By Paul Krugman* – The New York Times
But he doesn’t seem to be learning.
If you want to understand the developing trade war with China, the first thing you need to realize is that nothing Donald Trump is doing makes sense. His views on trade are incoherent. His demands are incomprehensible. And he vastly overrates his ability to inflict damage on China while underrating the damage China can do in return.
The second thing you need to realize is that China’s response so far has been fairly modest and measured, at least considering the situation. The U.S. has implemented or announced tariffs on virtually everything China sells here, with average tariff rates not seen in generations. The Chinese, by contrast, have yet to deploy anything like the full range of tools at their disposal to offset Trump’s actions and hurt his political base.
Why haven’t the Chinese gone all out? It looks to me as if they’re still trying to teach Trump some economics. What they’ve been saying through their actions, in effect, is: “You think you can bully us. But you can’t. We, on the other hand, can ruin your farmers and crash your stock market. Do you want to reconsider?”
There is, however, no indication that this message is getting through. Instead, every time the Chinese pause and give Trump a chance to rethink, he takes it as vindication and pushes even harder. What this suggests, in turn, is that sooner or later the warning shots will turn into an all-out trade and currency war.
David Leonhardt helps you make sense of the news — and offers reading suggestions from around the web — with commentary every weekday morning.
About Trump’s views: His incoherence is on view almost every day, but one of his recent tweets was a perfect illustration. Remember, Trump has been complaining nonstop about the strength of the dollar, which he claims puts America at a competitive disadvantage. On Monday he got the Treasury Department to declare China a currency manipulator, which was true seven or eight years ago but isn’t true now. Yet the very next day he wrote triumphantly that “massive amounts of money from China and other parts of the world is pouring into the United States,” which he declared “a beautiful thing to see.”
Um, what happens when “massive amounts of money” pour into your country? Your currency rises, which is exactly what Trump is complaining about. And if lots of money were flooding out of China, the yuan would be plunging, not experiencing the trivial (2 percent) decline that Treasury condemned.
Oh well. I guess arithmetic is just a hoax perpetrated by the deep state.
Still, even if Trump isn’t making sense, will China give in to his demands? The short answer is, “What demands?” Trump mainly seems exercised by China’s trade surplus with America, which has multiple causes and isn’t really under the Chinese government’s control.
Others in his administration seem concerned by China’s push into high-technology industries, which could indeed threaten U.S. dominance. But China is both an economic superpower and relatively poor compared with the U.S.; it’s grossly unrealistic to imagine that such a country can be bullied into scaling back its technological ambitions.
Which brings us to the question of how much power the U.S. really has in this situation.
America is, of course, a major market for Chinese goods, and China buys relatively little in return, so the direct adverse effect of a tariff war is larger for the Chinese. But it’s important to have a sense of scale. China isn’t like Mexico, which sends 80 percent of its exports to the United States; the Chinese economy is less dependent on trade than smaller nations, and less than a fifth of its exports come to America.
So while Trump’s tariffs certainly hurt the Chinese, Beijing is fairly well placed to counter their effects. China can pump up domestic spending with monetary and fiscal stimulus; it can boost its exports, to the world at large as well as to America, by letting the yuan fall.
At the same time, China can inflict pain of its own. It can buy its soybeans elsewhere, hurting U.S. farmers. As we saw this week, even a mostly symbolic weakening of the yuan can send U.S. stocks plunging.
And America’s ability to counter these moves is hindered by a combination of technical and political factors. The Fed can cut rates, but not very much given how low they are already. We could do a fiscal stimulus, but having rammed through a plutocrat-friendly tax cut in 2017, Trump would have to make real concessions to Democrats to get anything more — something he probably won’t do.
What about a coordinated international response? That’s unlikely, both because it’s not clear what Trump wants from China and because his general belligerence (not to mention his racism) has left America with almost nobody willing to take its side in global disputes.
So Trump is in a much weaker position than he imagines, and my guess is that China’s mini-devaluation of its currency was an attempt to educate him in that reality. But I very much doubt he has learned anything. His administration has been steadily hemorrhaging people who know anything about economics, and reports indicate that Trump isn’t even listening to the band of ignoramuses he has left.
So this trade dispute will probably get much worse before it gets better.
