By Paul Krugman
Opinion Columnist
At this point, it’s looking as if Trump’s tough talk on China trade will turn out to be as empty as his tough talk on, say drug prices. Faced with the prospect of actually going toe to toe with powerful interests – as opposed to doing harm to desperate immigrants, poor people who need health care, etc. – Trump keeps backing down, ignominiously. But what happened to all that bluster about trade wars being “good, and easy to win”?
I can think of four reasons Trump ran away:
1. Someone actually managed to explain the economics to him, and he realized that the trade war wasn’t actually a good idea
2. He just lost his nerve, as he consistently does when confronting people who aren’t powerless
3. He was bribed, with China offering sweet deals to his personal business interests
4. The Chinese also have some kind of tape
It tells you a lot about the state of American leadership that (1) is highly implausible, while 2-4 all seem quite possible. And this means that what I’m about to say may amount to overthinking the issue.
Still, I think there are some good reasons why even a crude mercantilist looking at the China situation might conclude that this particular trade war isn’t nearly as easy to win as it might appear at first glance.
On the surface, the U.S. would appear to very much have the upper hand in any trade confrontation. After all, last year we only sold China $130 billion in goods, while they sent us $500 billion. So they have a lot more to lose, right?
Well, it’s not as clear as all that. You need to look at the realities of modern trade. And when you do, the story looks quite different. It goes without saying that Trump is wrong about the economics of bilateral trade imbalances. But he’s also wrong about the political economy, which isn’t the same thing.
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Admittedly, the political economy of trade is kind of mercantilist, because it’s driven largely by producer interests. Long ago I wrote about “GATT-think”, the view of trade, enshrined in international negotiations, that sees exports as good, imports as bad, so that letting someone sell us stuff, even if it’s better and cheaper than we could make ourselves, is a “concession.” The genius of the postwar international trading system was that it harnessed this special-interest reality, using the ambitions of exporters to offset the protectionism of those competing with imports, to engineer a kind of enlightened mercantilism that vastly expanded world trade.
But GATT-think needs some modifying in an era of complex international value chains. Even if producer interests predominate over consumer interests, what producers should care about is not how much they export but how much income they derive from exporting. That is, they should care about “income at risk,” not “exports at risk.” These numbers can be very different, and in the case of US-China trade they are.
Consider the over-used but still illuminating case of the iPhone, which is assembled in China out of components made all over the world. That final assembly accounts for only 3 to 6 percent of the manufacturing cost, but the whole price of an iPhone shipped from China to America is counted as a Chinese export. If I’m doing the numbers right, this means that China exports around $17 billion worth of iPhones to America each year, but Chinese producers account for only around $1 billion of that.
Smartphones are an extreme case, but there’s a lot of that sort of thing. The income China derives from exports to the US is probably not much more than half the face value of those exports. There’s a bit of the same thing going on in the other direction – US aircraft, for example, contain quite a few foreign components – but it’s much less extreme.
What this means, in turn, is that even if we only focus on narrow producer interests – even if we take a mercantilist view – US-China trade is a lot less lopsided than it seems, which in turn means that the pain from a trade war would be a lot less asymmetric than the raw trade numbers might suggest.
But wait, there’s more. Apple sells those iPhones for considerably more than it costs to import them from China. This adds a whole additional chunk of US income at risk to the bilateral trade relationship. True, given time Apple could probably find other suppliers – but not right away, and not easily. Foxconn wasn’t built in a day.
Overall, it’s still probably true that China would be hurt worse than the U.S. in an all-out trade war. But the pain wouldn’t be at all one-sided. And it’s possible, I guess, that Trump dimly recognized that reality, or at least noticed that his beloved stock market really doesn’t like trade war talk.
Actually, I’m still betting that it’s a bribe and/or some kind of tape. But worth talking through, anyway.
Follow me on Twitter (@PaulKrugman).
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