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Trump’s Trade War with China: A Great Miscalculation

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Trump and his advisors seem to be extremely ill-informed about the ways in which China can retaliate, even though the US can impose tariffs on more Chinese goods, than China can impose on the US, says CEPR’s Dean Baker

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GREG WILPERT: It’s The Real News Network. I’m Greg Wilpert.

President Trump ramped up the trade conflict with China on Monday when he announced that his administration will impose an additional 10 percent tariff on $200 billion worth of Chinese imports. Here’s what he had to say at a meeting the other day with a National Federation of Independent Businesses.

DONALD TRUMP: China has been taking out $500 billion a year out of our country and rebuilding China. I always say, we have rebuilt China. They’ve taken so much. It’s time, folks. It’s time. So we’re going to get smart, and we’re going to do it right. And we’re actually getting a lot of support. But we have to do something about it now. Maybe something happens where they come and they say we agree it’s been unfair for the last 25 years, but somehow that doesn’t seem to work so easily.

GREG WILPERT: Trump’s announcement is in reaction to China’s tariff retaliation of $50 billion on U.S. imports, which countered Trump’s original tariffs on $50 billion of Chinese imports. In other words, a trade war between the U.S. and China seems to be underway. Stocks of companies that do a lot of business with China are now suffering. For example, Boeing and Caterpillar stocks both fell by 4 percent on Tuesday. And the Dow Jones Industrial Average dropped by 1.2 percent, or nearly 300 points, also on Tuesday. Also, the New York Times recently reported that the global economy is already reacting negatively to a mere possibility of a trade war.

Joining me now to analyze the implications of the China-U.S. trade dispute is Dean Baker. Dean is a senior economist at the Center for Economic and Policy Research in Washington, D.C., which he cofounded. He is also the author of the book “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.” Welcome back, Dean.

DEAN BAKER: Thanks for having me on.

GREG WILPERT: So first of all, is the U.S. now in a trade war with China? And secondly, who do you expect would lose in such a conflict? For example, could it lead to a slowing of the global or of the U.S. economy, and therefore to rise in unemployment?

DEAN BAKER: Well, it certainly looks like we’re getting into a trade war. And you know, in terms of who could lose. Yeah, I mean, a lot of people could lose in this story. I mean, Trump, not surprisingly, doesn’t seem to have a clear idea of what’s going on here, so he makes it as a nation-versus-nation story, China’s won at our expense.

Well, when China was exporting, or they are now exporting more than they’re importing from us, there are intermediaries there. There are gainers in the United States. So you have a lot of companies, you know, for example, General Electric, Apple. They set up operations in China, produce things at lower cost there, and import them to the United States. They win in that story. They also, you have other companies that contract out. Wal-Mart has set up low-cost supply chains throughout China. Other countries in developing world also. Allows them to undercut their competitors. They won, as well.

So the story that China won and we lost, that, that’s ignoring what went on in the last two decades as our trade deficit exploded. A lot of workers in the United States lost, but there were other very big actors in the economy that won. Now, going forward with the trade war, China has all sorts of things it could do to the U.S. The immediate story here, when Trump’s talking about raising tariffs, he’s raising taxes. So if we’re putting a 10 percent tariff on $200 billion in goods, that’s a $20 billion tax. Now, that’s not enormous in the U.S. economy of $20 trillion, but $20 billion tax, Trump’s tax cut was somewhere in the order of $180 billion a year. So that’s fairly large in reference to the tax cut that he just had.

So yes, I mean, this will dampen growth, and it could end up very badly. I say that primarily because I don’t think anyone has a clear idea, probably including Donald Trump himself, of what he’s doing here.

GREG WILPERT: So Peter Navarro, one of Trump’s main trade advisers, recently argued that the U.S. will come out ahead, because the U.S. can impose far more tariffs on Chinese goods that China can impose on the U.S., given that China exports three times as much to the U.S. than vice versa. I want to just show a brief clip of him making that argument. Here’s what he had to say.

