The Unbearable Asininity and Immorality of Donald Trump's China "Policy"

I was really hoping to stay out of the whole "Donald Trump is Running for President" thing, because I truly believed (and pretty much still do) that (a) the spectacle was just a really good, and slightly depressing, publicity stunt for the reality TV star; and (b) anything I said would just give the guy another free commercial (albeit for an extremely limited market).  Thus, any discussion of this unserious "candidate's" completely unserious "trade policy" - which is literally nothing more than the immediate imposition of tariffs on all Chinese imports - was really just a waste of my and, by extension, your time.  

But then I saw the (admittedly early and utterly unpredictive) polls, and then I read that he's deathly serious about running for President, and then I went on the Laura Ingraham Show and found that smart conservatives like Laura (and a lot of her listeners) actually sympathized with Trump's "get tough on China" plan.

So here I am wasting a quiet Easter Weekend screaming into the interwebs about Donald Trump's - Donald Freaking Trump's - China trade policy.  I hate to say it, but this really does need to be done.  So let's just hold our collective noses and get this over with.

As noted above, Trump's entire trade policy boils down to slapping unilateral tariffs on all Chinese imports as soon as he gets into office.  Here's the man himself describing his big plan to NBC News:

"I would tell China, very nicely, fellows, you are my friend, I like you very much. I've made a lot of money on China by the way, a lot of money with China. I would say we are going to put a 25 percent tax on all your products coming in, and that's going to do a number of things," Trump said.

"Number one: as soon as they believe it's going to happen, they will behave so nicely, because it would destroy their economy,” said Trump in an interview with NBC’s Today show on Tuesday.

Playing up to voter fears on the loss of jobs to China, Trump said the transfer of cash to the Chinese was down to Beijing’s controversial currency peg.

"When you see what China is doing to us, what we're going to lose this year, $300 billion to China. And they are taking all of our jobs, and they are doing it through manipulation of their currency," Trump said.

Trump's China policy is wrong on just about every possible level: factually, legally, economically, strategically, morally and even politically.  Let's systematically address each of these now.

1. Trump gets his basic facts wrong. 

Before we get to Trump's tariff policy itself, it's important to understand the serial fallacy of Trump's basic factual assertions, i.e., that (a) China's currency remains extremely undervalued versus the US dollar; (b) China's currency policies are driving both the US-China trade balance and US unemployment; and (c) that the US trade deficit, and especially the United States' bilateral trade deficit with China, is a big problem for the US economy.

As I've noted here many times, China's currency policies are not nearly the vehicle of economic destruction that Trump and others claim them to be.  First, Trump erroneously focuses on the nominal US-China exchange rate (what the government says the currency is worth), rather than the real exchange rate (what the currency is actually worth).  It's the real rate that matters, as any "businessman" like Trump should know,  because it measures what tradeable goods and services actually cost.  And, as I've noted repeatedly here, the real dollar-yuan exchange rats has increased dramatically - almost 50% percent - since 2005.  Second, as the real value of China's currency has increased, American unemployment has gone from about 5% in 2005 to slightly under 9% today, and the US-China trade deficit has (except for the recession) steadily increased.  So there's no strong connection between China' currency and total American jobs or the trade balance (as the Congressional Research Service has repeatedly noted).

Next, Trump's assertion that $300 billion annual US-China trade deficit is a sign that America is "losing at trade" is the height of economic ignorance.  First, there's actually a strong correlation between US economic growth and an expanding US trade deficit.  As Cato's Dan Griswold recently wrote in a must-read paper on the subject:

An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.

And if fixating on the overall US trade balance weren't dumb enough, Trump goes one further and obsesses over an even more economically meaningless stat when he worries about the US-China trade balance.  As I've noted here repeatedly, the proliferation of global supply chains and multinational investment has rendered bilateral trade balances a totally unimportant trade policy metric.  Indeed, old school trade stats like these have become so obsolete that the WTO has launched a new global initiative to determine how better to account for actual trade flows.  The most common example of the indisputable obsolescence of the US-China trade deficit is the iPhone (and the iPod before that): each device imported into the US from China accounts for about $300 towards the bilateral trade deficit, yet the Chinese get only about six bucks worth of value from the item's assembly and shipment.  Meanwhile, the US-based Apple and its affiliates get hundreds of dollars from an iPhone's final US sale (for things like design, marketing, and even some manufacturing).

Even the idea that China is totally dominating the United States is absurd.  Yes, China has experienced impressive GDP growth, but (a) that's what developing countries do; and (b) America is still much, much wealthier, greener, and more productive.  Moreover, China's incessant quest for GDP growth through industrial planning has led to some pretty scary inflation (which is driving China's the increase in the Yuan's real value), some major league economic distortions (e.g., a frightening property bubble and an increasingly troublesome high-speed rail system), and a lot of other serious problems that, if not solved pretty quickly, could implode the entire Chinese economy.  Always the empiricist, Trump once "proved" how China was "eating our lunch" by noting how big and shiny China's cities are.  Well, on that, he's right, but that's because no one is actually living in them.  I mean, it's so easy to keep a city clean without the, you know, citizens.

