I don’t think the US will win its trade war with China, nor do I think a win would be desirable. Nonetheless, it’s worth thinking about what would constitute a win. Who would benefit and who would lose?
In my view a win would entail the following:
1. China agrees to stop stealing US intellectual property, and instead buys the intellectual property.
2. After China gives in, we remove the tariffs on Chinese goods that were imposed in retaliation for IP theft.
If that were to occur, who would win and who would lose? One group is obvious:
1. US IP producers would be winners. This would boost incomes in areas such as Hollywood and Silicon Valley, as there would be less piracy and more commercial exports of films, music, software, etc.
Here are some other effects of a US victory:
2. US imports would increase. That’s because any policy that boosts exports also tends to boost imports. While the increase in exports would be mostly in IP goods, the increased imports would be in middle and lower tech goods, such as furniture, textiles, autos and auto parts, home appliances, etc.
3. The dollar would get stronger, which would reduce the export of non-IP products, such as oil and food.
4. The income distribution in America would become more unequal. Incomes would rise in coastal California, Boston, Manhattan and the DC area. Incomes would fall in the rust belt and parts of the South, as lower tech industries lost out to import competition. The farm belt and the oil patch would also be hit.
Is that what the protectionists want?
PS. Again, this is not a prediction of what will happen, rather what would happen.
If we “win”.
READER COMMENTS
Alec Fahrin
Mar 22 2018 at 11:54pm
Basically it appears that Trump’s policies are directly aimed at worsening the lives of his supporters.
Yet, maybe that is what he wants. If people feel like foreigners, minorities, and the “deep state” are the reasons their livelihoods are increasingly worse than blue staters, they’ll continue voting for the billionaire who promises to beat up those threats.
Once again, no politician wants to get rid of the boogeyman scaring his constituents into acquiescence. Japanese played the role in the 1980s and early 1990s. “Rising Sun”, “The Enigma of Japanese Power”, “Japan as Number One”, “Trading Places”, and “Agents of Power” were all great Japan-bashing books from the 1980s and early 1990s.
“Agents of Power” talked about how Japanese professors and students infiltrated every American university and technological company, and were siphoning off the intellectual property to Japan. Americans had to watch what they said about Japan, or they’d get fired from their company. Japanese were watching your every move through their electronic products.
We put hundreds of tariffs on Japan and imposed Voluntary Export Restrictions. All of this just to get Reagan reelected in 1984 and Bush in 1988. Clinton pursued the same charade in 1992. In 1990 Bush lowered the tensions and ended some trade actions, but then he lost in 1992 to a Georgetown University graduate who promised to “balance the trade deficit with Japan”.
All of those candidates won when they bashed Japan.
China serves as a great political boogeyman and whipping boy. Schumer praised President Trump today. Everyone in politics likes to blame the nations’ woes on foreigners.
Trump may end up winning the trade war politically.
But Americans will not win.
Colin
Mar 23 2018 at 12:30am
better hollywood/media clearly means better quality of political ads which means this will be true Scott, regardless of facts, haven’t you seen this facebook post?
Duncan Earley
Mar 23 2018 at 2:20am
There is one line in your post that isn’t clearly true to me:
“That’s because any policy that boosts exports also tends to boost imports.”
If that isnt true the point of your post is incorrect yes? And the word “tend” makes it sound a like it might not be.
Todd Kreider
Mar 23 2018 at 6:53am
There would be a pressure on the dollar to strengthen, but we don’t know it would get stronger because it is too difficult to predict other future presures. (This is probably what Scott meant.)
Jackson
Mar 23 2018 at 8:43am
The implication of your post is that a win for protectionism may have an adverse effect increasing the greater concentration of money and manufacturing in coastal cities and states. Blue states.
Given that you admit that China steals (note: steals, not borrows) intellectual property from the U.S. What do you propose? Look the other way until China has stolen enough to permanently destroy the economies of the very places that you say will benefit from a “win” for protectionists. You are being too coy by half. You posit that a win over IP theft “may” have negative implications while a loss will most assuredly is currently having a negative impact. I guess we should except our lot in life and move on, yes?
mike
Mar 23 2018 at 9:00am
Another thought: If china is currently producing products without paying licensing / IP fees, they are “Stealing” market share from domestic firms that manufacture said products etc.
