How America Can Win The Trade War With China

By former Fed governor Larry Lindsey.

We have been of the view that America can “win” a trade war with China, in the sense that China will take more “casualties” than America. But that kind of war is the proverbial negative-sum game. Who wants to do something in which your side is still “losing” (taking casualties), even if you “win” the war? The purpose of a trade war is to establish a trade peace, in which your side reaps benefits that far exceed the costs of the war. Even though China is now vulnerable, an outcome that benefits America, rather than merely hurts China, will require a policy pivot. Without that policy pivot, the vulnerabilities in the American side of the dispute will start to rise very rapidly.

Until quite recently, markets have responded negatively to trade announcements coming from the Trump administration, but then recovered as market participants came to believe that Trump was merely being tactical. As a result, key market indices are essentially flat for the year. But the recent spate of trade policy announcements have shaken that confidence.

Unless the administration can restore the belief that the goal is to win a trade peace and not just a trade war, then equity values should go down because the future will be bleaker, not more positive.

This does not mean a comprehensive solution to all trade problems on the planet needs to be resolved. But it does mean that the Trump administration must come to a “deal” on something, just to show that it can. Otherwise it is merely a disruptor of the status quo and not a disruptor that leads to a better outcome. China is a natural place to start, in large part because it also needs the promise of a cessation of hostilities at some point in order to keep its economy together and so it can agree to a trade “peace,” or even a trade “cease fire,” that will give Trump and America much of what it is looking for.

A trade cease fire might look something like this.

  1. China agrees to reduce its annual trade surplus with America by some number, say $150 billion. This is about one third of the current deficit and, other things equal, would add about three-quarters of one percent to American GDP.
  2. America agrees not to impose any new tariffs on Chinese goods for one year. At the end of that year it will evaluate China’s success at meeting its promised reduction in the trade deficit.
  3. America will handle other issues, such as intellectual property, outside of the tariff framework and use processes like CFIUS, augmented by FIRRMA, to handle these matters.
  4. Over the next year the two sides will work together to negotiate a more lasting solution.

This is hardly a comprehensive solution to the trade issues between the U.S. and China. However, it does remove an important component of the uncertainty now beginning to creep into both financial markets and industrial planning around the global supply chain.

Can investors be certain that a new round of tariffs will not begin a year from now? Of course not, but that was something that could never be guaranteed. It also separates the narrowly defined “trade” relationship from the intellectual property and investment issues. A basic rule of policy is that the number of policy instruments should be at least as great as the number of policy goals. Using tariffs as a mechanism for dealing with intellectual property concerns violated this fundamental principle. In so doing, it “overreacted” on the trade front thereby inducing others to respond to the overreaction using the same tools.

Most important, it establishes a positive dynamic on the trade front that can lead to a net winning position for the American economy and not just one in which America merely suffers fewer losses.

Comments

Deep Snorkeler Fri, 07/06/2018 - 14:06 Permalink

Trump, Captain Flaccid

Leader of a nation of reclining simpletons

(the opiated obese) seeks a fight

with the brilliant Chinese people.

Smirk-face Trump rides the tricycle of self-love

on the golf course of imperial collapse.

The recession cometh.

JimmyJones powow Fri, 07/06/2018 - 14:13 Permalink

Got to fight one to win one, Let it begin since China has been fighting one since Bush Sr was in office and he opened the door for them then Clinton gave them most favored nation status .

The Globalist are heavily invested in China, this is a direct attack on them.

In reply to by powow

JimmyJones GoFuqYourself Fri, 07/06/2018 - 14:24 Permalink

Not so fast, they have a much bigger demographic problem then we do in the US, single child policy in China now biting them in the but.  Japan has priced out and worked out through insane working demands their ability to choose to reproduce.  All is not great in the East.  In fact the only country in the East that doesn't have a reproduction problem, is North Korea.

To reverse offshoring you need to do what was done to start it in the first place, make it more profitable to manufacture here instead of there.

In reply to by GoFuqYourself

shortonoil Rapunzal Fri, 07/06/2018 - 14:45 Permalink

50% of imports from China are coming from US companies doing business in China. This is as much a trade war with US companies as it is a trade war with China. These companies moved to China because it is much cheaper to not care about their worker's safety, to not share their profits with their employes, and to not give a damn about the environment. They went to China and gave away American technology and jobs. They went to China acting more like Huns than Americans. They have emaciated the US middle class to stuff their own pockets. It is about time someone called them out! They don't deserve, nor have they earned more of a free ride. Bring it on, and screw the mealy mouthed FED.

In reply to by Rapunzal

Consuelo shortonoil Fri, 07/06/2018 - 14:51 Permalink

You forgot one other key reason:

Over-bloated government bureaucratic intervention/regulation into every aspect of business (and individual) life. 

