Economics

Estados Unidos perderá la guerra comercial con China

Sep 21, 2018 Anatole Kaletsky

LONDRES – Estados Unidos no puede ganar su guerra de aranceles contra China, sin importar lo que diga o haga el presidente Donald Trump en los próximos meses. Trump cree que lleva las de ganar en este conflicto, porque la economía estadounidense es fuerte y porque políticos tanto republicanos cuanto demócratas apoyan el objetivo estratégico de frustrar el ascenso de China y preservar el dominio global estadounidense.

Pero irónicamente, esta aparente fortaleza es la debilidad fatal de Trump. Aplicando el principio de artes marciales de redirigir la fuerza del oponente en su contra, China puede ganar fácilmente la competencia arancelaria, o al menos pelearle a Trump un empate.

Desde David Ricardo los economistas sostienen que restringir las importaciones reduce el bienestar de los consumidores y dificulta el crecimiento de la productividad. Pero la razón principal por la que Trump se verá obligado a ceder no es esa. Para evaluar las fortalezas respectivas en el conflicto sinoestadounidense, hay otro principio económico –poco invocado para explicar la futilidad de las amenazas arancelarias de Trump– mucho más importante que el concepto ricardiano de ventajas comparativas: la gestión keynesiana de la demanda.

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0 Comments on this paragraph, 52 Comments on this article

Janos Nagy Dec 9, 2018

Well when someone opinion based on an economist lived more than 200years ago namely David Ricardo we should know that there are no economic theory is valid in today's economic realities.
Governments involvement in the cost and price structure is adding about 40 percent (average) to the cost by enforcing taxes regulations and policies.
Now in the USA this adding 40 percent to the cost and even with minimum wage is more than the full cost of a product from China.
In true reality the USA government financing the Chinese goods by having very low tax components may be 20 percent of the tax component in the price to compare to a domestic product.
If the USA would stop a trillion plus deficit spending than there would be 20 to 30 million job to compete in the market economic.
Anyway selling your labor for a fair market value is one's economic rights.
Buying cheap under taxed Chinese imports is not anyone economic right.
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John LaChance Dec 9, 2018

Mr. Kaletsky makes a big mistake right off the bat: "US businesses could not, in aggregate, find extra low-wage workers to replace Chinese imports." That's what he calls demand management. No, boss, that's not going to happen. We don't live in an isolated world where goods produced in China but no longer allowed in the US have then to be produced in the US for US consumption. Hell, no. We've got Vietnam ready to take up the slack, providing Americans with low-cost goods. We've got Malaysia and Indonesia and any number of other developing countries who would love to provide us the goods that China was "privileged" to sell us. That, mister, is the essence of your argument...gone wrong. Trump wins. America wins.
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Henry Rech Oct 15, 2018

Mr Kaletsky forgets to mention that China wants US $. It wants US $ so it can fund its Belt and Way investments. It must export to the US. It also needs strong US $ inflows to support its currency. The ubiquitous opinion is that China has the upper hand in international affairs. The Chinese dragon is but made of paper mache.
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Ali Garba Sep 25, 2018

An illuminating perspective… When we reduce the war to US and China, it will seemingly become a zero-sum game—China’s gain is US loss in the global economy. With Trump’s rejection of multilateralism, China may have its way, as it re-aligns its strategic economic relations through bilateral and regional agreements. It also gives other advanced and emerging economies the leverage to optimize the increasingly new chaotic economic order. Interesting battlegrounds are new or under-explored markets especially communist/socialists countries undergoing reforms (such as North Korea, Cuba and Venezuela), former USSR region (Russia inclusive) and the rest of Asia. For Africa, China’s approach will make it very difficult for US businesses to prosper. In the Americas, China will consolidate its gains, especially with an unpredictable Trump. Renegotiated NAFTA and TPP will still leave room for Chinese businesses in Mexico and Canada…So, the trade war is not going to last long, or long enough to favour US. A reviewed international trade regime may do.
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j. von Hettlingen Sep 24, 2018

