Trade is war by other means. No shots fired, no body bags, with the winner selling more cars and t-shirts in its domestic and global markets. Traditional weapons are deployed – tariffs, subsidies, subtle and not-so-subtle barriers to trade such as prolonged inspections of imports of perishable products.
This Trade War Is Different
The current trade war between communist China and capitalist America has a new dimension: national security. The loser will find itself with an economy dependent on its adversary, supply chains in peril, its currency weakened, and living in a world in which those who would do it harm set the rules governing the world order. The winner will have the best chips, the strongest currency, the more successful and secure economy.
As in shooting wars, there will be collateral damage: consumers will pay more for the goods they buy, resources will be less efficiently allocated, innovation will be slowed by the lack of intellectual intercourse, economic growth will be stunted.
The Continuing Lure of “Free Trade”
All wars in which America has engaged have been opposed by often well-intentioned pacifists. In this trade war the “pacifists” are advocates of free trade who hesitate to surrender the delusions under which they operated while China waged an unopposed attack on American industry.
With President Clinton leading the way, America arranged the admission of China to the World Trade Organization on the theory that it would play by WTO rules, prosper, and with a new middle class leading the way, would relax the Communist Party’s grip on the masses. China did indeed prosper while American consumers, many of them blue-collar workers unwittingly digging a grave for many U.S. businesses, gorged on cheap t-shirts and sneakers. In America, the benefits accrued to an educated coastal financial elite that did not see the rusting factories and the displaced factory workers in fly-over America, home of masses in love with their bibles and guns. They found their champion in Donald Trump, to the consternation of the elites and a good portion of the rest of the world. Forgive the broad brush.
So here we are, facing a China that devoted the proceeds of its victory in the one-sided trade war to building military strength that, along with a desire to correct generations of perceived humiliation, has made it a threat to the liberal world order, including most importantly the United States.
The Great Scot And The Great Communicator
All because we ignored two great seers. The first was Adam Smith, The Great Scot. He advised “when some foreign nation restrains the importation of some of our goods … Revenge … naturally dictates retaliation, and … like duties and prohibitions upon the importation of some or all of their manufactures…”. He also pointed out that although free trade produces economic prosperity, “defence is of much more importance than opulence”, and if restrictions on free trade are necessary to secure a nation, so be it.
The second was Ronald Reagan, the Great Communicator. He advised that when it comes to international disarmament agreements, a Russian proverb, “Trust, but verify”, should be our guide. When it came to trade, we trusted China but neglected to verify that it was keeping to its word to obey WTO rules.
American Firms Denied Access To China Asked To Step Up Their Investments In China
Xi Jinping knows he is in a war. He has ordered IBM, Cisco Systems and Dell equipment, along with Microsoft and Oracle office tools, to be replaced with stuff made by Chinese competitors. Microprocessors from Intel, which gets 27 per cent of its revenues from sales in China, and Advanced Micro Devices (AMD) are to be replaced. Officials and executives of state-backed firms may not bring Tesla vehicles or Apple iPhones (about 20 per cent of sales made in China) to their offices.
Such moves are not cost-free for the parties to this war. China watches as American firms move jobs and facilities to safer countries, while Tesla, Apple, and other U.S. firms watch as their sales in China decline. To offset his losses, XI invited some 100 American businessmen to Beijing and launched a charm offensive to persuade them to invest more in China. Desperate for foreign investment to shore up his staggering economy, Xi is simultaneously destroying the value of American investments in China and trying to persuade our CEOs to invest still more in the People’s Republic. He apparently believes that CEOs’ combination of greed and gullibility, combined with a massive lobbying effort in the U.S., will enable him to wage war while obtaining ammunition from his adversary with promises of unspecified “reforms”. So far, no sale. And China’s use of exit bans to detain executives, often for years, is undoubtedly on the minds of our captains of industry as they study future itineraries. But Xi is a fan of a long march.
Biden Counters, Sort Of
Biden, too, knows he is in a war. He has retained Trump’s tariffs, ordered export controls to prevent advanced technologies from reaching China, and is ladling out billions to subsidize American chip factories. With some success as businesses compete for contracts and factory construction is at a record high.
Just as Xi wants to freeze American firms out of China’s massive market while persuading them to invest more in his country, Biden wants to replace Chinese products with those made-in-the USA, preferably by the six per cent of private-sector workers who are members of a trade union.
But he simultaneously is pursuing policies that weaken the two most potent weapons he has available: King Dollar, a reserve currency that creates the power to sanction enemies, and King Oil, a resource that gives American firms a competitive advantage.
The deficits resulting from the President’s continuation of Trump’s profligacy are causing investors to wonder just how safe a haven the dollar provides, and serious policymakers to predict that interest on the rising debt will soon swallow a large portion of government revenues.
His pledge to destroy the American oil industry in pursuit of a greener world and a contented left wing will cripple an industry that gives the U.S. a valuable trade advantage. His refusal to permit the construction of facilities to export liquified natural gas (LNG) harms allies suffering from Putin’s shutdown of Russia’s pipelines that brought gas to Western Europe.
The Winner And Still Champion, But Only Maybe
Nevertheless, America retains the advantages of a relatively large GDP and an entrepreneurial population in the lab and on the factory floor, more constrained than ever by government regulations and industrial policy, but still relatively free to think and innovate. China is lumbered with high unemployment and a middle class immiserated by Xi’s economic mismanagement. Its talented entrepreneurs are missing in action, their heads down and their wallets sheathed, as the regime makes success risky and a spate of bloggers bombards the media with attacks on successful businessmen.
America now faces three adversaries coordinating their policies: Xi in the Pacific, Putin in Europe, Iran in the Middle East. The American military admits it is no longer capable of fighting more than one hot war at a time. Whether America’s enemies will grant it the long time necessary to win this trade war is not certain.