a relatively recent British innovation. Patent "royalties" are an even more recent US innovation, named after the "land patents" whereby Kings bequeathed American lands to privileged subjects. Look at AMD and Intel. No powerful buyers would trust Intel as a single source of their chip designs ("IP") , and thus FORCED Intel to license their "IP" to others. IA64 is now in fact largely AMD's 64. Sorry for the technical example. IP is a dangerous notion now more loosely applied to "truths of nature" like mathematical proofs or DNA. India and other countries rightly reject such manufactured monopolies. For the USA, races for IP monopoly rights translate into very real "secret weapons" for Uncle Sam warrs. I imagine the Brit-USA Anglophone zone is playing its last cards at maintaining hegemony.
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- Kien Choong Apr 9, 2018
  
  PS: I should point out an implicit assumption that, making technology transfer a condition of investment will, all other things being equal, assist in the development of the country in receipt of investment. It seems such an obvious and simple point, I wonder why so few commentators seem to neglect it. (Firms are free not to invest!)
  - Andi Domenii Apr 28, 2018
    
    You ignore the reality on the ground. Chinese companies benefit from transferring the technologies from their initial Western partners then, with the full support of their government, broke the deals and then, subsidized, invade the western markets and put out of business the western companies used previously as milk cows. There is nothing fair here is a pure war for geopolitical dominance conducted by Chian and the West should respond in kind (although it is a little late). PS: when a German company (like Siemens, or VW) or even a Chinese one comes in U.S. nobody there force this company neither to have a mandatory local partner (like in China or in the Golf countries) neither to give its technology to someone there. In fact the first requierment creates the perception that the second one is a reasonable one.
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