If a $100 widget or piece of apparel should have $10 of IP / licensing, and China simply doesnt pay, then they can produce at $90 vs $100 in Us, sell at $95, bankrupt the US firm and keep all production overeseas. Now, if they must pay the $10, some (maybe much?) of that item is now manufactured.
winning indeed. MAGA as trump would say (sarcasm, but not completely with how smug the author is wrongly in this post)
Alan Goldhammer
Mar 23 2018 at 9:29am
I’m curious about what types of IP China has stolen. Look at a lot of tech stuff that is marketed in America. These products and parts were designed outside of China (Japan, US and Taiwan). I presume those items coming into the US are compliant with our IP laws and if not Apple and the rest of the ‘idea’ developers have done a poor job of protecting their own IP. If the stolen IP is only for the Chinese domestic market, is this tariff action a legitimate solution?
As noted by Alec Fahrin in the first comment to this post, there was a lot of hand wringing about the Japanese back in the 1980s and early 1990s. Their takeover of American did not succeed and what makes anyone think that the Chinese are more capable?
Hazel Meade
Mar 23 2018 at 9:35am
I doubt we can predict what will happen in trade terms if China decides to pay for US IP instead of stealing it. China has so many US dollars lying around they might just spend them on buying IP and producing legitimate copies instead of clones. So it might not mean fewer high tech imports – it might mean more and better high tech imports, and less buying of US government debt. It might change the incentives in China so that Chinese engineers have to develop their own tech instead of ripping off American tech. The global economy is just too complex to predict what will happen.
Also, the main problem is not that it will increase inequality, but rather that the US government should not be used as the negotiating arm of US industry, with US consumers as the hostages. If US industry has to disclose IP in order to do business in China, that’s between them and the Chinese government, it’s not really something the US government ought to concern itself with. If anything the US government should be happy that the business environment in China makes it a less desirable place to set up factories.
Scott Sumner
Mar 23 2018 at 10:45am
Duncan, Yes, policies that boost exports also boost imports. That’s why it’s called “trade”. I don’t think my claim is even controversial.
Jackson, I’m not too worried about the Chinese theft of IP, because I think America’s IP protections are too strong, giving firms too much monopoly power. Why should Disney have control over Mickey Mouse for nearly 100 years? Weren’t copyrights originally intended to be for 26 years?
I’m not saying the Chinese theft of IP doesn’t cause any harm–it does. I just think the damage is small. Policy makers should focus on other problems–the shortage of kidneys for transplant is a 10 times more serious problem, and the government is making the shortage worse. Let’s focus on the real problems.
Mike, You are confusing the IP intensive products we export with the lower tech products we import. You need to think in terms of which industries would expand and which would shrink if this worked. You are implicitly suggesting that a win would reduce our trade deficit, which seems really far-fetched.
Hazel, Yes, the economy is complex, in which case the baseline assumption should be no change in the trade deficit, unless we have reason to think otherwise. And we don’t.
Ed Hanson
Mar 23 2018 at 10:49am
Scott
What you are saying until our debt rises to level that Greece style austerity is demanded; and our trade balance will not correct until we are reduced to third toward world level; there is nothing this country can do to stop the bleeding because if we use direct action that every other country uses to one extent or another, we are uniquely criminal and command scorn on us.
OK, you are now the fourth orignal thinking economist I have asked tthese questions. Is our huge and growing trade balance a problem? And if so, what is your solution before the problem reaches an extreme crisis on its own. The first three would not or could answer.
Ed
Jody
Mar 23 2018 at 12:06pm
Tit for tat is superior to Always Cooperate in a world of heterogeneous strategies.
Alec Fahrin
Mar 23 2018 at 12:26pm
Jackson,
Why do you believe punching China in the nose will convince it to bend over for the US?
Wouldn’t this incentivize China to just retaliate and nationalize every American company and all their IP technology in China?
There’s a tendency to think all Chinese progress comes at the expense of Americans. Yet the world is not winner-takes-all or zero sum.
If American corporations do not want to lose their IP, they do not need to produce in China. You’re basically saying that American companies and individuals should not be allowed to operate freely in economics.
Also, please tell me all about those great IP producers in Alabama and Kansas. They benefit from trade with China in non-IP goods. Blue states benefit from improved IP treatment in China, not red states. Your point seems invalid.
Jacob Egner
Mar 23 2018 at 1:45pm
Scott Sumner: What do you think the optimal copyright and patent durations are? When you were coming up with that answer, were you trying to maximize consumption, consumer surplus, consumer surplus + producer surplus, or something else? I look forward to learning something from your answer, thanks.
Grant Gould
Mar 23 2018 at 3:31pm
I’m a bit skeptical that Silicon Valley is among the winners. Relatively little software is “sold” in a pirateable sense any more — it’s hard to pirate Facebook, for instance, or Uber.
michael pettengill
Mar 23 2018 at 5:59pm
Low tech Apple iPhones vs IP intensive soybeans?
