How Much Damage Will Come from this Trade War?

by | Aug 13, 2019 | Trade

First, the good news: the U.S. and world economies have not imploded, so far, as fallout from the rising trade tensions between the Trump administration and Xi Jinping’s government in China. Now, the bad news: there is no certainty that this will not play itself out as a serious and damaging trade war between the […]

First, the good news: the U.S. and world economies have not imploded, so far, as fallout from the rising trade tensions between the Trump administration and Xi Jinping’s government in China. Now, the bad news: there is no certainty that this will not play itself out as a serious and damaging trade war between the two countries that might spill over into grievous harm to many other parts of the world, as well.

From the day that Donald Trump became president, he has been telling the American people and everyone else that he believes that national economic prosperity requires seeing international trade as a zero-sum game. In his mind, the buying and selling of goods and the investing of capital across political lines on a map of the world is economic combat creating winners and losers.

If another country gains, it means that America potentially has been made worse off. Buying foreign goods threatens jobs and business profitability within the United States. An American private enterprise investing in some other country takes away prosperity from America because a factory that could have been built in the U.S. is not. (See my articles “The Zero-Sum World of Donald Trump” and “America’s Economic Commissar of Trade.”)

Trump’s Impatience With Markets and Prices

Also, in Donald Trump’s mind market prices are considered to be economic policy tools to be used for either domestic market manipulation or international economic warfare.  The president stamps his feet and pouts on Twitter that the Federal Reserve won’t give him the lower interest rates he wants to stimulate business investment to create more of the jobs that will make American voters reelect him in 2020. He wants the same interest rate manipulation to lower the value of the dollar on the foreign exchange market so American exports will increase and foreign imports will decrease.

The idea and understanding that interest rates are not whimsical numbers to raise and lower to serve political purposes, but market-based prices meant to reflect the supply of savings out of people’s earned incomes relative to the demand by borrowers to use the real resources that savings represents to undertake time-consuming investments that will not pay off until various moments in the future never enters Donald Trump’s head. (See my article “Interest Rates Need to Tell the Truth.”)

Nor does he seem to understand that the value of the dollar both at home and abroad as reflected on the foreign exchange market is also the result of market-based supply and demand. Governments and central banks certainly influence them based on the fiscal and monetary policies that are followed, but they, too, are not arbitrary numbers to just “fix” by edict or command in an attempt to affect buying patterns and investment flows in and between nations.

There are real and serious consequences, both intended and unintended, when governments and their central banks try to move them about by fiat. This is no less the case when the president of the United States, by capricious “executive order,” threatens to raise or actually raises the import duties on goods entering the United States from particular designated countries that have fallen foul of Donald Trump’s good graces.

Trump’s “Great Man” Theory of Government Power

President Trump clearly believes in and likes the political great-man theory of history. He fawns over foreign tyrants like Kim Jong-Un of North Korea, President Vladimir Putin of Russia, and, at times, President Xi of China. These are “strongmen” who possess power and control over all or much of what happens in their countries through authoritarian command. Donald Trump seems to think that this is what should be the nature of the American presidency.

He doesn’t like what or how much another country exports to the U.S.? Then Trump just slaps on a higher import tax to teach that country a lesson. American farmers lose business due to China cutting back on purchasing U.S. agricultural goods in retaliation for the higher tariffs on their exports? Then Trump takes import duties collected and redistributes them to farm voters whose support he needs. Trump doesn’t like the level of interest rates? He wishes he could just tell the Federal Reserve Board what rates of interest would make him happy — and impose them. The president is frustrated with the domestic and foreign investment decisions by certain American corporations? He goes about threatening them with “bad things” if they do not direct their investment capital the way he wants them to.

How so very much like the “democratic” socialists inside and outside the Democratic Party he warns against, with his use of and wish for more presidential executive power to centrally command and control what others do with their lives and property according to “the plan” he thinks necessary for American “greatness.” Welcome to Donald Trump’s version of national(ist) socialism.

Trump’s Progressive-Like Groupthink on Race

And how much racial groupthink comes from Donald Trump, just like the “progressive” race and gender warriors on the political “left.” The “progressive” democrats (socialist and otherwise) insistently demand that all human relationships should be seen through the prism of racial and gender identity, with victor and victims defined by skin color and sexual orientation. Only with Trump, those from “South of the Border,” with their browner epidermis, represent the plague of drug dealers, murders, and rapists.

How fortunate America has been that those with whiter shades of skin never show such tendencies or traits! No, there are no cocaine and heroin pushers, no serial killers or sexual predators among those of Western and Northern European ancestry who make their home in America. How lucky we are that those whiter people are free from those corrupting proclivities, that the perverse, sick, and cruel sides of human beings go no more than skin deep.