PETER NAVARRO: What China did, and it’s a big mistake, was they came back and retaliated with their own tariffs. And then the president-. Very courageous decision yesterday. This takes courage and vision to see the chessboard. He put on $200 billion more in tariffs. And guess what? The Chinese found out that they do, indeed, buy a lot less from us than we buy from them. And they’re out of bullets before we are.

GREG WILPERT: So would you agree with this, that the U.S. can do more to hurt China than the other way around?

DEAN BAKER: Well, it’s kind of scary to hear Peter Navarro saying that. I mean, I presume that reflects his thinking. It’s 100 percent wrong. It’s sort of like, well, you know, we have a better, we have a better offensive soccer game than the team on the other side. Well, if they have a better defensive game we’re going to lose. And the story here is that they’re not restricted to just retaliating by tariffs.

So one of the things that they’ve already talked about doing, I’d be shocked if they don’t do this, is make it a lot harder for U.S. businesses to operate in China. And all of them know China is already the largest economy in the world by many measures. It certainly will be the largest economy in the world 10 or 15 years down the road. Our companies don’t want to be locked out of the Chinese market. On top of that, here’s the one I really like, I think this would benefit everyone. They don’t have to honor U.S. patents and copyrights. This is Microsoft’s copyrights, and Windows. Pfizer, Merck’s patents on prescription drugs. They could just produce goods, don’t honor them, and even export than elsewhere in the world, possibly back to the United States. I actually think that would be great. That’s free trade, but that will hit U.S. companies really hard, and they will be screaming at Donald Trump. So if they think that we have a winning hand simply because we could put tariffs on more goods than China but on ours, that is really wrongheaded thinking.

GREG WILPERT: So finally, what do you make of the argument that China is being unfair with regard to its trade practices towards the U.S.? This is something that President Trump has repeatedly made, and we showed a clip earlier in the introduction where he makes precisely that argument. What does fairness even mean? Doesn’t every country or government pursue its own interests, depending on how it interprets that interest? Or has the U.S. ever intentionally and altruistically give that good deal to an economic rival, as Trump seems to suggest.

DEAN BAKER: Well, we haven’t given them a good deal. Our companies are profiting. They made lots of money from relations with China. But there’s certainly trade practices you could point to with China that, you know, are a problem for the United States. And Trump actually raises in the campaign, he was talking about China, he had used the term manipulating, I would just say managing. They artificially, they kept down the value of their currency to give them a competitive advantage. And he went around the country for two years yelling about how China, China was a world-class currency manipulator. And he was essentially right.

So if he put that at the center of his agenda, and said, hey, we want you to raise the value of your currency 20 percent, 25 percent, I don’t know exactly what the right target would be. China, by the way, has said it wants to do this anyhow, just a different timeline. That’s the sort of demand that you could win in, in a battle with China. You go, look, we want you to raise it. We take steps against you if you don’t. Tariffs, or whatever it might be. If you do, we’ll have good relations. And you know, again, that’s the sort of thing that- it’s a very specific demand. It’s something that China, as I say, they plan to do it anyhow. They’re just arguing over the number of years. That would be a winning strategy.

But Trump has not mentioned currency once in, once he started his trade war. So I have very low confidence where he ends up. And unless, you know, again, being fair or unfair, as you say, that’s kind of in the eyes of the beholder. I mean, the question is what can you do that is going to help the interests of working people? Not that I think that that’s Trump’s interest, but that’s what I care about. And that seems to be off his agenda.

GREG WILPERT: OK. Well, we’ll leave it there for now. I’m speaking to Dean Baker, senior economist at the Center for Economic and Policy Research. I should mention this is Dean’s last regular weekly interview with us, because he’s going to retirement, or semi-retirement. But I’m sure he will be back to to interview with us as the economic developments warrant. Thanks again, Dean, for having joined us today.

DEAN BAKER: Thanks a lot, Greg, I’ve enjoyed it.

GREG WILPERT: And thank you for joining The Real News Network. Also, if you like stories such as this one, I want to remind you that we recently started our summer fundraiser, and need your help to reach our goal of $200000. Every dollar you donate will be matched. Unlike practically all other news outlets, we do not accept donations or support from governments or corporations. Please do what you can today.