What is high tech about rounded corners on rectangles, one part of the Apple claim against Samsung for IP theft? That is a core design rule for woodworkers and machinists.
The coinventors if a fundamental patent for wireless communication got nothing but belated recognition shortly before Lamar’s death, but no money. But as a Jewish refugee, she didn’t invent for the money, but for the greater good of those who provided her shelter from the Nazis.
Patents are in the Constitution to promote stealing IP from Europe. Britain governmebt granted patents to corporations and made it a crime for anyone to pass on the useful arts one learned without permission, ie trade secrets, to maintain perpetual British corporate monopoly. The USA idea was public disclosure of all the arts to eliminate the monopoly by IP that gave Britain so much power.
Trump is defending the British colonial policy of government granted and enforced monopoly, while China has embraced the US Constitution of public disclosure of all trade secrets to eliminate monopoly power.
Alan Crowe
Mar 23 2018 at 6:19pm
I’m confused because I’m struggling to distinguish the arguments against tariffs from the more general arguments that taxes lead to a dead-weight loss.
In the case of taxes generally, the apology is that the money is taken out of the consumer surplus and the producer surplus (depending on elasticity) and spent on public goods. That fixes the under-supply of public goods, which is worth a lot, enough to compensate for the dead-weight loss.
Tariffs look like a sneaky trick. The money that comes from producers comes from foreigners, and gets spent on local public goods. Thus the locals might hope that they are getting good deal. They are only paying the tariff as consumers. Had the money been raised by a tax, they would be paying both as consumers and producers.
Presumably this sneaky trick comes unstuck when supply proves to be very elastic, and foreigners end up paying hardly any of the actual incidence of the tariff.
But I’m still a little worried about the rigor of the argument. The government needs some revenue. Perhaps it charges VAT domestically or Income Tax. Perhaps it needs to raise more. Is imposing a tariff worse than raising VAT or Income Tax? But the dead-weight argument applies (to varying degrees) to all attempts to raise revenue, whether tax or tariff. So the full argument needs to say why a tariff is worse than the alternative ways of getting the revenue.
Ed Hanson
Mar 23 2018 at 7:16pm
Alan
I only have a partial answer. Up to the point taxation is too high, to me, it depends mostly on how the tax is used. An example of historical use of tariffs came during the Washington administration. The United States bonds were a mess and worth pennies on the dollar. The debt from the revolutionary war was huge. Hamilton instituted tariffs collected in gold backing the dollar and which almost immediately brought the value of US government bonds above par. Then success and growth and even longevity of the country truly extends from that action.
Ed
Gordon
Mar 23 2018 at 7:26pm
Scott, this is a brilliant post. I think people have a strong tendency to overlook that China is only able to buy goods and services from the US by selling goods and services to the US. It makes me wonder if people view trade as if the world still operated on a single base currency.
Scott Sumner
Mar 24 2018 at 12:40am
Ed, No, our huge trade deficit is not a problem, nor does it imply we are borrowing from the rest of the world (a common myth). Second, even if it were a problem, tariffs would not address the deficit; it’s caused by a saving/investment imbalance. Trade deficits are a symptom.
BTW, Trump’s policies (such as fiscal stimulus) are causing the trade deficit to get much bigger.
Jacob, I can’t give you a precise number, but there are real trade-offs here. Weaker IP laws would tend to cause faster growth in developing countries. It might reduce the profits of US high tech companies, but that’s a trade-off I’m happy to take. Think of it as a foreign aid program that is far more cost effective than our actual foreign aid program. The strongest argument for strong IP rules are in drugs, where new inventions could save millions of lives. It’s important to motivate drug researchers.
Alan, Most economists believe that a VAT is more efficient than a tariff. As far as the income tax, that’s more debatable.
Just to be clear, I don’t think the Trump tariffs announced so far will do a lot of harm, but they also won’t help. They are a small negative (so far.)
Thanks Gordon.
Ed Hanson
Mar 24 2018 at 1:37am
Scott,
Thank-you Scott, you have given men some small comfort. If you would take the time could you give more elementary economic lesson and expand on “Trade deficits are a symptom” Such as symptom of what?
Ed
Mike
Mar 24 2018 at 10:01am
So, the, the answer is to continue to let the Chinese steal American Intellectual Property?
Todd Kreider
Mar 24 2018 at 10:43am
Scott wrote above:
At the same time, millions in poorer countries can’t afford the new drugs as was the case in India in the 90s when companies ignored IP law of the US and EU, copied HIV drugs and sold them for a much lower price.