That is not to say huge multinationals wouldn't have moved offshore anyway, but a large swath of companies definitely would, and would have stayed here without this unnecessary burden.

In reply to by shortonoil

khnum shortonoil Fri, 07/06/2018 - 15:06 Permalink

Its all theatre tptb have no solutions for the problems they created themselves so now we play blame the foreigner as a distraction, with the endgame being what. resurrecting 19th and early 20th century industry?.

Come on America open those technology vaults and start some new industries instead of crying over spilt milk.

In reply to by shortonoil

inhibi Deep Snorkeler Fri, 07/06/2018 - 14:17 Permalink

China aint that brilliant, but they are much humbler than Americans.

It isnt brilliance to make one's country the center of all manufactured goods in the world. Its merely a very quick way to reach new technological heights, while sacrificing the countries resources & environment in the process.

At this point in time, when vast knowledge is essentially all free and online, there really is no difference in potential acumen (of the individual at least - and it is the individual that invents new tech and products that keeps the capitalist world going).

In reply to by Deep Snorkeler

francis scott … inhibi Fri, 07/06/2018 - 15:20 Permalink

If the Chinese aren't brilliant, at least they're not as dim as

former Fed Governor Larry Lindsey.

"an outcome that benefits America, rather than merely hurts China, will require a policy pivot"

The most extreme policy pivot --  or any kind of pivot --  I can

see  --  is the pivot from the make-believe and wishful thinking

of America's so-called experts, which thinking benefits America, 

but not the American people, while it promotes our superiority

over everyone and our envyable status quo, which was gifted to

us by Manifest Destiny.

 

The wishful thinking of America's propagandists who 'know' 

that our $21 trillion national debt (which will soon be increased

by a trillion dollars a year thanks to our criminal defense

spending and our genetic right to spend of more than our 

tax receipts), will be as easily overcome as Saddam and Qadaffi.

 

There are not separate little contests or mini events being

played out in the MSM now, like the trade war with China.

or the fortress islands in the South China Sea.  Not to

mention who now controls Crimea or whether or not the

US can keep as many troops on Syria as the neocon 

politicians in Washington would like.

 

There are today only the finals of A BIG WORLD CUP 

for hegemon happening.  It involves not only China, but

other big players as well: India, Russia, Turkey, Brazil,

Argentina, Philippines, Iran, etc. etc.   

 

Countries with billions and billions of consumers who have

absolutely no need for American LNG, crude oil, hyped up

weapons.  Or anything produced in the US with expensive

American labor.  

 

The petrodollar is dying and the Eastern European

members of the EU and NATO are rejecting Washington

and Brussels' call for open borders and the admission into

the EU of all the migrants and refugees the US and its

coalition partners created when they turned the Middle

East into rubble and set millions of Arabs on the road to

the Europe. 

 

The more affluent ones moved to France,

Germany, Italy, etc. to become consumers in the

European countries with their "anti-Capitalism" low

birth rates, and to push the GDPs of their adoptive

countries higher and, Surprise, Surprise: 

 

TO INCREASE THE AMOUNT OF THE 2% OF THESE FOSTER

COUNTRIES' GNPs THAT ARE SPENT ON AMERICAN

MILITARY WEAPONS FOR THEIR DEFENSE AGAINST 

A RUSSIAN INVASION.  

 

We see that stupidity is still alive and well in the first

world nations that comprise the West.  And that the

possibility of America removing its Imperial Purple Toga

to put on spandex bicycle shorts like the rest of the world

is just a dream like the coming of the Prince of Peace.

 

  

In reply to by inhibi

CashMcCall JimmyJones Fri, 07/06/2018 - 21:48 Permalink

Why might cheating on one's wife be a negative? Trump is known for bad pay and has thousands of Circuit Court Cases in NY brought against him.  He is a grifter and a con artist. He was born with a $500 million credit line. Fred Trump was one f the richest men in America. Had Trump invested his inheritance in MSFT stock, he would be worth 10 times his present worth of 1.8 billion. In fact if he had just stuffed Fred's money in a mattress, he would be worth 2 billion today. 

The great self-promoted myth that Trump is a self-made man is laughable. He is a draft dodger, a blowhard and a rich kid bully. He's garbage. 

In reply to by JimmyJones

truthalwayswinsout Fri, 07/06/2018 - 14:12 Permalink

Gee what total B.S. Did you ever hear of the Vietnam war?

Gradual escalation is a sure fire means of losing.

What Trump needs to do is simply put a full on trade embargo against China.

Watch how fast the Communist Party disappears as they are put against the wall and shot.

Of course Apple, Amazon and Walmart will be upset but who really cares? They got a massive tax break this year and they can use the money to build new automated factories in the US. Right now they only increased dividends and share buybacks.

I would venture to say that if he announced a full on embargo, the Chinese Communists would settle up within the week. If not we can negotiate with a new group of non-communists.