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September 17, 2009November 12, 2013Loren B. Thompson, Ph.D

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A Future Trade War? It’s Already Here.

September 17, 2009November 12, 2013Loren B. Thompson, Ph.D

There’s a lot of talk in Washington right now that President Obama’s tariff on Chinese tires and the dispute over Airbus subsidies could lead to a trade war. That’s kind of odd, since the tariff was levied pursuant to agreements China made when it joined the World Trade Organization, and the Airbus subsidies case originated in U.S. efforts to enforce free-trade rules. Some of the fear-mongering is undoubtedly being stirred up by friends of Airbus and the Chinese tire industry. But the one-sided nature of the coverage suggests that many people don’t grasp how America’s trade performance has deteriorated in recent years, and how destructive it would be for current trends to continue.

In the case of China, you could make the argument that we have already been in a trade war for some time, and that the U.S. is losing badly. Last year, China exported about a billion dollars in goods to America each day. America exported roughly that amount to China each week. The difference between those two flows — $338 billion versus $70 billion — is equivalent to 2% of U.S. gross domestic product, and that’s only one bilateral trading relationship! The huge imbalance helps explain why U.S. economic growth and private-sector job creation in this decade has been the worst since the Great Depression. It also explains how China accumulated over a trillion dollars in foreign exchange reserves, which it now proposes to use partly to buy U.S. companies.

If these trading patterns resulted purely from the interplay of unfettered market forces, then we would either have to live with them or resort to protectionism. But they don’t. China’s currency manipulation — as treasury secretary Geithner bluntly described it early in his tenure — boosts Chinese exports and dampens imports as effectively as a 30% tariff, according to the Economic Policy Institute. China engages in a range of other unfair practices too, such as the mass theft of intellectual property. So as you listen to all the fears about how cracking down on unfair practices will make it harder for U.S. consumers to get cheap goods at WalMart, keep something in mind: before China came along, many of those workers could have afforded to shop at Macy’s.

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