Anatole Kaletsky proposes China to respond to Trump’s tariff war with a “full-scale Keynesian stimulus” to avoid any damage to its economy. David Ricardo’s doctrine of restricting imports that reduces consumer welfare and impedes productivity growth does not serve China, because it imports much less from the US than vice versa.
Instead of fretting about its high export volumes to the US, that are being targeted by tariffs the author says the Chinese should inject extra investment into infrastructure projects, which would be financed through a higher level of government borrowing. However it is unclear whether such a stimulus would help China boost its debt-fueled growth. While Beijing may want to slow the country's growth, the risk is that a sharp deceleration may derail the entire economy.
China’s total debt had quadrupled since 2007. Although the debt-to-GDP ratio is not the highest in the world, there are concerns about its massive debt binge. Getting local governments on board could be a problem, because they are totally addicted to their debt-fuelled economy, trying to hit growth targets or fund infrastructure work. It is a short-term solution that is not sustainable in the long run unless China tackles deeper structural issues.
The most worrying risks lie in the non-financial corporate sector, where the debt-to-GDP ratio may hit nearly 300% by 2022. This sector includes the liabilities of local government financing vehicles. As state-owned firms borrowed heavily from banks linked to the government, defaults in the hugely indebted corporate sector could ultimately trigger “systemic risks” in the economy, affecting the state coffers.
The author says, despite bipartisan “support in” Congress for a “containment policy” toward China, it “paradoxically works against Trump.” China’s leaders have little appetite to “use overt demand stimulus as a weapon in the trade war because of strong commitments made by President Xi Jinping to limit the growth of China’s debt and to reform the banking sector.” They need to tackle this very difficult problem of balancing financial risk - too much credit growth alongside a stalling economy. ¨
The question is whether Xi Jinping would reject the Keynesian policy even though it means to increase spending and raise the debt ceiling. Now that Trump has waged a tariff war against China, the author says “it is simply inconceivable that Xi would attach higher priority to credit management than to winning the tariff war and thereby demonstrating the futility of a US containment strategy against China.” The problem ist that there is a negative correlation between public debt and economic growth, and that debt reduces growth.
Given the ongoing Russian probe and Trump’s low approval ratings, his political fortune is not certain. The mid-term elections are looming and it raises the question what the Republicans will do when the trade war starts to hurt businesses and voters. China and the rest of the world are biding their time, hoping for a political shift in November. Nevertheless Trump could still try to remain relevant, as narcissistic as he is. He might “make a deal” that fails to achieve his stated objectives but allows him to boast of a ‘win’ and justify the verbal belligerence that inspires his supporters.”
The author sees Trump as a paper-tiger, whose successful rhetorical technique of “shout loudly and carry a white flag” is nothing more than bluster, that merely “helps to explain the consistent inconsistency of his foreign policy.”
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D. V. Gendre Sep 24, 2018

The article implies that there is a winner in a trade war. This is of course complete nonsense. The tariffs may have different outcomes at different times in the economic cycle. However the article even neglects the reality.
First one needs to aknowledge that the US has the biggest economy and has the most liquid equity markets. So if there is an economic "problem" somewhere in the world many investors will transfere their money to US markets. Ironically the Chinese will and have done the same, even if those tariffs are targeting China. A look at the chinese stock market shows this reality.
Second the tariffs on chinese goods are not really a problem for the US in economic good days but more so for China which is in an economic weakening position (not only because of tariffs). Again a look at both stock markets will show what I mean!
The tariffs on China are hurting it much more since important exports drop and in a weakening economy the imposed tariffs on US goods will hurt China even more! This leads to the third point. The article forgets to tell that China in contrast also imposed new tariffs on US goods.
Yes there are alternatives for China to get the goods needed and in the long run China will make some deals with other contries that the US would better not see (e. g. oil from Iran and Russia).

This trade war may offset a global recession. If not it will certainly prolonge and deepen a possible recession in the future. If one is now looking for a winner in this trade war he must be a cynic. In the long run there are no winners in a trade war even with a Keynesian boost. Such absurd boost will just make things worse.
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Jay Kay Sep 24, 2018

Now watch the next generation of production technology go about meeting consumer demand with ease, often on demand and JIT and supplied to directly to the consumer..
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ROBERT VESSEL Sep 23, 2018

China should break the buck. By doing so, Americans will no longer be able to afford imported goods, thus saving us from ourselves/ It would also stop the US from using its currency to bully the rest of the world.
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Douglas Leyendecker Sep 23, 2018

Okay, so how does the United States stop China from stealing intellectual property and how does one compete against a country that massively subsidizes industry and finance with no economic repercussions. Might as well just let China take over the world, right?
- D. V. Gendre Sep 24, 2018
  
  Like all subsidies they represent only dead capital. In the long run China will not be able to hold up with all subsidies and the rotten structre will come to light. The longer this game is played the harder to unwind the build-up problems.
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- David Lloyd-Jones Sep 23, 2018
  
  "Intellectual" "property"? We're talking about knowledge here. If company B learns how company A makes paint, then it gets richer -- but so do we all from the first poor shlump losing their monopoly.
  
