Trade War Games (Review of How To Win a Trade War)
This blog post will offer a brief review of "How To Win a Trade War," by famous podcasters and think tankers/journalists Chad Bown and Soumaya Keynes. I wanted to post something in time for their official book launch (which is today), but I only got the book last Thursday night, which means (1) I may have missed some things as I read it quickly for the purposes of doing this post and (2) this will not be a well organized post but rather just some thoughts that occurred to me as I read through the book. With those caveats out of the way, and expectations sufficiently lowered, here goes!
First of all, I was very excited when I came up with the Trade War Games title for the post, and was planning to make a reference to the famous line from the movie WarGames about how the only winning move is not to play. It was disappointing, then, to see that Chad and Soumaya themselves make this reference in the book, stealing what I thought was going to be my thunder. But I left the title anyway, because I had already typed it in there and couldn't think of a better one
More substantively, let me note that I agree with a general point that they make at various times: Empirical evidence doesn't tell us as much as we might like about trade policy, and to some extent we are all going on instinct. Yes, there is data out there, and equations, and logical arguments. But there is a lot of uncertainty, and often some arguments on both sides. So, we should probably all have a bit of humility about these issues. (Having said that, I'll put aside that humility for some of the points I make below!)
With apologies to Chad and Soumaya, now I'm going to raise a complaint. The subtitle of the book is "An Optimistic Guide to an Anxious Global Economy," but I don't think they are very optimistic! Right away, on pp. 3-4, they talk about "a little elegy for the old rules-based trading system" and say they eventually "realized that there was no going back." Come on, Chad and Soumaya, don't give up so easily! Let's keep up the fight!
(Let me interject a non-trade point here. Has anyone come up with a Brangelina-style name for Chad and Soumaya? Choumaya maybe? It would save a bit of space in writing about them.)
Back to the fighting (or not), on p. 5 Chad and Soumaya – I'm not using Choumaya until I get their permission! – say "[d]on't expect an ideological defense of free trade." Well, OK. But this makes me wonder if I need to put together a defense of free trade – evidence-based rather than ideological – in book form myself. If someone could turn off trade policy for a few months, maybe I could find the time to write one?
Turning to Chapter 2, on trade and peace, I want to make the point that some people – I don't mean Chad and Soumaya here – seem to frame the issue as trade not being able to prevent all war, perhaps as a way to dismiss the narrative that trade contributes to peace. So, some people might say, Russia and Ukraine were both part of the WTO, and that didn't stop the war, so ipso facto trade does not promote peace.
Now, while it's no doubt true that trade doesn't stop war completely, nevertheless, it seems to me that there are some pretty good success stories (e.g., the EU), and I think it's fair to say that, on balance, trade contributes to peace. As Chad and Soumaya put it more elegantly, on p. 34 of the book, "a world with a full tapestry of economic connections is safer than one with lots of spooled threads sitting alone."
Skipping ahead a bit, they note on p. 76 that most people don't care much about trade, which is something I've mentioned here on this blog. I'm not sure whether this is good or bad. Sometimes the public attention on our subject area is nice (and I hope it helps their book sales!); other times it feels good to argue quietly about things few people care about (like when Chad and I argue about "optimal tariffs").
Just after that, Chad and Soumaya make a point, in a very polite manner, about how "political identity" might be a better explanation for populism then reactions to trade policy. There's a lot going on with this issue, but I think some research by Professor Diana Mutz supports this view.
Somewhat relatedly, on pp. 78-79, Chad and Soumaya raise the issue of certain voters shifting from Democrat to Republican because of Bill Clinton's support for the NAFTA. I feel like I debunked this suggestion here and here, and I'm curious how they would respond to those posts.
Finally on these same populism themes, on p. 79 they say, "[i]n 2016, the [China shock] effect was big enough to tip the vote and bring President Trump into office." Here, I feel obligated to note that Trump lost the election to Hillary Clinton by several million votes. Maybe populism in the U.S. was all just an electoral college illusion?
My favorite chapter of the book was the one on trade deficits, where I have strong feelings (along with a good deal of uncertainty, because as they point out, economists have some different views on the specifics here, even if they agree on the general points). In this context, on p. 94, I was glad to see them highlight the problem of U.S. government borrowing. I know there's a lot going on in the world right now, but I think this deserves more attention. Then on pp. 97-98, they get into the issue of Chinese consumption, and talk about how it is lower than American consumption. That's true, although American consumption is above international averages, so I'm not sure this is the best comparison. Basically, as I understand it, China is below average and America is above average. That, I think, is a key part of the explanation for U.S.-China trade imbalances.
In terms of solutions to imbalances, on p. 100 they seem skeptical that currency adjustments could help, and maybe they are right politically. Nonetheless, in my view, we really should be pushing for this sort of adjustment (i.e., market-based currency depreciation/appreciation).
