A trade war between America and China takes shape
The two countries threaten to descend into a sequence of tit-for-tat retaliations
Apr 7th 2018
TALK of tariffs is in danger of developing into cries of trade war. On April 3rd America published a list of some 1,300 Chinese products it proposes to hit with tariffs of 25%. Just a day later China produced its own list, covering 106 categories. “As the Chinese saying goes, it is only polite to reciprocate,” said the Chinese embassy in Washington, DC.
According to the Peterson Institute for International Economics, a think-tank, America’s list covers Chinese products worth $46bn in 2017 (9% of that year’s total goods exports to America; see graphic). China’s covers American goods worth around $50bn in 2017 (38% of exports). The sums were enough to move markets on April 4th, though the S&P 500 index soon made up lost ground.
Both countries’ lists are, for now, no more than threats. Over the next two months America’s list will be open for public consultation (there is no deadline for the tariffs to come into force). China has said that it will wait for America to move. There is still a chance the two sides will choose a deal over a trade war. Although America’s list was drawn up in response to China’s alleged theft of American firms’ intellectual property, Mr Trump regards the trade deficit with China as a separate affront. Tariffs might yet be avoided by China agreeing to buy more American stuff.
But this skirmish follows others. On March 23rd America imposed tariffs on steel and aluminium from some countries, including China. That prompted tariffs covering around $3bn of American exports to China. More retaliation is expected, as the Chinese react to separate American tariffs on solar panels and washing machines.
Historians of trade have an advantage over those who study wars of the military kind. Each side in a trade dispute lays out in detail the products to be affected. That makes it easier to analyse their strategies.
Mr Trump’s tariffs on steel and aluminium turn out to be rather crude. They are an attempt to protect a single industry by blocking foreign competition, guided by a mistaken belief that this will make it stronger. By contrast, China’s retaliation, and the latest American threats over intellectual property, are more sophisticated. Rather than coddling one industry, they are meant to prod a trading partner into changing its behaviour. They are means, not ends.
This week’s American list is designed to hit products benefiting from China’s industrial policy, including its “Made in China 2025” plan to dominate certain strategic sectors. Industrial robots, motors for electric vehicles and semiconductors are all in its sights. (At least 90 products, including aircraft parts and cars, recorded no Chinese exports to America in 2017 and may be intended as a pre-emptive strike.)
That might seem fair in Mr Trump’s eyes. But bureaucrats crafting trade-protection policy face a trade-off between punching the other country and protecting their own consumers. Even before the latest announcement, some offending products had been dropped from America’s list after government analysts identified them as “likely to cause disruptions to the US economy”, or “subject to legal or administrative constraints”. The final choice took account of the availability of substitutes from elsewhere. Analysts at Goldman Sachs, a bank, estimate that of the products proposed for tariffs, only around 20% of America’s imports in 2017 came from China (the share is higher for LEDs, televisions, and printers and copiers).
The element of surprise
Some parts of America’s strategy were unexpected. Minimising disruption to businesses would suggest tariffs on finished goods rather than their inputs. Some companies may not realise that their suppliers are buying from China, so higher costs for intermediate goods could travel along supply chains in unpredictable ways. Pricier parts could make American manufacturers less competitive than foreign rivals. However, although the two biggest tariff lines by value on America’s list were colour-screen televisions and passenger vehicles, consumer products accounted for less than 20% of the affected imports.
What of China? In response to America’s tariffs on steel and aluminium, it placed tariffs on $0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and $1.2bn-worth of aluminium waste. This echoed Canada’s response to the American Smoot-Hawley tariff of 1930, when it raised tariffs on eggs as retaliation for America doing the same. Douglas Irwin of Dartmouth College reports that the number of eggs Canada exported to America fell by 40% between 1929 and 1932. But the number going the other way plunged by 99%. Such tit-for-tat retaliation is intended to demonstrate that trade barriers make industries weaker, not stronger.
The list China published on April 4th is even bolder. It makes no effort to comply with World Trade Organisation rules, and aims at pressure points in America’s democracy, including industries with powerful lobbies, such as aircraft and soyabeans, as well as products from politically sensitive states. Wisconsin is home both to Paul Ryan, the Speaker of the House of Representatives, and a sizeable share of America’s cranberry exporters. Mitch McConnell, the Republican leader of the Senate, represents Kentucky, home to America’s bourbon exporters. Both products are included in China’s $50bn tariff threat.