  That's not normal. It's not even proved to happen much. It's just the worst that could possibly happen. Bleahh.
  
  What is actually happening is that American consumers are teaching foreign suppliers how to make the goods they want to buy. Then once the orders are filled the suppliers keep the production lines running to supply their own customers.
  
  Case in point: Buick, which uses the world-class Cadillac engine. Buicks are made in China. Buicks are only made in China because every Chinese who can't afford a (German) Rolls Royce will settle only for a Buick. (USA! USA! USA!'s biggest automotive exporter, btw, is BMW.) GM has taught GM(China) how to make Buicks.
  
  GM makes the profit on the Chinese buying Chinese-made Buicks. Financial property.
  
  I don't know where the superb chips that make those excellent engines come from. Honda-McLaren would be one possibility... I do know the cutting edges of most of the machine tools are almost certainly from Sweden. Long story short: there are globalists and there are people who can't find the capital of their own state on a map.
  - Paul Friesen Sep 23, 2018
    
    Good points. And about the "intellectual property". Any idea about when the U.S. might be about to pay Britain for the steam engine?
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douglas ungredda Sep 23, 2018

How many of these taxed imports are from indigenous Chinese manufacturers rather than American subsidiaries operating in China or operating under a license issued by an American MNCs to manufacture it? If this were the case, these tariffs represent a self inflicted blow to American financial interests and results as dividends and income derived from Chinese operations could suffer. Then is the issue of the Chinese Keynesian policy stimulus, which might entail liquidating part of the American treasuries portfolio by the Central Bank of China. If this selling increases, American yields could go up compounding an existing expectation bias in the American structure of domestic interest rate levels. In the end, American interest rate levels have an influence in global interest rate levels, slowing global growth. so in the end its less exports for everyone, not just China , putting at risk the global trade in volume and prices. This is no zero sum game. the global economy could stand to lose .
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Steven Hillyard Sep 23, 2018

The Chinese government plays the long game. What happens in the near term with respect to its trade relations with the US is meaningless to their long term economic fortunes. It sees its economic future in trade with emerging economies, hence the Belt and Road. China will continue to exploit its comparative advantage in manufacturing while developing demand for the goods that developed economies cannot hope to provide at a competitive price—washing machines for instance. More important, the Chinese government will continue to move up the value chain by investing in its human resources by enhancing its educational systems—something America has failed to do even though that was an assumption upon which trade agreements like NAFTA were based. As Jack Ma said, it’s going to be a long “war”. A fruitless war at that.
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John Ellis Sep 23, 2018

Couldn't agree more. Any tariffs will be passed onto US consumers and manufacturers and the reduction in Chinese imports is likely to be modest. Any reductions in Chinese exports could then easily be digested at home with some mild fiscal stimulus. Meanwhile the Chinese have a host of overt and covert means of strangling strategically targeted US imports to China, and generally hampering US businesses operating there. Given the contrast between the open and closed political systems in China and the US I've little doubt who will start to scream first.
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Rainer Famulla Sep 23, 2018

Come on, guys!
The trade war is just a diversion dance!
This is a finance war!
The US is betting, that in the short term, it is in a better position to twist China's financial arm than the reverse.
Why do you think the "trade negotiations" are now being led by Steve Mnuchin, the Treasury Secretary than Wilbur Ross?
Because the Chinese still hold around $2 trillion in US Traesuries. But more importantly, they themselves have to refinance about $1.8 trillion in USD denominated debt over the next 13 months.
Their veneer of financial solidity has already worn very thin and recently published work e.g. on the structure of their bond market, shows how rickety and flawed their financial system still is.
Mind you, they have made great efforts to drain their financial swamp, but they are still waist deep in water.
So the threat of divulging the weaknesses and parading them to a wider public, could seriously damage their standing in USD denominated financial markets.
It may not be wise to be as cocky as a Peter Navarro and others currently sound, but there is a basis for them feeling that they have found a Chinese Achilles heel.
- Rainer Famulla Sep 24, 2018
  
  correction: should be $1.2 trillion in US Treasuries instead of $2 tr.
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- John Ellis Sep 23, 2018
  
  They are not being led by Mnuchin.
  - Rainer Famulla Sep 23, 2018
    
    U.S. Proposing New Round of Trade Talks With China - WSJ
    https://www.wsj.com/.../u-s-proposing-new-round-of-trade-talks-... - Diese Seite übersetzen
    13.09.2018 - Treasury Secretary Steven Mnuchin has been picked to lead a new round of trade negotiations with China being proposed by the U.S.
    
