Report Detail Summary

Free Trade, Trade Wars or Something in Between: Part II

May 13, 2019

President Trump followed through on his promise to let a tariff increase on $200 billion of Chinese goods go into effect Friday morning. While the action surprised many and fueled additional criticisms and economic fears to the President trade policy. The pundits should not be surprised. Going all the way back to the presidential campaign, President Trump has been quite transparent on this issue. administration does not lose sight of the objective. The administration must take into account political considerations, like focusing on the reelection. The Chinese are aware of this, so are many other analysts. The question is whether the administration will take a deal in order to appease the special interest groups adversely affected by the trade issues. We are already seeing these groups lobbying for a remedy to the losses induced by the Chinese policy. Politically this is a simple problem. All the US has to do is negotiate with the Chinese and have them agree to buy more US goods in order to reduce their loses. Such a solution solves the special interest problem but will not address the real problem which is the technology theft. This the easier road to take. But if the US settles for such an outcome, we have lost the trade war. The prize is to capture losses due to the technology theft. That is the prize worth fighting for. The more difficult road will be to take steps to stop the technology theft and eliminate all trade barriers by allowing unfettered access to both markets. This second option is a bit more difficult for obvious reasons, the Chinese will have to develop or pay for the technology they use. The US will have to develop enforcement mechanism and embrace a true free trade system. If things do not work out, a trade war that pushes everyone into autarky could easily develop. Letís hope President Trump takes the road less travelled. Letís hope he negotiates a direct solution and successfully stops the technology theft. The question is whether the Trump Administration will go to the matt for such an outcome. The President needs to make the calculation as to whether the benefits of his trade actions exceed the costs. If he believes what he says, the answer is a rotund yes and the president should go for it. But is he willing to risk his reelection? Only he knows.

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