*American economist, Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times . He was awarded the Nobel Memorial Prize in Economic Science in 2008.
Neoliberalism Has Met Its Match in China
By Ellen Brown* – Truthdig
When the Federal Reserve cut interest rates last week, commentators were asking why. According to official data, the economy was rebounding, unemployment was below 4% and gross domestic product growth was above 3%. If anything, by the Fed’s own reasoning, it should have been raising rates.
Market pundits explained that we’re in a trade war and a currency war. Other central banks were cutting their rates, and the Fed had to follow suit in order to prevent the dollar from becoming overvalued relative to other currencies. The theory is that a cheaper dollar will make American products more attractive in foreign markets, helping our manufacturing and labor bases.
Over the weekend, President Trump followed the rate cuts by threatening to impose, on Sept. 1, a new 10% tariff on $300 billion worth of Chinese products. China responded by suspending imports of U.S. agricultural products by state-owned companies and letting the value of the yuan drop. On Monday, the Dow Jones Industrial Average dropped nearly 770 points, its worst day in 2019. The war was on.
The problem with a currency war is that it is a war without winners. This was demonstrated in the beggar-thy-neighbor policies of the 1930s, which only deepened the Great Depression. As economist Michael Hudson observed in a June interview with journalist Bonnie Faulkner, making American products cheaper abroad will do little for the American economy, because we no longer have a competitive manufacturing base or products to sell. Today’s workers are largely in the service industries—cab drivers, hospital workers, insurance agents and the like. A cheaper dollar abroad just makes consumer goods at Walmart and imported raw materials for U.S. businesses more expensive.
What is mainly devalued when a currency is devalued, Hudson says, is the price of the country’s labor and the working conditions of its laborers. The reason American workers cannot compete with foreign workers is not that the dollar is overvalued. It is due to their higher costs of housing, education, medical services and transportation. In competitor countries, these costs are typically subsidized by the government.
America’s chief competitor in the trade war is obviously China, which subsidizes not just worker costs but the costs of its businesses. The government owns 80% of the banks, which make loans on favorable terms to domestic businesses, especially state-owned businesses. If the businesses cannot repay the loans, neither the banks nor the businesses are typically put into bankruptcy, since that would mean losing jobs and factories. The nonperforming loans are just carried on the books or written off. No private creditors are hurt, since the creditor is the government and the loans were created on the banks’ books in the first place (following standard banking practice globally). As observed by Jeff Spross in a May 2018 Reuters article titled “Chinese Banks Are Big. Too Big?”:
[B]ecause the Chinese government owns most of the banks, and it prints the currency, it can technically keep those banks alive and lending forever. …
It may sound weird to say that China’s banks will never collapse, no matter how absurd their lending positions get. But banking systems are just about the flow of money.
Spross quoted former bank CEO Richard Vague, chair of The Governor’s Woods Foundation, who explained, “China has committed itself to a high level of growth. And growth, very simply, is contingent on financing.” Beijing will “come in and fix the profitability, fix the capital, fix the bad debt, of the state-owned banks … by any number of means that you and I would not see happen in the United States.”
Political and labor unrest is a major problem in China. Spross wrote that the government keeps everyone happy by keeping economic growth high and spreading the proceeds to the citizenry. About two-thirds of Chinese debt is owed just by the corporations, which are also largely state-owned. Corporate lending is thus a roundabout form of government-financed industrial policy—a policy financed not through taxes but through the unique privilege of banks to create money on their books.
China thinks this is a better banking model than the private Western system focused on short-term profits for private shareholders. But U.S. policymakers consider China’s subsidies to its businesses and workers to be “unfair trade practices.” They want China to forgo state subsidization and its other protectionist policies in order to level the playing field. But Beijing contends that the demanded reforms amount to “economic regime change.” As Hudson puts it: “This is the fight that Trump has against China. He wants to tell it to let the banks run China and have a free market. He says that China has grown rich over the last fifty years by unfair means, with government help and public enterprise. In effect, he wants the Chinese to be as threatened and insecure as American workers. They should get rid of their public transportation. They should get rid of their subsidies. They should let a lot of their companies go bankrupt so that Americans can buy them. They should have the same kind of free market that has wrecked the US economy. [Emphasis added.]”
