What’s Trump’s Deal with China?

Donald Trump’s worst nightmare By Shizhao (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)%5D, via Wikimedia Commons
First, click here and watch a fun mashup of Donald Trump saying “China” about a million times.

Trump seems to have several issues with China, most of them wrong or confused. The weirdest one to me is that Trump seems convinced that China’s authoritarian rulers are technocratic supermen running circles around the US, laughing all the way to the bank with America’s money. These would be the same leaders who recently have been grasping at straws as the stock market crashes and the economy slips partly due to those same leaders irresponsibly encouraging everyone in the country to pour their savings into the stock market. While China’s leaders have done quite well in many ways, such as by embracing policies that have lifted more than 680 million people out of poverty since 1981, they are hardly the geopolitical super-geniuses of Trump’s imagination.

The flip-side of Trump’s China love is his China hate. In Trump’s mind, he has identified problems in US-China relations that only he has the power to solve. Maybe Trump thinks he’ll really charm Xi Jinping with his classy impression of Asian business people and win all the concessions he demands.

Onto the substance. Trump seems to have five interrelated grievances against China. First, Trump has railed against China’s recent currency depreciation, which he says China has been doing for years but in fact the opposite is true. Believe me. I used to be able to buy 8.2 yuan for every dollar back in 2004. Today I can only buy 6.38 yuan per dollar. Here’s the nuanced explanation of why Trump is full of it.

The second grievance is the trade deficit between China and the US. Trump argues that China’s currency manipulation shoulders a lot of the blame, which was somewhat true five years ago but is mostly wrong today. He also argues that China’s theft of US intellectual property (Trump’s third complaint) is a big factor, which is partially right but exaggerated.

Now, I’m a bit of a trade deficit agnostic. International trade creates winners and losers in both countries engaging in the trade. Also, our most popular trade indicators are a bit outdated for understanding the modern global economy, where the idea and the design of a product like the iPhone originates in California; the parts are manufactured in several countries including Germany, South Korea, and the US; those parts are then shipped to mainland China for assembly in a factory owned by a Taiwanese company; and the finished iPhone is sent back to California at which time we count it as an import. At this point the iPhone adds $229 to $275 to the US-China trade deficit even though only a fraction of that is actually retained by the Chinese economy. (The linked paper estimates that $10 or less per iPhone is paid in labor costs in China, and gross profits mostly go to the foreign firms that own the factories.)

Many other high tech products like the iPhone follow a similar narrative. The cheap plastic stuff and poisonous dog food we import from China are different stories. But now we see how complicated this all is. It’s far from clear that the US-China trade deficit is a big problem, let alone hugely responsible for American woes.

Trump’s fourth criticism, that China is stealing American jobs, is pure demagoguery. Do you remember Deng Xiaoping or Hu Jintao coming to the US and forcibly removing America’s light manufacturing industry? No? Right, me neither. Sure, opening up trade with China has contributed to job loss and stagnant wages in the US, but these problems have a lot more to do with our own policies and values than nefarious Chinese plots. American workers are much more productive, yet their wages have remained stagnant for more than 30 years. Major shareholders and executives at the top of corporations eat up all the profits created by productivity gains. The guy who used make the dog food is now the clerk who stands in the pet food aisle at Walmart, but some time around 30 years ago the country decided it was okay to stop giving these kinds of service workers raises.

Trump’s fifth grievance is all the US debt that China holds. This is an oft-misunderstood issue that is not necessarily a sign of American weakness but rather shows that China has nowhere else to put its money (same goes for Japan). These countries are not loaning us money and then threatening to break our kneecaps if we don’t pay up plus 20% next week. They buy our debt even though interest rates are so low because our debt is considered the safest in the world, and what else is China going to do with its surplus cash, build more ghost cities?

So Trump is half right on one of his five grievances with China, and I’ll give him another half point on the trade deficit issue, since some economists I trust think it merits consideration. Should Trump somehow become president, maybe he can speak with Xi Jinping about something he actually knows about, bankruptcy.


One thought on “What’s Trump’s Deal with China?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s