Such methods have worked before. In 2003, when the European Union threatened to put tariffs on American products, including oranges, in retaliation for George W. Bush’s tariffs on European steel, Mr Bush yielded. (Florida, a crucial swing state, is home to many orange-growers.) Mr Trump’s pronouncements do not suggest he is ready to sue for peace. Nor does he seem aware of the risks of failure.
Economists understand little about the causes of growth
The first in a series of columns on the profession’s shortcomings
Apr 12th 2018
OVER the past decade economists have been intensely scrutinised for their intellectual failings in the run-up to the 2007-08 financial crisis. Yet had the recession that followed been more severe—wiping a quarter off the GDP of every advanced economy, say—those countries would still have ended up four times as rich per person, in purchasing-power terms, as developing countries are now, and more than ten times as rich as sub-Saharan ones. Robert Lucas, a Nobel prizewinning economist, once wrote that after you have started to think about the gap between poor and rich countries it is hard to think about anything else. Economists understand even less about economic growth than about business cycles. But the profession has done too little to address this failure or to understand its implications.
Economists have precious few hard facts about growth. They know that sustained growth in GDP per person only started in the 18th century. They know that countries can become rich only by growing steadily over long periods. They know that in some fundamental way growth is about using new technologies to become more productive and to uncover new ideas. Beyond that, almost everything is contested.
There are three broad lines of thinking. The first dates from 1956, when Robert Solow and Trevor Swan independently developed models based on the idea that growth is a consequence of capital accumulation. Their models explained how poor countries could catch up with rich ones, but not why rich countries had grown in the first place. Mr Lucas and other economists, including Paul Romer, sought to fix that by adding descriptions of how knowledge is developed and disseminated. As simple stories about how growth might work, such models function well.
Yet they share two flaws. First, they are often too vague to be of much practical use. As Paul Krugman, another Nobel prizewinner, once wrote, they “involved making assumptions about how unmeasurable things affected other unmeasurable things”. And they leave out most of what matters. Some economies do indeed leap from poverty to riches by mastering state-of-the-art technologies. But most do not, suggesting that formidable obstacles prevent many poor countries from growing in the way that models of knowledge accumulation and diffusion suggest they could. Growth theory is silent about what those obstacles might be.
A second strand of empirical research followed. Economists pored over cross-country economic data in search of factors that might explain differences in growth. Some focused on individual countries and used techniques known as “growth accounting” to quantify the relative contributions of capital and labour. Often, however, much of the growth could be attributed only to an unexplained residual, sometimes interpreted as representing progress in technology but better understood, in the words of Moses Abramovitz, another economist, as “a measure of our ignorance”.
Other empirical researchers compared countries, seeking links between economic and political characteristics and rates of growth. Yet, as Mr Solow has remarked, this project has not inspired much confidence. The trouble is the sheer number of variables that might matter, alone or in combination. A study might find that some factor—the rate at which businesses are created, say—is materially linked to growth. But in reality something else correlated with business creation, not included in the study, might be the crucial influence. The world is too complicated to be dissected and examined this way.
A third group of researchers look to history for lessons, examining the Industrial Revolution, the diverging fortunes of former European colonies and so on. They are held back by a paucity of data and have not managed to converge on a shared understanding of the nature of growth. Yet their approach is in some ways the most promising, because it means grappling with the ways in which culture and politics constrain economics. Debates about the origins of the Industrial Revolution revolve around the relative importance of secure property rights, the extent to which cultures tolerate personal ambition and so on. Those about why one European colony ended up rich and another poor focus on why different places ended up with different sorts of institutions, and to what effect.
At bottom, such issues must be the most important ones. An economist might explain China’s rapid growth in the 1980s by saying that it began to deploy more capital per worker and to adopt foreign technologies. Yet it was very clearly the result of a political decision to loosen state control over economic activity. It would similarly be accurate to say that China’s future growth will depend on how well it develops and deploys new technologies. But that depends on decisions about economic governance taken by its leaders, which will in turn be influenced by social and geopolitical forces that economists scarcely understand and generally ignore. Economists might imagine that if they were put in charge of a poor country, they could get it to grow. But a formula for growth that takes no account of social and political complexities is no formula at all.
Ignore it and it will grow away
A clearer understanding of how growth happens, and why growth-boosting institutions sometimes wither or fail to take root, could raise the living standards of billions of people. The economics of growth should therefore be central to the discipline, even though the questions it poses are objectively hard, and the answers rest more in history and politics than in elegant mathematics. Until they can give better answers in this area, economists should speak with greater humility about how this structural reform or that tax change might affect long-term growth. They have not earned the right to confidence.
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