US-China Trade War (1)

The multilateral trade system, the WTO and its predecessor, has been the backbone of the world trade system since the end of WWII. However, Trump’s tariffs announcement has made the WTO largely irrelevant [1]. He wants all US trade partners to negotiate with America bilaterally. Most nations seem to agree, but China has not, at least not so far. The trade war now seems mainly between China and the US.  

At first glance, America is likely to win. In most trade wars, the one with the larger trade deficit wins, as some experts claim. This is because the nation with a trade surplus is afraid to lose its market share. However, things are not so simple this time. First, it depends on the definition of win. Most textbooks teach that international trade benefits all involved nations. In [2], I explained that this conclusion is conditional. If you ponder the chapter on trade benefits, it assumes that all trading partners are of good character. If some are bad, the conclusion does not hold. I also pointed out the case of monopolies in a prior chapter. If you have one or more bad characters even in a domestic economy, free trading will not work. Before China joined the WTO, the world trading system largely worked because most member nations were of good character. Disputes happened sometime, but they were solved through normal procedures. 

This has changed when China joined the WTO. China has never obeyed the rule of law, either at home or abroad. It is hard to enforce the WTO rules when China joins because China never intended to follow the rules. Consider an example, the trade dispute between China and Australia. China punished Australia for proposing COVID investigation. It was the early days of COVID. Australian PM at the time, Scott Morrison, asked the WHO to investigate the origin and spread of COVID. China warned the Australian government not to do this. Any government abiding by the rule of law would agree to such investigations. This is the main method to make a government accountable. Australia’s request was perfectly normal according to WHO rules. As a result, China slapped trade punishment on Australian wine, barley, lobster, and others. Australia tried to resolve the trade dispute, initially bilateral then through the WTO. This took many years without results. Another example. The US and China reached a trade agreement, called phase I, in the early days of COVID. During COVID, China had an excuse for not implementing the agreement. But after COVID, according to US officials, China did not carry out ONE item of the agreement.  

If you consider [2] carefully, the reasoning assumes all nations involved in fact being republics or democracies, at least of good character. If one is totalitarian, then the reasoning makes no sense. For example, when the Chinese government puts heavy tariffs on Australian wine or lobster, Chinese media would blame Australia, and ordinary Chinese would believe the media. Those who doubt might not dare to say anything. If they did say, they would be silenced or even worse. Their voices would not be heard, must less to influence the outcome. 

Former Treasure Sec. (Trump 1.0) Steven Mnuchin said it is very hard to get China to come to the table to rectify trade problems. He said they had tried everything and only tariffs worked. To overhaul the world trading system will take many years. Trump decided to take down the whole system, changing the multilateral trading system to bi-lateral one. It has benefits as well as risks. 

References: 

[1] Trump’s Tariffs Change World Trading System

[2] Tariffs: A Theoretical Understanding