Credit President Trump for Losing the Trade War With China
Try to imagine for a moment talking building construction with President Trump. Most of us would look exceedingly dim next to him. This is a subject Trump knows intimately.
Love him or hate him, Trump understands commercial real estate. If anyone doubts this, they need only stop to consider the various buildings around the world that bear his name. At his specialty, Trump is a genius.
To all this, some will respond that Trump has had many property-related bankruptcies. Well, of course he has. That’s the norm for risk-takers. If anyone doubts this, do some research on the world’s best venture capitalists. The list of failed businesses they’ve backed will dwarf the list of successes.
All of this rates discussion in consideration of Trump’s self-proclaimed expertise as a negotiator. While it’s possible he has some innate skills in this area, the more realistic answer is that he’s a great negotiator in the property space simply because he knows property. Great negotiators are great precisely because they know their subject backwards and forwards.
That’s why it’s not surprising Trump “lost” the trade negotiations with China. Of course he did. He’s long been talking about something well outside his area of expertise. That he has been naturally led to statements that weren’t powerful negotiating points as much as they revealed him as an easy target to best in a negotiation.
For one, Trump claimed that China had boosted exports to the U.S. via a devalued, manipulated currency. That people trade as opposed to countries is well beside the point. The main thing for readers to realize is that Trump was wrong. As opposed to declining against the dollar, China’s yuan has risen over 25% against the USD since 2005.
As for the manipulation charges, they’re false too. China’s monetary authorities are merely doing what dozens of monetary authorities around the world do: peg their currency to the dollar. In that case, China’s yuan generally doesn’t strengthen or weaken as much as it rises when the dollar rises, and declines when the dollar declines.
To suggest that China’s currency actions amount to “manipulation” is to ascribe sinister motives to what is common, and logically common. During the Bretton Woods era, the U.S. Treasury pegged the dollar to gold and countries around the world were encouraged to peg their currencies to the dollar. Per Adam Smith, the sole use of money is to circulate consumable goods. When currency relationships are stable, the trade that is the driver of all production becomes much more common. That’s an obvious positive. China is doing something that's wise.
Furthermore, this notion is that currency devaluation creates trade advantages is belied by common sense. Lest we forget, nearly every U.S. product is the end result of global cooperation. That’s why a devalued dollar would be so awful for U.S. producers. Such a scenario would lead to surging production costs thanks to more expensive imported inputs, not to mention that American workers earn dollars. A devaluation would logically lead to increased wage demands faced by U.S. companies, higher shipping costs, etc. Lastly, investment is what renders producers globally competitive, yet devaluation puts a bull’s eye on the investors whose capital commitments bring down the cost of everything. In short, Trump’s claim that devaluation gives the devaluing country an advantage further marked him as naïve on the subject of trade.
But what really made Trump a non-factor in trade negotiations were his endless rants about “trade deficits” with China. Trump didn’t understand that there were none. And aren’t. Individuals trade, and trade balances. I run a trade surplus with my employers, and my reward is trade “deficits” with my favorite restaurants, online retailers, and movie theatres. Trade between American and Chinese citizens balances too. The "deficits" in trade with China are an effect of a worthless - and rather misleading - calculation.
Applied to China, feverish purchasing by Americans of the goods produced in China factors into the trade balance. On the other hand, feverish purchasing by Chinese investors of stocks, bonds and other forms of equity in the U.S. do not factor into the so-called trade balance. Still, the balance is there, and it favors the U.S. We only have a trade “deficit” with China insofar as the Chinese aggressively invest in the U.S. For Trump to call for China to reduce its “trade surplus” with the U.S. was for Trump to demand that Chinese investors send their capital to other countries. Is it any wonder Trump lost this negotiation? He was literally demanding that the Chinese do something injurious to the American people.
That Trump was talking well outside his area of expertise unsurprisingly manifested itself in threats to levy U.S. tariffs on $150 billion worth of Chinese goods. Ok, but trade once again balances. If Chinese producers can’t sell to American consumers as easily, then Chinese consumers can’t as easily buy from U.S. producers. This matters a great deal simply because some of the most valuable U.S. companies (think Apple, Nike, Boeing) are heavily reliant on sales to an increasingly consumptive Chinese population. In his confusion, Trump was trying to harm what’s been remunerative for the greatest U.S. businesses.
That Trump “lost” a trade negotiation with China was a given. Where he should be given credit is that he actually lost. Had Trump won, the American people would have lost owing to the injurious stances Trump was taking on trade.
Better yet, markets loved Trump’s loss. Hopefully he sees the correlation. The less he does the more that markets will like him. And the more that he’ll succeed as President.