This is not your grandfathers’ trade war. Trade wars of old broke out when one nation, say America, was importing too many shoes from China at prices so low that domestic manufacturers and their union demanded tariff protection. That was then, this is now. A trade war is in progress because the administration believes American firms are exporting too many advanced semiconductors (chips) and the equipment for their manufacture, needed by China for its surveillance programs and advanced weapons systems.
Your grandfathers’ trade war damaged a trading partner by taking measures to buy less from it; today’s trade war seeks to damage a trading partner by selling less to it. It seeks permanent security advantage rather than temporary economic advantage. Appease a steel union with a tariff, or respond to whining auto workers by negotiating “voluntary” caps on the number of vehicles a competing nation will export, and you open a negotiation. Curtail sales of strategic goods to an adversary by requiring licenses for exports, subsidize domestic manufacture, and you move trade policy from the economic to the national security agenda, weaponizing trade in the interests of national security.
This not a temporary move to satisfy a domestic constituency by making an exception to some aspect of a broadly free-trade policy. Negotiations to follow. It is a permanent move of trade from the economic policy agenda to the national security policy agenda. Tariffs can be repealed, export restrictions removed. But the restructuring of major industries and work forces in pursuit of greater national security cannot be reversed if XI Jinping and Joe Biden become the best of friends, or if the voice of the turtle-dove is heard in Putin-land.
Even if tensions ease, if China decides to join what some call the international community of nations, and America decides that the inefficiency of autarky is too costly to bear, the changes wrought by this war will be permanent. America is subsidizing industries that will be investing billions and hiring millions. China is doing the same. Those are deep-seated, almost unalterable changes in these nations’ economies, as are the changes wrought by shortening supply lines as part of a come-home-America strategy.
One common characteristic of both the old wars seeking economic advantage and the new seeking military advantage is the potential for retaliation. Don’t sell us chips and we won’t sell you rare metals that you need to make batteries for electric vehicles. This forces both parties to subsidize domestic producers, an expense that should but will not be charged to their military budgets. We subsidize potential US producers of things we now buy from China to reduce those purchases, China subsidizes development of high-end chips to reduce what they buy from us. Self-sufficiency trumps efficiency.
Like a shooting war, this new sort of trade war brings with it an enduring ratcheting up in the size of government and its power over the economic life of a nation. Government employees, disbursing export licenses and billions upon billions in subsides and responsible to voters, will decide which technologies seem likely to provide the tools for coping with climate change, and which companies will develop the natural resources now purchased from adversaries. Errors to be billed to taxpayers.
The role of profit-maximizing, private-sector executives responsible to private shareholders is reduced. K Street offices will be insufficient to house the bloated army of lobbyists that fight to give their clients an edge with the burgeoning government bureaucracy in what is known as the battle of Gucci Gulch in honour of their footwear selections. No cumbersome, heavy boots for these warriors. Tasseled loafers are the footwear of choice as they scurry down the corridors of government agencies.
None of this is to suggest that the path down which the Biden administration is taking trade policy is not in the national interest. It is, and it is working, despite the likely grant of numerous exemptions. US chip suppliers and companies maintaining chip-making equipment in China have begun pulling their workers out. The fact that the protectionist trade unions on which the President has relied during his decades-long climb up the slippery ladder of American politics are reveling in his policy does not make it wrong. What is amazing is Biden’s contradictory willingness to succumb to his green Left and allow America to become dependent on unreliable foreigners for an adequate supply of oil rather than remove obstacles to the development of domestic resources.
Nothing here to worry devotees of that Great Scot, Adam Smith. “It will generally be advantageous,” he wrote, “to lay some burden upon foreign, for the encouragement of domestik industry … when some particular sort of industry is necessary for the defence of the nation.”
In 1940, at a time when Japan obtained 80 per cent of its oil supply from America, Franklin Roosevelt banned the export to Japan of oil, as well as iron, steel and other sinews of war. Japan responded by conquering nations containing those resources to assure itself of supplies. Eighty years later Biden banned exports of sophisticated chips to China. An assured source of supplies lies 100 miles across the Taiwan Straits.