The issue of imbalances is one where I think a lack of understanding of particular aspects really hurts the policy debate, and if policymakers had a better sense of the issue, they might approach it differently. Or they might not, of course. But explaining it to them is worth a try!
Turning to Chapter 7 on rules, this is the chapter for the lawyers. Here, I will complain once again about the lack of the optimism promised on the book cover! Their take seems to be that while a rules-based system sounds good, it can't actually work these days. I'm going to push back here and say that perhaps a few more years of trade wars will remind everyone of the benefits of a rules-based system, and we'll see a resurgence in support for the old system, or something like it at least. Yes, the old system had problems, but is the current approach working out for those who are pushing it? I'm not sure it is, and at some point that may lead to some pining over what has been lost.
And anyway, even today many people still believe in a rules-based system: Governments keep signing trade agreements with dispute settlement mechanisms, and using them on occasion to bring formal complaints; and despite all the difficulties with WTO dispute settlement, China has filed two panel requests against India in recent months, marking the first WTO disputes between those two countries.
So, even if there is no going back, the present situation is not ideal, and we need to think about a way forward that incorporates some of what we used to have. (Maybe I really do need to write that optimistic pro-free trade book.)
Some other points on the rules:
- On p. 112, I think they are underestimating the chances of a successful WTO complaint on Chinese subsidies. Of course, maybe the problem is me overestimating the chances! But I don't think I am. (There's tons of evidence that has been gathered as part of domestic CVD cases. It seems like this would be useful in SCM Agreement Article 5 adverse effects complaints.)
- On p. 114, this is a great line about zeroing: "This is an abuse of math that delivers a higher tariff rate."
Next up were chapters on subsidies and stockpiling that I thought were very sensible (yes, subsidies are "a sprawling mess"). But then we get to a chapter on "import barriers," which they call "the good stuff" (p. 173). They seem to think everyone is excited about the import barriers chapter, but I read it like I watch horror movies, with my hand covering my eyes and taking only quick peaks at the text! But I do agree with them that import barriers "can be unwieldy, blunt, and prone to abuse."
And then in the conclusion chapter, on p. 215 they encourage readers "to treat this as an exciting opportunity to come up with a vision of the future." They are practically begging me to write a book! I will note that there are hints of their own vision in this chapter, and I think some aspects of it could help with the path forward. For example, they play up the importance of safeguards, and I agree that this should be a key part of a revised and resurgent rules-based trading system.
They also make a point about creating an "international competition authority" to deal with "market dominance." Here I'm more skeptical. A practical problem I see is that in today's world market, this would probably apply to U.S. big tech dominance, which means the U.S. government is likely to be opposed. Of course, a future U.S. administration could be skeptical of big tech, and it may also be that U.S. big tech dominance is beginning to fade, which would change the dynamics. Still, I'm not sure an international organization like this one could get off the ground.
Overall, the book provides a reflection, done in the moment rather than after the fact, on a chaotic time in trade policy. At this point, with so much uncertainty about how current U.S. trade policy efforts will turn out, it can be hard to assess the state of things. Chad and Soumaya seem to be doing a bit of that, but also holding people's hands as they try to make sense of everything going on. It is, as they put it, a "guide" to the trade wars. While the book is sort of about "how to win a trade war," perhaps it's better thought of as a self-help/therapy book on the questions of "how to process a trade war" or "how to stay sane in the midst of a trade war."
Let me also note that Chad and Soumaya are doing a Peterson Institute event on the book later today, and if they say anything that triggers additional reactions, I'll add them to this post. (And here they are on The Daily Show with Jon Stewart, if you want a more comedy-focused book launch.)
Finally, separately from the book, but presumably tied to its release so I think I can bring it in here, in a NYT op-ed they published on Sunday Chad and Soumaya weigh in on a possible China-U.S. trade peace:
In our dream scenario, Mr. Trump would accept that his government could help to redress global economic imbalances by borrowing less. For its part, the Chinese government would strip away the incentives it provides that lead its companies to overproduce, while encouraging its citizens to spend and import more. The United States and China would agree that mutual dependence makes them both safer — and then exchange hugs.
Sounds good! Let's make all that happen! (Although I remain skeptical that Chinese consumers – or German, Japanese, etc. consumers – are suddenly going to spend significantly more). But before you start feeling too optimistic, here's some cold water they are throwing on you:
For this to happen, however, Mr. Trump and Mr. Xi would need personality transplants. So more realistically, any future deal must reckon with three facts: First, the Chinese government is no more willing to transform its subsidy-soaked economic model than the U.S. government is keen to make veganism the national diet; second, both the U.S. and China have considerable leverage in any negotiation; and third, the bilateral U.S.-China trade relationship involves the rest of the world, too.
They then suggest the possibility of "formally giving up on any idea of a grand, permanent détente in the near future, and establishing a goal of resetting expectations at least once a year." Maybe that's the most realistic approach. But I'm still holding on to my optimism, in part because I see so much that hasn't been tried, and I would like to convince policymakers to give it all a shot.