Jacob Egner
Mar 24 2018 at 11:33am
Scott Sumner: Thanks for your answer.
ChrisA
Mar 25 2018 at 4:34am
I don’t really know how much China uses US IP but a nation is entitled to make its own laws on IP. Let’s say China protects copyright for 10 years, vs the US 75 years, isn’t that their right?
Thaomas
Mar 25 2018 at 7:22am
As I read this post I was thinking about writing something along the lines of “Why do you waste our time pointing out the obvious?”
Then I read the comments.
It is amazing how one side of an economic transaction holding a different passport from the other makes people unable to reason about how the transaction should be regulated or not.
Of course a policy of threatened trade restrictions of imports of goods into the United States (that would harm people in the United States but also Chinese exporters so log as they were in place) that was successful in getting the Chinese government to enforce US IP laws and not use trade restrictions to make US companies sell their IP for less than they could otherwise have done, would benefit the US in the way Scott points out with the income distribution consequences he points out. This would raise national income and progressive taxation would help insure that low income people benefited.
Benefits could also be spread with higher Earned Income Tax Credits, reduction or elimination of the wage tax as a way of financing Social Security and Medicare, increasing the subsidies for purchasing health insurance provide that these measures were offset by sufficiently higher taxes on personal income to prevent an increase in the deficit, which, given inflation targeting or even an inflation ceiling policy by the Fed will strengthen the dollar and increase the trade deficit. As these complimentary measures are unlikely in the current political climate, the benefits and distributional consequences from “winning” this trade war with China would be as Scott lays out.
Scott Sumner
Mar 25 2018 at 12:54pm
Ed, A symptom of investment exceeding saving.
Mike, We have no ability to stop them from doing this, so let’s focus on policies that help our IT industry compete with China, like more skilled immigration and reform of copyright/patent laws.
Todd, I agree, see my response to Chris.
Chris, Yes, it’s their right.
Gordon
Mar 25 2018 at 6:19pm
I’ve been trying to explain this post to some ex-colleagues who work in the tech industry and they’re just not getting it. Earlier, I had said it’s as if people view trade as if the world operated on a single base currency. What I’m gleaning from my discussions with these ex-colleagues is that they’ve never given any thought to what drives currency exchange and exchange rates. I think they view different currencies as simply interchangeable. And these are very intelligent people. So if you’re ever dealing with trying to explain the economics of international trade to people, beware that many people have never given a thought as to what currency exchange and exchange rates mean.
Brian Mccarthy
Mar 26 2018 at 4:00pm
I’m not sure we should infer causality from an accounting identity, i.e. the U.S. has a trade surplus “because of” a savings / investment imbalance.
This seems particularly true in terms of the China / U.S. bilateral trade imbalance, given that China is a managed economy.
We know China has pursued an “investment-led growth” model. They pretty much set investment levels via central plan at 50% of GDP, lets call it (i.e. huge relative to anything we’ve ever seen sustained).
China also, until very recently, has had zero interest is foreign participation in its financial markets, which pretty much rules out their running a C/A deficit. They also had other reasons for “forcing” a C/A surplus – i.e. employment, market share, etc. So they have erected high barriers to trade, both explicit and implicit.
High investment + forcing a C/A surplus = crazy high Chinese domestic savings (fostered by sub-market retail interest rates and strict capital controls).
Ergo, the rest of the world (and to simplify, let’s just say the U.S.) is going to be locked into a C/A deficit with China funded by Chinese official purchases of Treasuries. Due to the centrally-planned nature of the Chinese economy, no adjustment is possible on that side, including via the currency which, at least until quite recently, was quasi-pegged.
If China’s planned economy is subsidizing production and forcing a Chinese current account surplus our market economy is going to be happy simply taking the subsidized goods and selling China Treasuries.
I can’t see any reason for this system to EVER equilibrate on its own until the Chinese Household sector reaches its limit in holding domestic financial assets, at which point China implodes in a catastrophic debt-deflation and/or maxi-devaluation. Until then (and who knows when that may be) we are stuck in a system in which the Chinese central planners have disconnected any self-correcting mechanisms.
Whether the U.S. should act to break the pattern, as Trump is doing, is as much a geopolitical question as an economic one.
But given the centrally planned nature of the world’s second largest economy, I think looking to the U.S. savings / investment balance is focusing on the wrong side of the issue.
David
Apr 12 2018 at 12:24pm
So should we, by this argument, maintain the new tariffs on Chinese goods?
This seems as much a case for protectionism as against it.
Comments are closed.