Trade wars have usually been contests for markets. Today’s is a contest for more than that. It is a battle to determine which nation, and which ideology will dominate the world order in the coming decades.
On one side we have the present champion, by any meaningful measure the dominant economic and military power. America’s wealth, its productive capacity, the might of its military are clearly superior to those of any other nation. It plans to retain that world-leading position by subsidising key industries, and including buy-American restrictions in government contracts. American firms such as Intel (Ohio) and Taiwan Semiconductor (Arizona) are investing billions in fabricating facilities (“fabs”) in America. Subsidies work.
In addition to strengthening the American arsenal, the Biden administration is attempting to deny China support it has been receiving from the US for its companies. The Commerce Department maintains an extensive “entity list”, to which The Economist reports it recently added 36 Chinese companies. That designation makes doing business them virtually impossible. In addition, the Treasury maintains a list of “specially designated nationals” that are in effect denied access to the global financial system. Congress is considering having TikTok added to the first list, and Huawei added to the second. Japan Netherlands, and Britain are inclined to support these bans, at least to some extent.
Challenging the current champion is a nation buying markets and key trade facilities with a so-called Belt and Roads Initiative (BRI), and a “Made in China 2025” plan that heaps subsidies on industries that Xi Jinping and his communist colleagues believe will dominate the future. Add a hard-working, lower-paid labour force, unions unthinkable, and China, the communists believe, will out-compete America in world markets, and then in military power.
Leading the American forces is long-time trade warrior, President Joe Biden. Biden first converted the crass self-interest of trade union protectionism into a patriotic policy. Trade unions built the middle class, and the middle class built America, he recalls learning at his father’s knee. Biden then overlayed the unions’ argument for protectionist policies with national security concerns – protectionist subsidies to the tune of perhaps $1 trillion over the next decade, and tariffs to confront China’s aggressive trade and foreign policies. No mention that Trump saw this coming when he pronounced, “Free trade is dead.”
Conveniently, those policies require ever-bigger government to administer the industrial policy that replaces markets with government bureaucrats when it comes to picking winners. One government agency is already adding 7,000 staff to manage the new infrastructure law.
Meanwhile, in this skirmish, China is not doing too well. It’s BRI programme has several countries, among them Pakistan, gagging at the cost of loans and the loss of control of port facilities and jobs for locals, as China staffs up what it sees as future military outposts. It’s ham-handed approach to the Covid epidemic that sprang from its Wuhan lab, its harassment of its own successful entrepreneurs has many firms relocating to other Asian countries and prompted foreign investors to pull $100 billion out of China’s bond market and cut their net purchases of yuan-denominated shares from $63 billion in 2021 to $13 billion last year.[1]
World trade is increasingly, although not entirely, conducted between blocs, each seeking to capture markets and resources from what we might call non-aligned nations, to rescue an old phrase from obscurity. Inevitably, there is collateral damage. America’s protectionist subsidies damage and infuriate its allies, while China’s more muscular approach antagonises many countries it is wooing war.There are no precision-guided missiles.
European vehicle manufacturers find it difficult to compete with US manufacturers of electric vehicles when our government offers large subsidies to customers so long as the vehicles are largely made in America. And defence contracts awarded preferentially to the home team, especially the team using American-made steel, iron and components, and employing union members are not designed to please allies who Biden claims to be urging to match America’s support for Ukraine.
In an economic sense, there can be no winners in this war. Consumers the world over will no longer benefit from the efficiencies of a system trading that, with all its imperfections, produced a relatively efficient use of the world’s resources. Those days are gone, if not forever, at least for planning purposes in the here and now.
Near-term economic efficiency now plays a subordinate role, if any, in the making of policy.
· The West, finally realising the long-run costs of dependence on Russia for oil and gas, is introducing sanctions that impose huge costs on itself in the interests of its national security.
· China’s refusal to rely on the West for vaccines is costing it dear in wealth and lives.
· Saudi Arabia’s subsidies of desert wheat farmers in the pursuit of “food security” cost its consumers four-to-six times the international price.
· Russia surrenders oil and gas revenues in pursuit of revanchist dreams of empire.
· Japan and South Korea are matching US subsidies in chips and EVs, respectively
· Western Europe’s decision to import costly LNG from far-away sources rather than buy cheaper Russian gas drives up home heating and manufacturing costs, while pressure builds for the EU to relax restrictions on subsidies by member countries so they can joing the trade war.
· The cost of America’s subsidies that induce manufacturers to do at home what they can do more cheaply abroad is substantial. For example, The Economist reports that chipmaking costs are 55 per cent higher in America than in Taiwan. That will be reflected in the prices of everything from cars to iPhones, and in Americans’ tax bills.
Shooting wars are not the only sort with high costs. Trade wars, too, are expensive. The problem for their free-trade opponents is that this trade war well might be worth its cost.
[1] Germany’s decision to participate in Xi’s BRI program by allowing a Chinese company to buy a stake in a terminal in Hamburg’s port, and BMW’s recent decision to pour $4.2 billion into its Chinese joint venture prove harbingers, suggest that Germany is unenthusiastic about joining it allies in a trade war aimed at reining in China’s power.