What Does It Mean For Trump To Win The Trade War?

Dr. Olusola Coker Books on Amazon

Dr. Olusola Coker Books on Amazon

U.S. President Donald Trump has just fired a new salvo against America’s main trading partner by increasing tariffs on $34 billion of imports from China, a move that marks a significant escalation of the trade war between the world’s two largest economies. Regardless of who fires the next shot, it is important to understand better what it is that Trump intends to win in this escalating conflict. What does victory look like for Trump?

Needless to say, its impossible to know what Trump really thinks. We can only guess. Here are my two best guesses, the first is based on taking his various tweets and statements at face value. The second is based on taking seriously the arguments of two of his closest economic advisers, Peter Navarro and Wilbur Ross, assuming that they do shape how Trump thinks about trade, and more importantly, what it means to win a trade war.

On the first, Trump believes that a trade deficit is bad, and a trade surplus is good.  The fact that America runs a chronic trade deficit means that the way international trade is conducted today is bad for America.  The current system of international trade is somehow biased against the U.S., and America’s trading partners are running trade surpluses against the U.S. because they are not playing fair. Trump is fighting a trade war to eliminate America’s trade deficit.

However, if this is what Trump thinks, then eliminating the trade deficit is insufficient to make America great again. Assuming miraculously that the U.S. has a perfectly balanced trade with all its trading partners tomorrow, that would only mean standing still for Trump. To make America great again needs a trade surplus. So a victory in the trade war, in this version of Trump think, requires a U.S. trade surplus.

Yes, I know, this version of Trump think makes the president look too simplistic, that’s why here is the second, and more sophisticated, version. And Trump does have sophisticated advisers, like Navarro and Ross. In fact, they co-authored a White Paper in September 2016 that has pretty much formed the basis of Trump’s subsequent economic strategy.[1]  Tellingly in their analysis of the problems that the U.S. has in trading with China, they pretty much dismissed the standard complaint of China as a “currency manipulator” as of marginal significance; instead, they argued that China is an unfair trading partner, period. Their argument is that, ultimately, China enjoys an unfair advantage because its wage rate is so low compared with American’s.

This is deep. It amounts to repudiating one of the most brilliant, powerful and profoundly counter-intuitive economic principles that has stood the test of time for over two centuries: David Ricardo’s theory of comparative advantage.  Simply put, two countries can both benefit from trading with each other even if one is more efficient in producing everything than the other. Using Ricardo’s example, workers in the UK are better at producing wool compared with wine. In Portugal, workers are better in making wine than wool. However, even if workers in the UK are more efficient than workers in Portugal in making both wool and wine, it would still benefit both the UK and Portugal if UK can export wool to Portugal (more UK workers producing wool, being productive than in making wine) and import wine from Portugal (more Portuguese workers producing wine, being more productive than in making wool).

In interpreting China’s lower wage rate as an absolute and unfair advantage, Navarro and Ross are effectively rejecting the principle of comparative advantage and the mutual benefits of international trade. And to generalize their argument against China, any other country with a wage rate lower than that of the U.S. would have an absolute and unfair advantage as a trading partner. Given that the vast majority of countries today have wage rates much lower than that of the U.S., winning the trade war in this version of Trump think means stopping trade with all these countries all together.

Running a trade surplus in the U.S. is theoretically possible, but the consequences would be prohibitively expensive imports of any kind; impoverishing American households and debilitating American businesses. Not exactly the right way to make America great again. Retreating into economic isolationism would produce a similar outcome. In both versions of Trump think, winning a trade war means losing, big time.

[1] “Scoring the Trump Economic Plan: Trade, Regulatory and Energy Policy Impacts”. September 2016, Peter Navarro and Wilbur Ross.

Yuwa Hedrick-Wong is the Chief Economist for the MasterCard Center for Inclusive Growth.

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