What Trump Doesn’t Understand — It’s a Lot — about Our Trade Deficit with China

By Kevin D. Williamson

Sunday, January 10, 2016

Donald Trump exemplifies one of the strange and lamentable dynamics in democratic discourse: People tend to have the strongest opinions on those things about which they have the least knowledge. Herr Apfelstrudelführer imagines himself issuing decrees that presidents have no power to issue, and he doesn’t seem to understand that illegal immigration — his headline issue — isn’t in the main driven by people walking across the Mexican border. He doesn’t seem to understand how laws are made or how government money is appropriated. He has, to say the least, a lot to learn.

Now he wants to launch a trade war with China over a trade deficit that he isn’t bright enough to understand.

This isn’t that surprising. Trump inherited a fortune, and, like many heirs, he’s a bit thick when it comes to the realities of money — my habitual comparison of him with Paris Hilton is not offered tongue-in-cheek. Those companies didn’t bankrupt themselves. Most of his success as a businessman has been in the entertainment business, and that’s a perfectly respectable racket, but I don’t want to see the troops saluting President Gwyneth Paltrow or President Kim Kardashian, no matter how much money they’ve piled up, and Trump is in essentially the same league, albeit with worse taste than Mrs. Kanye West.

Our trade relations with China are a legitimate issue of some concern, but they aren’t the issue that Trump and his ilk imagine. American manufacturing wasn’t hollowed out by unfair competition from wily Orientals — it wasn’t hollowed out at all, in fact, U.S. manufacturing output today being far higher than it was during the so-called golden age of the postwar era. Manufacturing wages have remained strong, too. What’s changed is the share of the work force employed in manufacturing, which has declined for several reasons: One of those is growth elsewhere in the economy, especially in the service sector (you know, all those crappy jobs in software companies and investment banks) and another is the fact that our manufacturers have grown much more efficient, requiring fewer (but better) workers than they did a generation ago. Which is to say, manufacturing employment has declined for the same reason agricultural employment did in another era.

Trump proposes to lay a 45 percent tax on American shoppers who buy Chinese-made goods. He won’t put it quite that way, of course: Those who want to tax trade always pretend that the wicked awful scheming foreigners are the ones who will pay the tax, but consumers usually end up being the ones who suffer. If the price of Chinese-made electronic calculators goes up 45 percent, you can bet that the price of U.S.-made or Swiss-made electronic calculators is going to go up 40 percent.

Trump insists that this is necessary because, in his words, “They do it to us.”

But they don’t. Not really.

China has some tariffs, as most countries do, but they aren’t for the most part remarkably high, and Beijing has in fact been reducing taxes on consumer goods in recent years because — get this — Chinese consumers don’t like being made to pay artificially high prices for cosmetics (tariff reduced from 5 percent to 2 percent) or diapers (cut from 7.5 percent to 2 percent) or other things they want and need. China did put a punitive retaliatory tariff on some cars made by GM and Chrysler, arguing that the U.S. government’s bailout of those firms constituted an illegal subsidy under the World Trade Organization rules to which both the United States and China are voluntarily bound. (The WTO ruled against Beijing, but, if you ask me, a bailout is a bailout.) That was a 12.9 percent tariff, incidentally, nothing like the 45 percent that Trump imagines, and it is being withdrawn. Chinese buyers in fact love American cars — a Buick is a much bigger status symbol in China than in New Jersey.

China exports two classes of goods to the United States: Consumer goods (all the stuff you see in Walmart labeled “Made in China”) and capital goods, meaning electronic equipment, machinery, and the like used by U.S. companies to produce the goods they sell. So Trump proposes to put a 45 percent tax on people of modest means who buy toys and shoes at Target, and on U.S. businesses looking to invest in real productive capacity here in the United States — i.e., to drop a European-level tax on companies working to employ Americans building stuff here in the United States. That’s a special kind of genius, if by “genius” you mean mud-eating stupidity.

Trade imbalances are not necessarily a bad thing, or even a thing at all. The nice people of Greenwich, Conn., probably buy a lot more steaks from American cattle ranchers than cattle ranchers buy hedge-fund-management services from guys in Greenwich, and the pinstripes in Greenwich don’t feel any poorer for that. (Neither do the cowboys.) We have run, from time to time, pretty significant trade deficits with countries such as Switzerland and Germany, in no small part because nobody ever looked at a fine wristwatch or a sports sedan and said, “Wow, it’s made in China — you know it’s good.” Ted Cruz is not being exploited by wicked men in Geneva in spite of the fact that his Patek wristwatch probably represents a sizeable personal trade deficit with the Swiss.

All in all, the Chinese buy about 30 cents’ worth of U.S.-made stuff for every dollar’s worth of Chinese-made stuff we buy. And, because we’re talking about the world’s two largest national economies here, those numbers get pretty big. If it isn’t tariffs — and it isn’t — why is our trade deficit with China so large?

For one thing, China is poor. Its economy has been growing, and it’s far better off than it was a generation ago, but it’s poor in a way that Americans don’t know from poor: The average family income in rich Shanghai is less than $5,000 a year, and in relatively hardscrabble Gansu, it is less than $2,000 a year. A pair of made-in-the-U.S.A. Frye boots costs a month’s pay in China, and very poor people don’t buy a lot of what the United States exports: airliners, software, pharmaceuticals and medical devices, etc. Beijing interferes with trade, of course, but the fundamental economic fact behind our trade imbalance is that the Chinese still aren’t rich enough to buy a lot of the stuff that we Americans make. They buy tons and tons of our soybeans, but they can’t afford very many of our awesome bicycles.

Beyond that, China may be officially socialist, but it doesn’t have much of a welfare state, so the Chinese save — a lot. Chinese families generally save a quarter or more of their income, because they don’t believe that they can rely on the government to take care of them when they get sick or old or face other troubles. So even though they’re earning a lot of U.S. dollars with their exports, they aren’t using those dollars to buy a lot of U.S. goods — rather, China holds a lot of dollars in its reserves, in effect lending us a portion of the goods we consume or, looked at another way, financing our purchases with negative real interest rates. And on top of all that, China isn’t blessed with a lot in the way of the natural resources it needs to make its economy go, so it has to spend a lot of the dollars it earns on raw materials and supplies from abroad (and the United States is only one of many suppliers here) because nobody will take renminbi when U.S. dollars are to be had.

(Would you?)

Our trade deficit with China isn’t a product of the Chinese getting rich — it’s a product of their being poor. We will not have more-balanced trade with China until Chinese people have a standard of living that is more like that of Americans. Putting a 45 percent tax on American shoppers and people who build computers in the United States (you know who does that? Lenovo, a Chinese company) or build robotics systems using some imported components isn’t going to change any of that. What’s worse, it will exacerbate one of the real problems that U.S-based firms do face: relatively high business taxes. Remember, much of that Chinese trade deficit comes from electronic equipment and industrial machines used by American companies rather than from cheap plastic waterguns, and Trump wants to put a 45 percent materials-and-equipment tax on top of the 40 percent they pay in corporate income taxes.

On economic matters as on so much else, Donald Trump is a dangerous buffoon — and so are those so-called conservatives who have rallied to his cause. Time to grow up.