Trade Wars, Episode I: The Empire Lashes Out

April 10, 2018

Lance Selfa analyzes the first stages of the trade conflict with China--and explains why the most right-wing administration in decades has the support of liberals on this one.

"TRADE WARS are good, and easy to win," proclaimed the Tweeter-in-Chief on March 2.

The next few months and years may determine if either of Donald Trump's assertions is true, whether for just himself or for anyone else.

One year into Trump's presidency, the administration is preparing to take action on an issue where Trump has made a lot of noise in the past, but not done much. The result has already been a more unstable world--and the road has been laid out for escalating tensions and conflicts among the most powerful countries.

The issue is more complicated and fraught for the left--because the political figures most associated with the left end of the mainstream political spectrum, up to and including Bernie Sanders, have similar attitudes to Trump on issues of economic nationalism, even if they express themselves with different rhetoric.

Thus, the premiere of Trump's trade war saber-rattling opens up new questions and challenges that the left needs to understand and respond to.

TRUMP BEGAN his 2018 offensive on trade issues in January by announcing tariffs--a tax or levy imposed on products coming into the country, usually with the aim of dampening demand for imports by forcing their prices to increase--on imported solar panels and washing machines.

Donald Trump
Donald Trump (Gage Skidmore | flickr)

Though business commentators and the stock market reacted negatively, the first targets were narrow, and the action seemed limited. Concern grew on March 9, however, when Trump took the next step of announcing tariffs on steel and aluminum imports.

That was only the warm-up. On April 2, the Chinese government responded with $3 billion in targeted tariffs on U.S. exports to China.

Not to be upstaged, the Trump administration then announced that it was considering up to $50 billion in tariffs on 1,300 products in retaliation for China's alleged theft of U.S. intellectual property. China hit back the next day, threatening 25 percent tariffs on a number of U.S. products. Trump upped the ante yet again, calling for trade officials to look into $100 billion in additional tariffs.

The U.S. business and media elites are now confronting one of their worst fears about the Trump presidency: that Trump's economic nationalism would set off a cycle of provocation and retaliation that would land the world economy in a trade war.

By early April, the panic had set in. The Dow Jones Industrial average plunged into "correction" territory--falling more than 10 percent below its most recent high. And commentators who style themselves as guardians of the global economic order were raising alarm.

"In just a few weeks, President Trump has destroyed a system of global trade rules that over the past 75 years brought unprecedented peace and prosperity to most of the world, including the United States," wrote Edward Alden, a fellow at the establishment Council on Foreign Relations. "With his threat to levy punitive tariffs on an additional $100 billion in Chinese imports, and China's vow to fight the United States 'at any cost,' the world is now on the verge of the worst trade war since the 1930s."

IT'S NOT clear where the tit-for-tat between the U.S. and China is leading. New White House economic adviser Larry Kudlow and Treasury Secretary Steven Mnuchin tried to assure reporters that the announced tariffs were simply the opening bid in a negotiation to win improved terms for the U.S. within the North American Free Trade Agreement with Mexico and Canada and in bilateral trade with China.

"This is not a trade war," Kudlow told reporters April 6. "This process, it may include tariffs at the end of the day. It may also not. It may be solved by negotiation."

But Kudlow then admitted that he wasn't informed of the latest escalation before it happened.

Trump and the trade hawks may be happy that action on tariffs is finally being prepared, but the representatives of economic sectors that might be targets of Chinese retaliation were definitely not.

Soybean farmers, two-thirds of whose exports regularly head to China, were particularly vocal. Brushing aside assurances from Trump that the administration would protect farmers from the fallout, an American Soybean Association spokesperson told the New York Times: "It's a whole lot easier not to wreck the car in the first place than it is to think about what a repair might look like."

Farm-state senators like the hog-castrating Tea Partier Joni Ernst of Iowa sounded very un-Trumpian. In a statement, Ernst warned against a "real danger that increased tariffs on U.S. exports will harm Iowa producers and undermine the rural economy."