    Is somebody else meeting with Liu He?
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Carmen Wong Sep 23, 2018

Xi has unlimited tenure, Trump will get impeached or not re-elected. Congress apt to change hands to a party that will curb stupid policies Trump installed. That’s all I have to say about this tariff taunt.
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Carl Buzawa Sep 23, 2018

The article makes light of both basic economic theory and past history, including that of the great depression. When China, with an economy half the size of the USA, sells 4 times what it buys from the USA, and what it buys are commodities that are in demand from other countries (albeit at a slightly lower price--but not much lower because the demand for commodities will just shift with the Chinese buying say beef from Argentina, but then the US selling its beef to the former buyers of Argentine beef). Whereas manufacturing jobs, especially of the low and middle-level products China has specialized in can be shifted with a time lag of less than a year to manufacturers whether in Thailand, Vietnam, India, or Mexico...and once that happens, and alternate factories develop it is very difficult to get those jobs back.

Similarly, take the case of steel and aluminum. China has purposely overbuilt its domestic industry way beyond its internal needs and as a result, there is a worldwide excess capacity. Where will China offload its excess capacity....When I was in China recently, the Communist Party-run papers were day after day after day touting their "belt and road" venture with African leaders. Great.....That has been tried before by virtually every European power and the USA. Many of these projects are good...many not... but wait until the Chinese try to recapture the debt from these African nations....best just to think of these as multi-billion dollar foreign aid projects with about the same long-term value and goodwill to China as all the other foreign aid from other countries has been to their economies.
- John Ellis Sep 23, 2018
  
  The Chinese economy is not half the size of the US.
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Gordon Shedd Sep 23, 2018

What would the impact be if the Chinese government were to sell US treasuries to fund their Keynesian support of the Chinese economy? Wouldn't that be a double-whammy?
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Alex Aslanidis Sep 23, 2018

I didn't bother reading past the intro, because Kaletsky's articles are usually garbage, but one can see what his argument is. The problem is that China's economy is heavily dependent on exports for it's smooth functioning, and the US remains the planet's consumer of last resort. Nobody else is willing to fulfill that role. Thus, in order for China to make up in domestic consumption what it loses in foreign consumption, it must recalibrate it's economy heavily, and that is something that is neither easy, nor quick.
- Paul Friesen Sep 23, 2018
  
  It did it in 2008-09. Exports to the U.S. were drastically reduced by the financial crisis, but the Chinese leadership responded with a massive stimulus plan. Because of that, the recession was over very fast for China.
  - joel bernard Sep 24, 2018
    
    Exactly! That's the relevant, very recent comparison, and that's why Kaletsky's article about the possibility of another Keynesian stimulus is on target. With consumer demand in China already growing so fast, why wouldn't they respond with another stimulus if exports to the U.S. fell? It worked in 2008-2009.
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- Paul Friesen Sep 23, 2018
  
  It did it in 2008-09. Demand from the U.S. and elsewhere was drastically reduced by the financial crisis, but the Chinese leadership responded quickly and decisively with a massive stimulus plan. Because of that, China was quickly out of the recession. China is (or at least was at that time) blessed with a leadership that understood Keynesian economics and had not drunk the austerity cool-aid.
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- John Ellis Sep 23, 2018
  
  But Chinese exports to the US are not likely to fall dramatically. The costs will just get passed on to US consumers and manufacturers. It will also lead to a general increase in US inflation because domestic producers will take the opportunity to raise their prices. This has already happened with steel. A 10% increase on a product with a 10% gross margin doubles its maker's profit.
  - Alex Aslanidis Sep 24, 2018
    
    If the US is serious about balancing their current-account, what you described won't matter. Once money doesn't leak out of it's borders (to pay for imports and interest), it will stimulate the US economy. Manufacturers will move back to the US, workers will be hired, wages will be increased, and the price level will correlate with the internal dynamics of the US economy.
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- Carl Buzawa Sep 23, 2018
  
  plus the reality is that much of China's internal demand is bankrolled by zombie state-owned banks. Having just visited interior China, I saw a tremendous number of new cranes and half-built buildings...but at the same time" see through" empty shells and airports that were built way-way beyond demand. Their use of capital to stimulate their domestic economy is inefficient, to say the least...coupled with the real bankruptcy of much of their banking system by any standard.
  - joel bernard Sep 24, 2018
    
    Nope. The banking system is backstopped by the state because the debts are largely in RMB. All those "ghost" cities, highways, airports, high-speed rail lines? It's call planning for the future. I've lived in China, too. We in the U.S. might want to try it sometime!
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Jack Harllee Sep 23, 2018

