The good news: I don’t think Donald Trump will cause a global trade war.
The bad news: The reason I say that is I believe that a trade war would be coming even if Trump had lost the election, largely because China is refusing to act like a responsible economic superpower. Unfortunately, Trump may be the worst possible person to guide U.S. policy through the turmoil that’s probably ahead.
He won’t be the reason we have a trade war, but he may well be the reason we lose it.
China is the greatest economic success story in history. It used to be very poor; there are still many people alive who remember the great famine of 1959-61. But after the reforms that began in 1978, its economy soared. Even now, China is only a middle-income country, with GDP per capita substantially lower than ours or in Western Europe. But China has a huge population, so by some measures it is now the world’s largest economy.
However, all indications are that China’s era of torrid economic growth is behind it. For decades, Chinese growth was fueled mainly by two things: a rising working-age population and rapid productivity growth driven by borrowed technology. But the working-age population peaked around a decade ago and is now falling. And despite some impressive achievements, the overall rate of technological progress in China, which economists measure by looking at “total factor productivity,” appears to have slowed to a crawl.
But a growth slowdown doesn’t have to be a catastrophe. Japan went through a similar demographic and technological downshift in the 1990s and has, on the whole, handled it fairly gracefully, avoiding mass unemployment and social unrest.
Growth at any cost
China, however, has built an economic system designed for the high-growth era — a system that suppresses consumer spending and encourages very high rates of investment.
This system was workable as long as supercharged economic growth created the need for ever more factories, office buildings and so on, so that high investment could find productive uses. But while an economy growing at, say, 9% a year can productively invest 40% of GDP, an economy growing at 3% can’t.
The answer seems obvious: redistribute income to households and reorient the economy away from investment toward consumption. But for whatever reason, China’s government seems unwilling to move in that direction. Again and again, stimulus policies have been aimed more at expanding productive capacity than at empowering consumers to make use of that capacity.
So what do you do if you have lots of capacity but your consumers can’t or won’t buy what you make? You try to export the problem, keeping the economy humming by running huge trade surpluses.
And I mean huge. Tellingly, China seems to be playing games with its trade numbers in an attempt to make its surpluses look smaller than they really are. But China appears to be exporting close to $1 trillion more than it imports, and the trend is upward.
Hence the coming trade war. The rest of the world won’t passively accept Chinese surpluses on that scale. The “China shock” of the 2000s taught us that whatever the (real) virtues of free trade, a huge import surge does unacceptable damage to workers and communities in its path. Furthermore, China is an autocracy that doesn’t share democratic values. Allowing it to dominate strategically crucial industries is an unacceptable risk.
That’s why the Biden administration has been quietly pursuing a quite hard line on China, retaining Trump’s tariffs and trying to limit its progress in advanced technologies. It’s why the European Union has imposed high tariffs on electric vehicles made in China, which is probably only the beginning of expanded trade conflict.
The Trump chapter
So the trade war is coming; in some ways it has already started. What will Trump add to the story?
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Ignorance, lack of focus and potential cronyism. Oh, and gullibility.
Ignorance: Trump’s insistence that tariffs don’t hurt consumers — even as businesses across America are planning to raise prices when his planned tariffs hit — strongly suggests that neither he nor anyone he listens to understands how global trade works. Not a good thing at a time of trade conflict.
Lack of focus: By proposing tariffs across the board, not on just China, Trump will raise costs for many American businesses and alienate allies who should be part of a cooperative response.
Cronyism: The president has great discretion in granting tariff exemptions to selected companies. During Trump’s first term, such exemptions went disproportionately to companies with Republican political connections. It’s naive to think this isn’t likely to happen again, and on a much larger scale.
Finally, gullibility: During his first term, Trump eventually stopped raising tariffs after signing what he called a “historic trade deal” in which China agreed to buy $200 billion in American goods. How much of that total did China actually buy? None.
As I said, serious trade conflict is coming as China tries to export its policy failures. But America just elected perhaps the worst possible leader to manage that conflict.
Paul Krugman is a New York Times columnist.