ALL OF this may be the opening salvo in a long negotiation and could turn out to be more bark than bite. Even if the tariff threats aren't withdrawn, they wouldn't go into effect for at least six months, after various affected interests have a chance to testify for or against them in Congress and regulatory hearings.

But we would be wrong to dismiss this as another round of White House noise, like the multiple "infrastructure week" proclamations that have become a Washington inside joke.

First, although Trump may be a pathological liar and political chameleon, his views on U.S. trade policies have been consistently protectionist since the 1980s.

He is part of the section of the ruling class, in the minority for many decades, that favors the aggressive use of trade measures such as tariffs to benefit "the American economy"--by which Trump and his rich friends actually mean Corporate America.

Second, the two most important positions in the government that address U.S. trade policy are occupied by well-known trade "hawks" who are particularly belligerent toward China.

U.S. Trade Representative Robert Lighthizer served as a deputy to the same post during the administration of Ronald Reagan, where he helped put in place tariffs on imports and protections for U.S. industry that punished Japan. He has promised to implement the same kind of measures against China.

The attitude of White House National Trade Council Director Peter Navarro is obvious from the titles of books he has written: Death by China and The Coming China Wars: Where They Will Be Fought, How They Can Be Won, to take only two examples.

Rounding out the protectionist crew of Trump advisers is billionaire Commerce Secretary Wilbur Ross, who told an audience at the 2018 World Economic Forum in Davos, Switzerland: "There have always been trade wars. The difference now is U.S. troops are now coming to the ramparts."

THIS IS "red meat" to the fans of Trump's "America First" agenda. But it also has resonance outside of Trump's right-wing base.

When the tariffs on steel and aluminum were announced, leaders of the AFL-CIO and the United Steel Workers leapt to the defense of the most anti-labor administration since the 1920s. "Tariffs won't start a trade war, there's 435 of them in place today to fight trade cheaters," AFL-CIO President Richard Trumka tweeted. "People may not like how Pres Trump rolled these out, but I applaud him for trying."

Trumka wasn't alone. Plenty of Democrats--including liberals posturing for a run for president in 2020--either congratulated Trump or criticized him for not going far enough.

Commenting on the steel and aluminum tariffs, Sen. Elizabeth Warren of Massachusetts said "The proposed tariffs take the right approach, but they target a narrow section of the economy and put our allies in the same boat as countries like China that cheat constantly on trade, all while the administration ignores the root of the problem."

Sen. Bernie Sanders of Vermont noted: "I think the main target of our concern has to be China."

Thus, the main problem that liberals had with Trump's tariffs was that, as originally announced, they also targeted U.S. allies such as Canada and Mexico, along with China. China may have accounted for 16.4 percent of U.S. trade in 2017, but Canada and Mexico were close behind at 15 percent and 14.3 percent, respectively, according to the U.S. Census Bureau.

The Trump administration subsequently said it would exempt U.S. allies, basically meeting Warren's and Sanders' demand.

So don't expect to hear much criticism of Trump's latest moves from Democrats in Congress. After all, Senate Minority Leader Chuck Schumer last year slammed Trump for "campaigning like a lion against China's trade practices," but "governing like a lamb."

LIBERALS AND unions are cheering Trump because they have long opposed free trade agreements and supported import tariffs as a way to "protect American jobs."

They start with the common-sense observation that working-class living standards and union organization have declined over the last 25 years, at the same time as "free trade" and mechanisms like NAFTA and the World Trade Organization (WTO) became unchallenged orthodoxy in the pre-Trump era.

Nevertheless, it's debatable how much the collapse in working-class organization and living standards can be blamed on U.S. trade policy alone.

Traditional manufacturing-sector jobs were in a long-term decline in the U.S. economy for decades before NAFTA went into effect in 1993 and before China's entry into the World Trade Organization in 2001.

