Until our President took over 100 plus days ago, the U.S. economy was the strongest in the world. Our State of Mississippi, the poorest in the Nation, now “has a higher per capita GDP than Britain, France or Japan,” according to journalist Fareed Zacharia writing in the Washington Post. Indeed, Zacharia writes: “The real economic story of the past three decades is that the United States has surged ahead of its major competitors. In 2008, the U.S. economy was about the same size of the euro zone’s; now, it is nearly twice the size.”
Japan, which in the early 1990’s dominated electronics, stagnated in innovation insulated by protective tariffs. As Zacharia points out: “In 1995, a Japanese person was 50 percent richer than an American in terms of GDP per capita; today, an American is about 150 percent richer than a Japanese person.” Low tariffs and free trade surged America to innovation and wealth.
Now our President has thrown our advantages into a poker pot of trade wars. As Zanny Minton Beddoes, the British Executive Editor of The Economist, told CNN: “The US tariffs that were 2% went up above 20%--a 10-fold increase. It is dramatic economic shock, a completely self-defeating wound. Whatever they tell you, tariffs are taxes on consumers. There is a serious risk now of a dollar crisis that leads to foreigners moving out of US Assets.” A fall in the dollar would require higher interest rates to fund US debts. In short, in just 100 days our President has put the position of the United States as owner of the world’s reserve currency at-risk. Recent declines in US bond markets proclaim the risk.
The canary in the coal mine is the Port of Los Angeles. The port’s director, Gene Seroka, told the LA Times April 24: “Imports at the Port of Los Angeles are expected to plunge in the next two weeks” during the trade war with China. He predicts a “drop by 35% as essentially all shipments out of China for major retailers and manufacturers have ceased, and cargo coming out of Southeast Asia locations is much softer than normal.” Trade between the US and Asia is freezing up; empty store shelves will follow.
In the US, one can hardly expect an importer to keep an order for a shipping container of goods from China that had cost $100,000, when the cost now would be $245,000. Indeed, the World Trade organization estimates: “if this trade war with China continues, they’re expecting the U.S. and China trade to decrease by approximately 80%.” (CBS News).
Those chanting “pain now for gain later” must reconsider. Adam Posen is the President of the Peterson Institute for International Economics. Mr. Posen’s article out this week in Foreign Affairs bears close reading: “Trade Wars Are Easy to Lose: Beijing Has Escalation Dominance in the U.S.-China Tariff Fight.” Posen quotes US Treasury Secretary Scott Bessent as saying China “is playing with a pair of twos.” Posen’s response is compelling:
“But this logic is wrong: it is China that has escalation dominance in this trade war. The United States gets vital goods from China that cannot be replaced any time soon or made at home at anything less than prohibitive cost. Reducing such dependence on China may be a reason for action, but fighting the current war before doing so is a recipe for almost certain defeat, at enormous cost. Or to put it in Bessent’s terms: Washington, not Bejing, is betting all in on a losing hand.” Mr. Trump doesn’t understand: China holds the cards.
Posen continues: “Bessent’s poker analogy is misleading because poker is a zero-sum game: I win only if you lose; you win only if I lose. Trade, by contrast, is positive-sum: in most situations, the better you do, the better I do, and vice versa. In poker, you get nothing back from what you put in the pot unless you win; in trade, you get it back immediately, in the form of the goods and services you buy.”
Posen writes it was “wildly reckless not to ensure alternate suppliers or adequate domestic production before cutting off trade. By doing it the other way around, the administration is inviting exactly the kind of damage it says it wants to prevent.” China will easily replace lost US trade by finding other markets and suppliers. Chinese rare earth minerals and low Chinese prices for manufacturing components the US needs will be harder to replace.
Posen says: “The Trump administration is embarking on an economic equivalent of the Vietnam war—a war of choice that will soon result in quagmire … and we all know how that turned out.” Zanny Minton Beddoes says it is all “a self-inflicted wound” threatening our economic advantages Americans have long taken for granted. Our President should fire his trade advisor, Petter Navarro (aka Ron Vera), and quit gambling holding losing cards.
Robert P. Wise is a Northsider.