There are several other factual problems with Trump's assertions, but let's just forget about these big flaws and examine Trump's actual policy - unilateral tariffs on Chinese imports to counteract Chinese currency "manipulation" (aka the "Trump Tariff").  As you'll see, it's just as wrong.

2.  The Trump Tariff has major legal problems. 

First and most obviously, the President can't just slap a tariff on Chinese goods.  The US Constitution (Article I, Section 8) gives Congress the sole authority to impose tariffs on foreign-made goods (i.e., "to regulate Commerce with foreign Nations"), so Trump would have to get congressional approval for his big China plan.   But considering that the most protectionist Congress in the last 20 years couldn't even pass legislation making currency undervaluation an illegal subsidy (and fretted for months over the WTO-consistency of the bill), does Trump really think that this new Congress - and its gaggle of free trade-supporting freshman - would agree to his plan?  Highly unlikely.

Second, there are several US laws that govern the imposition of remedial tariffs on Chinese (and other) imports, and these laws have strict procedural, evidentiary and substantive requirements that can't just be ignored.  Illegally subsidized imports from China (and other countries) are governed by the US countervailing duty law, while market-distorting surges in Chinese imports may be addressed under Section 421 (a China-specific safeguard).  President's Trump's remedial tariff would totally (and unlawfully) circumvent these laws.

Finally, the Trump Tariff would be inconsistent with two of the United States' most fundamental obligations under the WTO agreements: (i) Most Favored Nation (GATT Article I - the principle that a WTO Member must treat imports from all other Members equally) and (ii) the United States' tariff bindings (GATT Article II - the rule that a WTO Member cannot impose tariffs above the "bound rate" set forth in its tariff schedule).  Such a blatant violation of WTO rules would have serious consequences for the United States, as we'll discuss next.

3.  The Trump Tariff is economically ignorant.

Even assuming that Trump somehow convinced Congress to impose the Trump Tariff, its effects wouldn't be anything like Trump hoped or planned.  In fact, the tariff would end up causing a lot of pain (for both China and the US) for little or no economic gain.   First, as noted above, the Trump Tariff is blatantly WTO-inconsistent, so China would go straight to the WTO and easily win the right to impose retaliatory tariffs on US exports in the amount of the damage caused by the tariff.  Based on 2010 stats, the retaliation would be something like 25% (the proposed tariff level) of about $365 billion (total Chinese imports), or about $91 billion.  Considering that US exports to China totaled only about $100 billion in 2010, this WTO-legal retaliation would effectively close the United States' third largest export market - a devastating result for one of American exporters' fastest-growing markets (US exports to China have more than doubled since 2005).

Second, the economic pain wouldn't stop with US exporters because the Trump Tariff, just like any other consumption tax, would inevitably increase US prices of everything that American consumers currently buy from China.  Remember, US importers, not Chinese exporters, pay US tariffs and pass those on to American consumers.  This, of course, means that American families, many of whom are already struggling to get by, would end up paying more - a LOT more - for food, clothing, electronics, Smithsonian souvenirs, and everything else that now says "Made in China."  However, individuals wouldn't be the only ones screwed by the Trump Tariff - American businesses (and their many workers) would also be hit hard.  Because almost half of what we import from China is industrial supplies and materials or non-automotive capital goods - i.e., inputs used by American companies - lots and lots of these firms would inevitably pay more for the things that they need to remain globally competitive.  These higher costs, of course, also mean fewer employees, if not outright bankruptcy.  Awesome.

Third, it's highly unlikely that the Trump Tariff would lead to a significant increase in US manufacturing.  Sure, a few directly competitive US companies would benefit from that sweet, sweet import protection (by being able to milk US consumers for more money, natch), but the far more likely result is trade diversion - i.e., our imports would shift from China to other (more expensive) foreign countries like Vietnam, India or Mexico.  This is exactly what happened when the US imposed tariffs on Chinese tires under Section 421, and it's the very common result in anti-dumping and CVD cases.

Finally, even if the Trump Tariff succeeded in getting China to rapidly appreciate its currency (and, as noted below, it won't), it's far from certain that such appreciation would harm China's global competitiveness.  As Cato's Dan Ikenson stated last year: "RMB appreciation not only bolsters the buying power of Chinese consumers, but it makes Chinese-based producers and assemblers even more competitive because the relative prices of their imported inputs fall, reducing their costs of production. That reduction in cost can be passed on to foreign consumers in the form of lower export prices, which could mitigate entirely the intended effect of the currency adjustment, which is to reduce U.S. imports from China."  As an intermediate producer and big assembly hub, China is importing more these days than they did during the last period (2005-2008) of nominal currency appreciation, so Ikenson's insights likely hold truer today than they did even a few short years ago.

