ANALYSIS

  • US president Donald Trump's trade war with China is officially a joke.
  • The World Trade Organisation just ruled that the Trump administration's trade war with China violates the body's trade rules — rules the US helped to design.
  • That alone isn't enough to sink the trade war into full absurdity.
  • But add the fact that the US trade deficit surged to its highest level in 12 years this summer, and the fact that China isn't meeting its purchasing targets, and that China hasn't made any structural changes to its economy and well...
  • The whole project looks completely ridiculous.
  • This is an opinion column. The thoughts expressed are those of the author.
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We can now say, officially, that Trump's trade war with China is an unmitigated, farcical disaster.

There isn't just one reason, of course, but this week we witnessed the coup de grace. The World Trade Orginisation — a body the US once helped design —ruled that Trump's initial salvo of tariffs on Chinese goods were in violation of WTO rules. Symbolically this ruling crystalises the fact that this trade war was a breach of the US's own principles.

Practically, though, this ruling will mean little to the administration. Trump and his staff will continue to pretend as if negotiations are ongoing, and that progress is being made. But the data doesn't bear that out. In July the US trade deficit — the measure Trump claimed he was going to narrow by waging this trade war — surged to its highest level since 2008.

Then there's the Phase One trade agreement the US and China made. Beijing promised to buy massive amounts of US goods to close to trade deficit (again, not happening) and boost the American economy. But data from Chad Bown over at the Peterson Instite for International Economics shows that China is missing its US goods purchasing targets by a mile.

There is also little sign that China's policymakers are working on the structural economic changes Trump wants. In fact, since the coronavirus hit China has been turning to old, state-led ways of boosting economic output. The same thing happened during the last financial crisis. To avoid the economic fallout China started pumping credit into state owned enterprises (SOEs) and infrastructure projects. According to research in The Review of Financial Studies that process undid some of the opening of China's economy that had occurred over the decade before.

It is likely this closing is taking place again now during the coronavirus economic crisis. As Peking University finance professor Michael Pettis noted, before 2020 retail sales — a proxy for domestic consumption — were starting to catch up with industrial production — which is dominated by SOEs — as a driver of economic growth. Now industrial production is growing much faster despite the fact that China cheered rosier August retail sales numbers.

Finally there's the cost of the trade war to American businesses and consumers. Last September Moody's estimated that the trade war had cost the US 0.3% of GDP and 300,000 jobs and other analyses have found that Trump's tariffs resulted in similarly grim job losses.

In May The Federal Reserve Bank of New York calculated that the trade war had shaved $1.7 trillion off of US stock prices. Trump entered office saying that his trade tactics would bring American manufacturing back, but 2019 was the worst year for the sector since the financial crisis.

So to review: The trade war with China has failed to achieve the Trump administration's aims of changing China's economy, narrowing the trade deficit, and/or bringing manufacturing jobs back to the US. The agreement that produced is not being adhered to. And the US is being dinged by the WTO — an organization that, again, it helped to design — for violating international trade rules that it helped to write.

How is this not a joke?

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