There's no doubt that the decline accelerated in the 2000s, when what the Bureau of Labor Statistics calls "production, transportation, and material-moving occupations" dropped from 17 percent of all jobs to about 13.5 percent between 2000 to 2009--a decline of 4.2 million overall.

Nevertheless, labor scholar and socialist Kim Moody, in his new book On New Terrain: How Capital Is Reshaping the Battleground of Class War, concludes, after a careful analysis of economic data:

The problem with trade explanations or those rooted in the global shift of manufacturing generally is that manufacturing output in the United States has not declined overall or even slowed down much since the early 1980s but has increased at rates close to those of the post-World War II Keynesian epoch.

Instead, Moody argues, the dramatic decline of U.S. manufacturing jobs in the last three decades "is to be found in the rise of productivity extracted after 1980 by the introduction of lean production methods, new technology, and capital's accelerated offensive against labor."

Moody's point isn't that trade has no impact on jobs in the U.S., but that its impact is secondary to many more important factors that are rooted in the class struggle between workers and bosses in the U.S.

But for the likes of Trump and Ross, who are on the other side of the class divide, it's useful and easier to point the finger at China or Mexico. Sadly, union leaders who were ineffective in challenging the employers' offensive do the same thing.

REJECTING THIS conventional criticism of "free trade" doesn't mean accepting the "free trade" dogma of the neoliberal era.

In fact, the "pure" model of free trade--which views all countries as arriving at better outcomes if they import and export freely--exists only in economics textbooks.

It's common for the U.S. and the European Union to complain about how China's state-capitalist economy distorts the free market by subsidizing whole industries and products. Yet the U.S. government pays billions in subsidies to agribusiness, the National Institutes of Health regularly develops drugs whose patents are "privatized" to Big Pharma, and the Pentagon continues to play a major role in Silicon Valley.

Even under the "rules-based" trading system of the post-Second World War era, where international institutions like the WTO enforce global rules for trade, the system actually combines free trade and protectionism. To Harvard economist Dani Rodrik, a mainstream economist-turned-critic of globalization, the WTO has done less to foster "free trade" than to empower corporate insiders who write the rules that benefit themselves:

By fetishizing globalization and exaggerating its benefits and understating its downsides, we have essentially privileged and prioritized a set of powerful interests. The fact that pharmaceutical companies or foreign investors find it so easy to get what they want is in part because of our existing narratives, or existing ideas, about how the world does or should work.

Trump and other protectionists focus on the U.S. trade deficit in goods with China, which was $375 billion in 2017, but they rarely talk about the almost $250 billion surplus with the world that the U.S. generates in trade in services, such as software, financial services, transport and telecomm. Not coincidentally, these are among the industries that Rodrik singled out in his "set of powerful interests."

In 2016, U.S companies exported more than $54 billion in services to Chinese enterprises, while importing only $16 billion in return, according to the Commerce Department's Bureau of Economic Analysis.

In fact, when Trump announced his $50 billion in tariffs in March, he specifically cited China's theft of "intellectual property" as the rationale. Yet the U.S. seems to be more than holding its own in the knowledge-based service industries, and China is no more guilty of "stealing" U.S. industrial knowledge than the U.S. was when it refused to recognize Britain's copyrights in the 19th century. As Marxist economist Michael Roberts explained:

While [U.S.] jobs have been lost to technology-replacing labor (capital-bias) and the shift of U.S. industry to China in manufacturing, the employment share of high-tech and knowledge sectors has risen to about one-third of all U.S. jobs. Trump claims to be restoring the "smokestack" sectors where he won some votes, but in reality, that battle for jobs is already lost, thanks to U.S. industry shifting out. The real battle is now over profits and jobs in the knowledge-based sectors where the U.S. still rules.

MORE THAN 170 years ago, Karl Marx and Frederick Engels wrote in the Communist Manifesto that the capitalist class has "drawn from under the feet of industry the national ground on which it stood," using "raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe."

