In a recent episode of “The Daily,” two American producers — one a farmer, the other a manufacturer of sanitation trucks — explained how President Trump’s trade war is seriously hurting their businesses. Yet both continue to support his efforts, because they say the rationale for the trade war is justified.
In fact, while there’s been ample criticism of how Trump is going about it, the notion that China must be penalized for its violations of international trade rules — intellectual property transfers as a condition of joint ventures, subsidizing state industries, blocking American companies from parts of their market — is widely held across both political parties and most of economics. Almost no one questions whether this is a legitimate reason to wage a trade war.
This is a mistake: The entire rationale may be misguided. If so, it won’t help American workers, and as a protectionist effort, its costs to people across the globe could swamp its benefits.
Our objections to intellectual property transfers must be viewed, as economist Dean Baker has argued, from the perspective of those for whom the trade war is allegedly being waged: American workers hurt by globalization. But to insulate American multinationals from China’s practices in this area won’t help those workers, as it will incentivize more, not less, offshoring of production. But because technology transfers threaten the profits of these companies, forcing China to stop insisting on them lowers the cost to the companies of producing abroad.
In a similar vein, Baker asks who benefits from protecting “our” intellectual property? “It is not ‘our’ intellectual property that Trump is protecting. After all, very few people have any patents or copyrights that we are worried about China using without compensation. The intellectual property that Trump and his allies across the political spectrum want to protect belongs to major corporations like Boeing, Pfizer, and Microsoft. Their goal is to make China pay more money to get access to technology these companies have developed. That’s great for their profits — sort of like Trump’s tax cut — but does not help the vast majority of people.”
In other words, protecting the copyrights and patents of multinationals makes them richer, while again, smoothing their path to producing abroad (relatedly, the notion that our patent system is doing more harm than good has been gaining ground). Is it really worth fighting a trade war, with all its collateral damage, on their behalf?
Next, consider our objection to China’s subsidies to their companies. In American policy parlance, this practice is derided as the government, as opposed to the market, “picking winners.” As such, it is widely considered a recipe for inefficiency, waste, weak innovation and corruption. Why start a trade war over a practice that our markets-know-best model tells us will hurt those who foolishly ply it? To do so seems to admit “We can’t compete with you if you’re picking winners.” Given that this stance implicitly endorses socialism over capitalism, it’s an especially ironic one for the Trump administration to take.
There are valid counterarguments. State subsidies can distort global markets by allowing the subsidizer to corner global market share, even if they’re not the most productive producer. The theft of Intellectual property vs. its voluntary transfer (remember, these companies choose to agree to China’s joint venture conditions), should be prosecuted, and victims should be compensated. Neither should we accept currency manipulation, inhumane labor practices and human rights violations. To the contrary, as the world’s dominant economy, we have an obligation to stand up to such practices.
But none of that requires us to accept the growing tensions, chaos and potential geopolitical realignments that may well result from this trade war. In fact, as economist Yukon Huang argues in a recent New York Times op-ed: This trade war with China is “not really about trade.” It’s about the objection of our political leaders and industrialists to a different economic model than our own.
Even if they agree with that conclusion, some will argue: So what? Whatever the motivation, the fact that China’s “eating our lunch” is cause for pushback, and Team Trump is engaging in a lot more pushback than any of his predecessors.
The problem with that response is twofold. First, it’s not going to help American workers. To the contrary, by incentivizing more offshoring, it’s going to hurt them. Second, it is protectionism, which is one reason I’m surprised so many mainstream economists support these efforts. In contrast, Huang makes a compelling case that we should welcome the diffusion of technology and rise of emerging economies. That’s what globalization is supposed to be about!
In that regard, our trade stance should be one of openness, fairness and the recognition that other models of growth must be allowed to have their turn on the global stage. We might even learn that smart public investment is a lot more pro-growth than today’s U.S. politicians seem to realize.