President Trump’s trade dispute with China has obviously gotten serious, kneecapping stocks, collapsing interest rates and generating worries about a Trump-induced recession.
Trump has highlighted legitimate problems with Chinese trade practices, such as the theft of western technology and barriers to U.S. firms operating in China. But his prescribed solution—slapping tariffs on Chinese imports to force trade concessions—is counterproductive, harming the U.S. economy in order to harm China’s.
Worse, Trump has based his entire trade policy toward China on three falsehoods, suggesting garbage in will yield garbage out. Here are Trump’s three lies on trade:
China is a currency manipulator. The Treasury Department made this official designation on Aug. 5, breaking with its ordinary semiannual reporting timeline to do so in an urgent way suggesting some kind of emergency. But China doesn’t meet Treasury’s own standards for currency manipulation, and this is clearly a Trump power play meant to increase his leverage over China in trade negotiations. The Chinese renminbi has fallen against the dollar only modestly this year, and it has been much weaker before. “The U.S. decision to label China a currency manipulator is on shaky economic grounds,” notes Capital Economics. “If anything, the renminbi would be even weaker than it is now without policy support.”
China has basically decided to stop intervening to prop up the value of its currency, which is very different from deliberately trying to drive the value of the currency down. This matters because a weaker currency makes a country’s exports less expensive in foreign markets, while making imports more expensive. That would ordinarily reduce the trade deficit. But a weak currency also gives investors a reason to move money out of the country into stronger currencies that normally correlate with higher interest rates. So there are major downsides to a currency devaluation. By misstating what China is doing, Trump is further vilifying an opponent he can’t seem to defeat or make a deal with on the merits.
China is paying the Trump tariffs. This is an outright lie Trump has repeated many times. U.S. importers pay the Trump tariffs directly, with the money going straight to the Treasury. Those importers can absorb the added cost of the tariffs or try to pass cost hikes onto their own customers by raising prices. Once these American firms have paid the Trump tariffs, there may be negotiations with Chinese suppliers, leading to lower prices that offset some of the tariffs. But this is incidental and after-the-fact. The billions of dollars in new revenue Trump keeps crowing about comes from higher taxes on Americans.
China has been “ripping us off” for decades. Trump thinks a trade deficit is the equivalent of theft, with China taking billions of dollars per year out of the U.S. economy. What he overlooks is the fact that Americans are willing participants in these transactions, in which we hand over dollars and get something we want, such as a smartphone or a T-shirt or toys for our kids. This is no more of a ripoff than when any consumer walks into a store and exchanges dollars for goods. It’s called commerce, and most economists say a trade deficit in itself is nothing to worry about. If we spent less and saved more, the U.S. trade deficit would be lower, but we’d also have a different economy and culture.
Again, there are elements of truth in Trump’s gripes about China. It’s true that the outsourcing of some U.S. manufacturing to low-cost countries such as China has hollowed out certain American communities and caused strain on the middle class. Economies constantly evolve and there are always strains somewhere, as the new displaces the old.
But policies based on falsehoods rarely end well. The 1964 Tonkin Gulf “incident” turned out to be a phony pretext for justifying American escalation in Vietnam, until it built to a disastrous climax. Bogus reports of weapons of mass destruction in Iraq in 2003 led to the U.S. invasion of that country and thousands of American deaths in an entanglement far bloodier and costlier than its backers promised.
Trump famously said that trade wars are “easy to win.” The evidence already proves he’s wrong. What we don’t know yet is whether a disaster is unfolding, or just an unpleasant mess.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman
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