As the U.S.-China trade disputes continuously evolve, U.S. President Donald Trump is facing pressure that increases day by day. Not only the Chinese media, even the American media is joining in to “ridicule” Trump on his apparent lack of knowledge in economics. Starting a trade battle with China without understanding economics will ultimately damage the U.S. economy. But of course, things are not always as simple as they seem.
Anbound’s research partner Xu Weihong feels that Trump’s administrative team surely understands the principles governing basic economics, but they depart from different starting points with regards to their economic policies. Trump’s office is pursuing its starting point from that of the typical American “vote-based economics”. As Trump’s first presidential term is drawing to an end, the primary concern regarding any economic and social policies will be focusing on whether they will work in favor of increasing Trump’s voter base, allowing him to achieve a successful electoral result in the coming year. As it comes, there is nothing wrong with formulating policies that affects voters as a whole. But if policies are formulated to prioritize the interests of specific voting groups and not for the collective economy, this will erode the health of the economy in the long run. The outward-facing trade war is a classic example of this “bad policy”.
By launching a trade war against its trading partners, threatening them through the raising of tariffs and closing the market, the United States is moving towards the direction of an anti-globalization policy. The inland American low-income communities and the majority of farmers would benefit from this move. This includes individuals working in the coal, steel and automobile industries, the so-called “sunset industries”. Factories in the rust-belt will more or less see a glimmer of hope from the trade-war as well. Given that Trump relied on these populations of industry-workers, farmers and low-income white voters to propel him to presidency before, he will work to ensure that his voter supply is well-accounted for. Therefore, he also should not be afraid of being criticized as a “populist” if he wants to assume the presidency for a second-term.
Trump’s sudden launch of trade war doesn’t necessarily mean that he does not know how economics work. Trump’s team knows that initiating a trade war will raise the overall costs of the U.S. economy, thereby increasing living costs for all Americans. This will also not bode well for the appeal of the U.S. in attracting global high-tech talent, and the Federal Government’s finances will also take a turn for the worse. However, in order for Trump to be re-elected, they must strive to win the lowest level of support from the industrial and agricultural workers. To garner their support, the continuation of the multilateral trade war is an inevitability. Using economics jargon, Trump’s trade war, despite comprehensively raising living standards for the American people, will work to regulate the income gap and is also an economic policy for income distribution.
There is a presence of collective interest groups within the U.S. that despises the trade war brought about by Trump, and they are mainly the high-tech and innovative Silicon Valley as well as the modern financial powerhouse Wall Street. These two groups have the largest mouthpiece rights in U.S. mainstream media, and have been pressuring Trump through mass media from early on, relentlessly ridiculing the Trump administration of not understanding the basic principles of economics. The clash between the opinions of American business community, capitalists and politicians shrewdly represented the different interests that different interest groups are trying to pursue. It also comes to show that they do not really pay attention to China’s interest from all these, and it is hard to even say which party really represents the national interest of the United States. In order to “appease” Wall Street, Trump pressured the Federal Reserve to cut interest rates and reinvigorate the stock market through means of monetary easing. Forcing the Fed to implement “irrational” monetary easing is a measure that shakes the very foundation of the modern American economic system. Once the Fed loses independence, the credit-worthiness of American dollar reserves worldwide will be called into question. Once America loses its global “seigniorage”, the gigantic black hole of America’s massive debt may not be able to be filled.
Therefore, it is crucial for China that they do not simply accept the rhetoric of mainstream American media, and judge Trump’s economic team on a surface level. Instead, it should objectively and rationally analyze the orientation of interests group through data, understanding the working mechanisms behind modern economy and finance and formulate its own optimum strategic response. Compared with other core trade partners of the U.S., the U.S.-China trade conflict encompasses a background of China’s industrial upgrade too. Many interest groups from within America will be supportive of this scenario, and this is what China should pay attention to when formulating its policies. In China’s upgrade and transformation of its industry, competition with the industries and trade of developed nations is something that China has to experience.
In summary, China and the U.S. are both facing huge challenges brought about by economic transformations. Trump, forced by the electoral environment, chooses to ignore trade convenience, globalization and the independence of monetary policy in order to pursue a second term. This is already violating America’s national interests for an extended period of time. The Chinese ruling party, having no election-induced “short-term economic policy trap”, has to take extra precaution against falling into the same trap. Instead, it should use supply-side reforms to mitigate pressure from the trade war, promote fiscal transparency at the local government level, improve the efficiency of transfer payments, and promote the focus of state-owned enterprises, adopting transformation and efficiency.
Final analysis conclusion:
The initialization of the trade conflict by Trump is motivated by his desire to protect his vote base. In the long run however, this behavior proves to run contrary to the U.S. national interests. China should avoid falling into the same pit hole, and use supply side reforms to reduce pressures brought by a trade-conflict, at the same time upgrading and transforming its economy.