Kurt Campbell and Jake Sullivan, writing on Aug. 1 in Foreign Affairs (the journal of the Council on Foreign Relations), call it “an emerging contest of models.”
An Economic Cold War
To understand what is happening here, it is useful to review some history. The free market model hollowed out America’s manufacturing base beginning in the Thatcher/Reagan era of the 1970s and ’80s, when neoliberal economic policies took hold. Meanwhile, emerging Asian economies, led by Japan, were exploding on the scene with a new economic model called “state-guided market capitalism.” The state determined the priorities and commissioned the work, then hired private enterprise to carry it out. The model overcame the defects of the communist system, which put ownership and control in the hands of the state.
The Japanese state-guided market system was effective and efficient—so effective that it was regarded as an existential threat to the neoliberal model of debt-based money and “free markets” promoted by the International Monetary Fund (IMF). According to author William Engdahl in “A Century of War,” by the end of the 1980s, Japan was considered the leading economic and banking power in the world. Its state-guided model was also proving to be highly successful in South Korea and the other “Asian Tiger” economies. When the Soviet Union collapsed at the end of the Cold War, Japan proposed its model to the former communist countries, and many began looking to it and to South Korea’s example as viable alternatives to the U.S. free-market system. State-guided capitalism provided for the general welfare without destroying capitalist incentive. Engdahl wrote:
The Tiger economies were a major embarrassment to the IMF free-market model. Their very success in blending private enterprise with a strong state economic role was a threat to the IMF free-market agenda. So long as the Tigers appeared to succeed with a model based on a strong state role, the former communist states and others could argue against taking the extreme IMF course. In east Asia during the 1980s, economic growth rates of 7-8 per cent per year, rising social security, universal education and a high worker productivity were all backed by state guidance and planning, albeit in a market economy — an Asian form of benevolent paternalism.
Just as the U.S. had engaged in a Cold War to destroy the Soviet communist model, so Western financial interests set out to destroy this emerging Asian threat. It was defused when Western neoliberal economists persuaded Japan and the Asian Tigers to adopt a free-market system and open their economies and companies to foreign investors. Western speculators then took down the vulnerable countries one by one in the “Asian crisis” of 1997-8. China alone was left as an economic threat to the Western neoliberal model, and it is this existential threat that is the target of the trade and currency wars today.
If You Can’t Beat Them …
In their Aug. 1 Foreign Affairs article titled “Competition without Catastrophe,” Campbell and Sullivan write that the temptation is to compare these economic trade wars with the Cold War with Russia; but the analogy is inapt:
China today is a peer competitor that is more formidable economically, more sophisticated diplomatically, and more flexible ideologically than the Soviet Union ever was. And unlike the Soviet Union, China is deeply integrated into the world and intertwined with the U.S. economy.
Unlike the Soviet communist system, the Chinese system cannot be expected to “crumble under its own weight.” The U.S. cannot expect, and should not even want, to destroy China, Campbell and Sullivan say. Rather, we should aim for a state of “coexistence on terms favorable to U.S. interests and values.”
The implication is that China, being too strong to be knocked out of the game as the Soviet Union was, needs to be coerced or cajoled into adopting the neoliberal model and abandoning state support of its industries and ownership of its banks. But the Chinese system, while obviously not perfect, has an impressive track record for sustaining long-term growth and development. While the U.S. manufacturing base was being hollowed out under the free-market model, China was systematically building up its own manufacturing base and investing heavily in infrastructure and emerging technologies, and it was doing this with credit generated by its state-owned banks. Rather than trying to destroy China’s economic system, it might be more “favorable to U.S. interests and values” for us to adopt its more effective industrial and banking practices.
We cannot win a currency war through the use of competitive currency devaluations that trigger a “race to the bottom,” and we cannot win a trade war by installing competitive trade barriers that simply cut us off from the benefits of cooperative trade. More favorable to our interests and values than warring with our trading partners would be to cooperate in sharing solutions, including banking and credit solutions. The Chinese have proven the effectiveness of their public banking system in supporting their industries and their workers. Rather than seeing it as an existential threat, we could thank them for test-driving the model and take a spin in it ourselves.
*Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of thirteen books including her latest, “Banking on the People: Democratizing Money in the Digital Age.”