Since that time, free trade has been the program and mantra of the dominant capitalist power of each era. The most powerful and economically productive country always has an interest in removing barriers to its ability to trade with weaker and less productive capitals.

So it was when Britain was the leading power and the leading free trader of the 19th century. And so it was when the U.S. emerged as the dominant world power after the Second World War.

It's largely forgotten that "free trade" became a central part of U.S. foreign economic policy in the 1930s, under the New Deal presidency of Franklin Roosevelt. In the aftermath of the Second World War, the U.S. used free trade as a means to bind together Western countries behind its leadership in the Cold War against the ex-USSR. The U.S. then extended this policy after the 1991 collapse of the USSR, when it sought to build a "unipolar" world, in part by promoting "free trade globalism."

If "free trade" is traditionally the policy of the global hegemonic power, it stands to reason that support for free trade will wane if that leading power faces stiffer competition from an economic rival.

Moreover, various participants in a "free trade" system will have less incentive to participate in it if it doesn't produce profits and growth. That has certainly been the case with the world economy since the Great Recession of 2007-08. The volume of global trade has slowed sharply since 2012. As Roberts put it:

U.S. capitalism has lost ground relatively, not only to Europe and Japan, but even more worryingly to the rising economic juggernaut that is China, where foreign investment is strictly controlled and subservient to the state sector and to an autocratic Communist elite. The U.S. is now in the same position as the UK was in the 1880s, only worse. Trump is the consequence of that.

And one consequence of Trump, in turn, is his promotion of heretofore "fringe" voices promoting protectionism, like Navarro, to powerful policy-making positions.

ONE OTHER point shouldn't be overlooked. When Trump announced the tariffs on steel and aluminum, he invoked a rarely used section of a 1962 trade law allowing him to act in the interest of the "national security" of the U.S.

Economists immediately criticized this as opening the door to other countries similarly invoking "national security" in retaliation. But the real importance of this claim--which no U.S. government has asserted since well before the founding of the WTO in 1995--is the fusion of economic and military considerations in Trump's trade war.

It's no secret that the U.S. sees China not only as its greatest economic competitor, but also as its main military competitor in Asia and the world.

In this regard, Trump is not fundamentally different in substance from his predecessor, Barack Obama, whose policy of a "pivot to Asia" was aimed primarily at hemming in China as an economic and military rival.

This was a continuation of the Bush administration policy of ringing China with a set of U.S.-led military and political alliances. Plus, Obama promoted the Trans-Pacific Partnership (TPP) a free trade agreement between the U.S. and Asian countries explicitly designed to exclude China. Finally, he promoted the "onshoring" of U.S. industry to bring back manufacturing jobs to the U.S.

For a number of reasons--especially the U.S.'s inability to extract itself fully from quagmires in the Middle East and Afghanistan--Obama was never really able to make the "pivot" he wanted. But this is the explicit mission of the Trump administration's hawks, as described in the National Security Strategy document released at the end of last year.

Trump actually starts from the same premise that Obama did: China is a potential peer competitor that must be contained militarily and economically. But he has different tactics to accomplish that end--protectionism instead of onshoring, aggressive bilateral confrontation instead of multilateral treaties like the TPP.

Trump has one argument that resonates with at least a section of the foreign policy and military establishment: The United States cannot be the dominant military power if it outsources its industry and technology to other countries.

The current round of tariffs may not impact "national security" in particular. But that can't be said about the escalating rhetoric around "intellectual property," the most important of which is the digital technology--with military applications--that Silicon Valley is developing.

The conservative economist Martin Feldstein argues that the Trump tariffs may be a bargaining chip meant to get China to drop its policy of requiring firms doing business in China to transfer their technology to Chinese joint-venture partners. That may be one of the least destructive resolutions to the current trade controversy.

But if the world's two leading economies continue on the path toward confrontation, Trump's "easy" trade war could escalate into something far more dangerous.

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