Joseph E. Stiglitz is the winner of the 2001 Nobel Memorial Prize in Economic Sciences. His most recent book is Globalization and its Discontents Revisited: Anti-Globalization in the Era of Mr. Trump.
What was at first a trade skirmish – with U.S. President Donald Trump imposing tariffs on steel and aluminum – appears to be quickly morphing into a full-scale trade war with China. If the truce agreed by Europe and the United States holds, the United States will be doing battle mainly with China, rather than the world.
Beyond the platitudinous assertion that everyone will lose, what can we say about the possible outcomes of Mr. Trump’s trade war? First, macroeconomics always prevails: If the United States’ domestic investment continues to exceed its savings, it will have to import capital and have a large trade deficit. Worse, because of the tax cuts enacted at the end of last year, the U.S. fiscal deficit is reaching new records – recently projected to exceed US$1-trillion by 2020 – which means that the trade deficit almost surely will increase, whatever the outcome of the trade war.
The best outcome of Mr. Trump’s narrow focus on the trade deficit with China would be improvement in the bilateral balance, matched by an increase of an equal amount in the deficit with some other country. The United States might sell more natural gas to China and buy fewer washing machines, but it will sell less natural gas to other countries and buy washing machines or something else from Thailand or another country that has avoided the irascible Mr. Trump’s wrath. But because the United States interfered with the market, it will be paying more for its imports and getting less for its exports than otherwise would have been the case. In short, the best outcome is that the United States will be worse off than it is today.
The United States has a problem, but it’s not with China. It’s at home: The country has been saving too little. If the President had a whit of understanding of economics and a long-term vision, he would have done what he could to increase national savings. That would have reduced the trade deficit.
In fact, significantly reducing the bilateral trade deficit in a meaningful way will prove difficult. As demand for Chinese goods decreases, the renminbi’s exchange rate will weaken – even without any government intervention. This will partly offset the effect of U.S. tariffs; at the same time, it will increase China’s competitiveness with other countries.
If China intervenes more actively and retaliates more aggressively, the change in the U.S.-China trade balance could be even smaller. The relative pain each will inflict on the other is difficult to ascertain. China has more control of its economy and has wanted to shift toward a growth model based on domestic demand rather than investment and exports. The United States is simply helping China do what it has already been trying to do. On the other hand, U.S. actions come at a time when China is trying to manage excess leverage and excess capacity; at least in some sectors, the United States will make these tasks all the more difficult.
This much is clear: If Mr. Trump’s objective is to stop China from pursuing its “Made in China 2025” policy – adopted in 2015 to further its 40-year goal of narrowing the income gap between China and the advanced countries – he will almost surely fail. On the contrary, Mr. Trump’s actions will only strengthen Chinese leaders’ resolve to boost innovation and achieve technological supremacy.
Mr. Trump has shown how he responds when his lies are exposed or his policies are failing: He doubles down. China has repeatedly offered face-saving ways for Mr. Trump to leave the battlefield and declare victory. But he refuses to take them up. Perhaps hope can be found in three of his other traits: his focus on appearance over substance, his unpredictability and his love of big man politics. Perhaps in a grand meeting with President Xi Jinping, he can declare the problem solved, with some minor adjustments of tariffs here and there, and everyone can go home happy.
In this scenario, Mr. Trump will have solved, imperfectly, a problem that he created. But the world will still be different: more uncertain, less confident in the international rule of law and with harder borders. Mr. Trump has changed the world, permanently, for the worse. Even with the best possible outcomes, the only winner is Mr. Trump – with his outsize ego pumped up just a little more.