The idea that individual freedom and rights should be the guidepost and the spirit of America has no place in either the “progressive” or Trump worlds. They are battling over political control of the presidency and Congress to have coercive control over which groups shall be given favors and benefits, or special treatments, compared to others. (See my article “Donald Trump the Corrupt Creation of America’s Bankrupt Politics.”)

Trump’s Personal Trade Deals and Benefits

But Trump’s groupthink is focused right now on his escalating trade war with China. It is “America” versus “China.” Either “we” win and “they” lose, or it’s the other way around. That trade, when voluntary and mutually agreed-upon, is a win-win, two-way street seems not to be in the president’s lexicon of concepts. Yet, every personal market-based private sector transaction that Donald Trump ever entered into in his whole life reflected the conception of trade that he refuses to or is unable to grasp.

Back in the 1980s, Trump hired Tony Schwartz to ghostwrite his best-selling book The Art of the Deal (1987). Trump could have produced the book through his own “domestic” production by sitting down and writing the manuscript, himself. He either did not want to, or did not know how to in the way that would satisfy an interested publisher and attract a wide reading audience. So he decided to “import” the writing services of someone outside of his own immediate household.

Since Mr. Schwartz took the job, spent months following Trump around at home and at work, and interacted with Trump in numerous one-on-one conversations over a period of 18 months to collect the needed material for preparing the book, it can logically be inferred that they reached mutually acceptable terms of trade, that is, the fee to be paid to Mr. Schwartz for delivering the finished manuscript. Mr. Schwartz tells us that he received half of the $500,000 advance from the publisher as well as half of the royalties from sales, besides a byline on the title page.

So why didn’t Donald Trump write his own book? Well, according to Mr. Schwartz, Trump’s attention span is too short to be focused enough to think about and write any such extended project on his own. And during that year and a half that Mr. Schwartz was constantly in Trump’s company, he “never saw a book on Trump’s desk, or elsewhere in his office, or in his apartment.” Then, again, as President Trump has mentioned more than once, when you know that you are the smartest person that you have ever met, you do not need to be reading the ideas or experiences of others. What can they tell you that you don’t already know, and much better?

So whether it was a matter of absolute advantage (either Trump hired someone to write the book or it would not have been written) or comparative advantage (he could have successfully written it and maybe better than Mr. Schwartz, but his time was just too valuable in other directions), the fact was Donald Trump saw the benefit from participating in the social system of division of labor and importing the services performed by another. Would Mr. Trump have been better off if the U.S. government told him that he could not hire anyone from another household to write the book, so if he did not do the writing, himself, he would have had to have his then wife, Ivana, write it for him? (That might have made it a far more interesting book to read!)

Trump’s Trade Deficit in Outsourcing The Art of the Deal

In addition, Donald Trump suffered a balance-of-trade deficit as a result of his transaction with Tony Schwartz. The publisher (Random House) paid Mr. Trump that half-a-million-dollar advance, and then he turned around and expended a quarter of a million dollars in paying Mr. Schwartz for working on the manuscript.

But what did Tony Schwartz ever reciprocally buy from Donald Trump equal to $250,000? The answer: nothing. He, no doubt, got one of the free author’s copies of the book as the ghostwriter, so he did not even pay Mr. Trump back by buying a copy of the book. And there is no indication that Mr. Schwartz has ever spent money staying at a Trump hotel, playing golf at a Trump-owned fairway, or eating a famous Trump steak.

Clearly, this was a pure foreign trade loss for poor Donald Trump — all import from and no export to Tony Schwartz. The only answer: Donald Trump should impose an import tax on any further ghostwriting that Tony Schwartz may ever do for him in the future. And Mr. Schwartz will pay it.

But, wait! If Mr. Trump tells Mr. Schwartz that he refuses to purchase any more ghostwritten manuscripts from him unless — besides another $250,000 — there is an imposed additional $25,000 on the price to teach Mr. Schwartz a tariff lesson, isn’t Mr. Trump the one who has to pay the extra sum?

The American Importers Pay the Tariff

You mean the American buyer pays the import tax that the government imposes on the foreign-made good? The answer: Yes. The foreign supplier of any good sold in the United States has, invariably, incurred expenses producing and then transporting the product to American shores. The import duty is added to the price that the American import wholesalers and sellers must pay to bring the good from the arrival port to wherever they use it in other domestic manufacturing or sold more directly to the buying public as a consumer item.