In sum, the Trump Tariff would cause massive pain for very, very little gain.

4.  The Trump Tariff is strategically unsound.

Even if the Trump Tariff weren't legally and economically dubious, it's still an awful strategic play.  The idea that the Chinese government would just roll over and concede "defeat" in the face of President Trump's big, macho tariff is absurd.  First, Trump fails to grasp that the Chinese government would never, ever do anything that makes it appear weak in the face of American aggression.  Instead, retaliation, not concession, is the far more likely reaction (just as China did when President Obama imposed those tire tariffs), and such sinophobic chest-thumping would likely retard, not quicken, the gradual appreciation of the yuan that China needs to undertake.  Second, China's not nearly as dependent on the US market as Trump seems to think.  The EU is now China's biggest export market, and Chinese exports to the US represent under 30% of China's exports to its top 10 export destinations.  So while the US market is big and important, China has other options.  Third, China couldn't rapidly and dramatically appreciate its currency even if it wanted to because any such move would implode the Chinese - and by extension, global - economy.

But, you know, other than that, it's a fine plan.

5.  The Trump Tariff is immoral.

Leaving aside the Trump Tariff's legal, economic and strategic problems, perhaps most offensive is its immorality.  As noted above, one of the most obvious effects of the Trump Tariff would be higher prices for American consumers. Trump even seems to recognize this obvious fact, and when asked about it he calmly explained:

But that's a risk Trump is willing to take. He says his son can live with fewer toys, as long as jobs come back to the United States.

"I have a son, and he loves little airplanes ... Most of them are made in China ... He has so many of 'em," Trump told CNBC's Larry Kudlow last month. "If he had half of 'em, and if they were made in this country, I'd be very happy ... and he'd be just as happy."

Other than the fact that those jobs wouldn't come "back to the United States," this kind of statement is mind-blowingly insulting, even for someone like Trump.  As I've repeatedly explained on this blog, tariffs are regressive taxes that harm poor Americans far more than wealthy ones like Donald Trump because they force the former to pay a bigger share of their (much smaller) paychecks for basic necessities like food, clothing and shelter.  Tariffs on Chinese products are even more problematic because lower income Americans buy a lot more Chinese stuff than rich Americans.  In short, when prices at Walmart go up, Donald Trump doesn't notice, but a working mom sure does.  And the only ones who benefit from those higher prices are a few well-connected American manufacturers and their workers.  Nice.

And this gets back to the brazenness of Trump's "toys" statement: sure, he can tolerate his son only having 10 higher-priced toys instead of 20 Chinese-made toys, but what about the dad who can currently afford only one toy for his son?  Last time I checked, he can't buy half a toy (or tire or shirt or TV or whatever), so for many lower income American families, the Trump Tariff doesn't mean ten fewer toys, it means no toys (or tires or shirts or TVs or whatever).

Stay classy, Donald.


6.  The Trump Tariff is the exact opposite of fiscally conservative, libertarian or "Republican."

A lot of people have dismantled Trump's born again conservativism by noting how he until very recently supported things like universal health care and eminent domain abuse, but his protectionism is just as bad or worse.  Indeed, it's the height of statist redistributionism.  Trump forgets that American consumers are buying Chinese goods voluntarily - last time I checked China wasn't loading missiles with TVs and launching them into the US (although that would be kinda awesome).  And he freely admits that the goal of his policy is to force American businesses and families to subsidize (by paying higher prices) that small minority of American manufacturers who directly compete with China.  So not only is Trump saying that he knows better than us about what we should be consuming, but Trump's also saying that because we just can't help ourselves but buy cheap Chinese goods ("ooh, they're so cheap and pastic-y"), he has no choice but to enlist the full force of the US government to stop us from harming ourselves.  President Trump will tell us to pay more for less in order to line the pockets of a select few because we're just too dumb and helpless, and we can't be trusted to make the decisions that he, and he alone, deems "right."

It's for our own good, you see.  Now please someone, anyone, explain to me how this is the policy of a fiscal conservative?

(Answer: it's not.)

Look, the truth is that China presents some real challenges for American businesses and the US government, and they should both continue to smartly and lawfully pressure China to reform its troublesome policies (while getting the United States' own messy house in order).  But it's absurd to think that the Great Red Menace is coming to steal our jobs and eat our lunches.  In reality, China's economy is at a very precarious point, and if the Chinese government doesn't find a way to change course, the country's headed for a Japan-style collapse, as this recent article made clear.  But, hey, maybe that fact explains why Trump, while (fake) contemplating the presidency back in 1990, said the exact same things about Japan that he's saying about China today.

Then again, maybe just like 1990, Trump's once again pulling a fast one on all of us and is just sopping up some free publicity in order to hawk his ties board game cologne TV show.  Unfortunately, even if Trump's candidacy is a joke (and I still think it probably is), his China "policy" has gained real traction among the American public and some influential conservative pundits.

And that's far more disturbing than Trump's current poll numbers.