Mr. Kaletsky's conclusion depends on a number of predictions about how Chinese and American businessmen will behave. His track record on predicting human behavior is not good. In February 2016: "The politics and economics of the question virtually guarantee that British voters will back EU membership, even though this may not become apparent in public opinion polls until a few weeks, or even days, before the vote. "
- John Ellis Sep 23, 2018
  
  To be fair this was popular wisdom at the time. Even the leaders of the Leave movement like Farage (who initially predicted defeat after the polls closed) were amazed they had won and immediately started disavowing claims they had made during the campaign.
  - Jack Harllee Sep 23, 2018
    
    John, you are quite right, so let me refine my comment. Mr. Kaletsky, like a good economist, assumes people will act rationally and with accurate information. Further he assumes that those rational actions will be directed solely to improvement of material welfare. Those assumptions are sometimes reasonable approximations to reality. And they often are not. Kaletsy's assumptions informed his prediction about Brexit, and they inform his prediction about China winning the trade war.
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Paul Friesen Sep 22, 2018

I certainly agree. China does not really need U.S.demand. It has lots of people who can provide its own demand. It has leadership that seems to know how to manage demand, as shown by its use of a massive stimulus plan to nip the 2008 recession caused by the loss of so many exports in the bud. And it has lots of potential to develop its own supplies of things.

Carried to extremes, Trump policies could result in a world divided into two trading blocks - the U.S. all by itself in one block, and the rest of the world in the other. Guess which block would be bigger and more dynamic and, eventually, richer. I doubt if that would actually happen though. Like the author, I expect that Trump will cave in and declare victory, hopefully before too much damage is done.
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Petey Bee Sep 22, 2018

I agree completely with the author, that Trump's tariffs targeted to China have almost no possibility of helping the US domestic industries (especially considering retaliatory tariffs).

Substitutes for US imports would come from outside the US rather than inside. (Not that the US doesn't have the ability to rebuild domestic manufacturing, at least in part. But doing so is not a sincere goal of the Trump administration, nor is it desired by his critics)

Would the current and proposed tariffs be an effective way to harm China, as part of an adversarial vision of international relations that's been on naked display starting with Pres. Bush II and is now at a cartoonish level?

It could reduce Chinese exports, and harm China's balance-of-trade. But only to some degree. A Vietnamese or Mexican operation exporting into the US would still use Chinese sub-components. The Chinese manufacturer in this case would be in a less advantageous position with respect to pricing power and they would lose the assembly job, but it's not a complete loss. Moreover, the US would have to have arrangements with the alternative source countries for *those* countries to lock out Chinese ownership of the assembly/export industry there. Plausible for Mexico, less so for Thailand, Vietnam etc.

Could it create unemployment, put genuine pressure on Chinese government to change its power structure? Most unlikely. I think that's the point of the article above.

Could it help accomplish larger geopolitical goals of the US (broadly speaking, to prevent to formation of alliances whose total power could challenge the US)? By forcing China into closer economic relationships with US rivals, it seems to do the opposite.
- Jocelyn Pixley Sep 23, 2018
  
  I think this is largely right. But what is missed is that Chinese wages have already risen; raising the minimum wage is the next move. Jim Crotty rightly points to how Keynes preferred the term "effective demand" - via minimum wage rises and more jobs, and not "aggregate demand" which raises the top income earners and becomes inflationary before benefits trickle down. The aim would be to allow more Chinese to purchase China's own goods (it would be preferable to see Muslim Chinese included and not persecuted) and to see China accepting a properly accepted union movement. In the case of the USA, unions have had an appalling history, no party of labour has ever taken government (unlike UK, Australia, NZ and many true social democratic governments in Europe and South America). And Trump needs to build substitutes pronto - will he? The Australian Labor Party long opposed tariffs as a tax on the lowest paid in order for the well-off to avoid taxes. That was before wages based on need were tied to the granting of tariffs. Forget that, in either the Republicans or the old guard of the Democrats
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M M Sep 22, 2018

Who is on the defensive, China or the US? Who is more worried about US sanctions, China or the US? Whom have the people of the US voted for and are supporting to get their jobs back to their homeland, the Chinese or the Americans? In any conflict, damage is always consequential, the US may incur some pain but China ...most certainly ..shall incur a much greater pain, that is why you see their leadership running like headless chicken looking for new markets (debtors)!
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Jackson Chow Sep 22, 2018

The major battlefield in China is not the trade war itself but the social stability underpinning any authoritarian regime. Foreign capitals move their factories and job positions away from the country and hence unemployment rate will be surging. Under this atmosphere, it is hard to expect domestic consumption would be as strong as it is now.
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