Mr. Trump may boast to and assure American farmers that tens of billions of dollars have been received in additional import tax revenues on Chinese goods and they will be used to cover most or all of their losses due to diminished sales of their agricultural commodities in the Chinese market because of Beijing’s retaliatory trade restrictions.

But it has been and will be the American buying public that pays those import taxes that are then partly redistributed at the expense of their standard of living to try to keep whole the previous financial position of segments of the American farming community. The rest is simply pocketed by Uncle Sam to defray the expenses of other things the government does as another way to pick the American taxpayers’ pockets.

The Fallacies and Faults in Currency Manipulation

The American producing and consuming public are made no better off if the Trump administration finds a way to manipulate the value of the dollar on the foreign exchange market. Suppose that an American importer has to pay $1 to purchase 7 yuan on the foreign exchange market to acquire a Chinese product that costs 14 yuan to buy. The American importer, therefore, would have to trade $2 to have enough yuan to purchase the product from a Chinese exporter.

But suppose that it becomes possible to pay only 75 cents for the same 7 yuan, so only $1.50 has to be traded to have enough yuan to purchase that Chinese good whose price is still 14 yuan? From the American importer’s perspective the foreign good has become less expensive to purchase. Chinese import sales in America increase. But for the Chinese importer of American exported goods, the cost of a U.S. product may, thereby, increase by 25 percent in expense to bring into China, since more yuan must be paid on the foreign exchange market to acquire one U.S. dollar.

The Trump White House insists the Chinese government has manipulated a lower foreign exchange value for the yuan to artificially stimulate exports to the U.S.  It is true that governments, individually or in consort with each other, usually decide on “bands” within which their currencies will be allowed to fluctuate in terms of each other without central bank or government monetary intervention to move a currency’s value up or down.

So foreign exchange rates are not simply or purely free market–based. But the global foreign exchange market, on average each day, sees about $5 trillion worth of transactions. As a result, any government wishing to permanently or for a prolonged time move its currency’s value significantly lower than where the international market is setting it on a daily basis will have to inject large sums of its own currency into the foreign exchange market day after day, week after week, to have a lasting impact different from what global currency buyers and sellers think that nation’s money to be worth in international trade.

If the Trump administration tries to play this game, and pushes the U.S. dollar down on the foreign exchange market, it will make a variety of American exports less expensive to buy for some foreign importers. But… the cost of importing foreign goods into the United States will start to go up, since, now, more dollars will have to be given to purchase the more expensive foreign-made goods.

This will increase the cost of living for consumers across the U.S. market, and raise the cost of importing foreign resources and raw materials and other goods used in U.S. domestic manufacturing; this, too, will percolate through the stages of production over time and make American products more costly to buy both at home and in foreign markets.

This all threatens to become what during the tariff wars of the 1930s was sometimes referred to as “beggar-thy-neighbor” policies — that is, trying to undermine the exporting sectors of other countries in the attempt to “stimulate” your own country’s domestic production and export sales. However, tit-for-tat increases in tariff barriers and reciprocal attempts to lower one’s own currency vis-a-vis that of others only weaken the international division labor, reduce the benefits and improvements in standards of living that come through global specialization and trade, and disrupt the calculating rationality of a functioning medium of exchange both within a country and in its facilitation of transactions between nations.

Individuals Live and Trade, Not Macro Aggregates

But all Donald Trump seems to see are macroeconomic aggregates — America versus China. This is as faulty and dangerous as it is to see people in the United States only as racial, gender, or social aggregates: black or white, male or female, rich or poor. Nations are only communities of individual human beings, each of whom is a distinct person possessing various qualities, characteristics, and self-conceptions about who they are, what is important to them, and how they wish to live.

Nations are also communities of producers and consumers, suppliers and demanders, each of whom, again, is a unique and distinct individual deciding how to earn a living, with whom best to exchange and trade, and what to buy and sell and at what terms seem the most profitable, all things considered for each one of them in their respective corners of society.

All that Donald Trump’s trade wars with China or any other countries can do is to diminish the freedoms and standards of living of each and every American and that of many others in other lands. Trade wars can only be fought with fiscal, monetary, and interventionist regulatory policy tools that hinder and hamper the free choices of all of us, both in the domestic and international marketplaces. (See my article “Trump’s Economic Warfare Targets Innocent Bystanders.”)

This is a rather high price for all of us to pay just because the president of the United States is ignorant of basic economic reasoning, and seems to hanker to be an authoritarian leader who can get his way whenever he likes, just like those foreign dictators he seems to like to pal around with occasionally on the international stage.

Made available by the American Institute for Economic Research. Visit their website at

Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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