Killing the Pax Americana

  
Via:  bob-nelson  •  2 weeks ago  •  10 comments

Killing the Pax Americana
Trump’s trade war is about more than economics.

S E E D E D   C O N T E N T


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O.K., they weren’t supposed to start the trade war until I got back from vacation. And I really have too many kilometers to cover and hills to climb to weigh in on a regular basis or at great length. But since I’m currently sitting in an outdoor cafe with my coffee and croissant, I thought I might take a few minutes to address two misconceptions that, I believe, are coloring discussion of the trade conflict.

By the way, I don’t mean Trump’s misconceptions. As far as I can tell, he isn’t getting a single thing about trade policy right. He doesn’t know how tariffs work, or who pays them. He doesn’t understand what bilateral trade imbalances mean, or what causes them. He has a zero-sum view of trade that flies in the face of everything we’ve learned over the past two centuries. And to the (small) extent that he is making any coherent demands on China, they’re demands China can’t/won’t meet.

But Trump’s critics, while vastly more accurate than he is, also, I think, get a few things wrong, or at least overstate some risks while understating others. On one side, the short-run costs of trade war tend to be overstated. On the other, the long-term consequences of what’s happening are bigger than most people seem to realize.

In the short run, a tariff is a tax. Period. The macroeconomic consequences of a tariff should therefore be seen as comparable to the macroeconomic consequences of any tax increase. True, this tax increase is more regressive than, say, a tax on high incomes, or a wealth tax. This means that it falls on people who will be forced to cut their spending, and is therefore likely to have a bigger negative bang per buck than the positive bang for buck from the 2017 tax cut. But we’re still talking, at least so far, about a tax hike that is only a fraction of a percent of GDP.

This means that it’s hard to justify claims that the trade war, at least what’s currently in the pipeline, will cause a global recession.

If the trade war expands not just to all imports from China but to imports from Europe and other parts of the world, we could get this up to a contractionary fiscal policy of a couple of points of GDP; $200 billion here, $200 billion there, and soon you’re talking about real money. And that certainly could happen: Trump imagines that he’s winning, and might well move on from China to European cars and so on. But we’re not there yet.

But doesn’t the prospect of foreign retaliation change the picture? Actually, what foreign retaliation does is prevent tariffs from being less bad than an ordinary tax increase. When a large country like the U.S. imposes tariffs, one effect — if we don’t face foreign retaliation — is a rise in the price of U.S. exports, either though a rise in the dollar or by drawing resources away from export to import-competing sectors. This price rise is, other things equal, a gain for America (although not for export-oriented sectors like agriculture.) And this “terms of trade” effect can mitigate or even reverse the overall losses as tariffs distort the economy.

If (when) foreigners retaliate, however, the terms of trade effect goes away, and we’re back to tariffs just being a tax on domestic consumers.

Maybe the larger point here is that there tends to be a certain amount of mysticism about trade policy, because the fact that it’s global and touches on one of the most famous insights in economics, the theory of comparative advantage, gives it an amount of mind space somewhat disproportionate to its actual economic importance. Yes, trade policy is important; but in terms of the strict economics it’s not more important than health policy, or fiscal policy, or policy in general.

I say this, by the way, as someone whose career as a professional economist was based mainly on research into international trade and finance. In general, people who actually work on these issues tend to assign them less importance than those who haven’t studied them closely.

All of this, however, is only about the strict economics of a trade war, which may be the least important aspect of what’s happening.

For trade policy isn’t just about economics. It’s also about democracy and peace.

This is obvious and explicit in Europe, where the origins of the European Union lie in the Coal and Steel Community of the early 1950s — an agreement whose economic benefits, while real, were in a way incidental to its real purpose, preventing any future wars between France and Germany. And membership of the E.U. has always been contingent on democratization — which is, by the way, why the E.U.’s limp reaction to the de facto collapse of democracy in Hungary and, it appears, Poland represents such moral failure.

It’s more implicit in the case of the United States. But the historical record is pretty clear: the postwar trading system grew out of the vision of Cordell Hull, FDR’s Secretary of State, who saw commercial links between nations as a way to promote peace. That system, with its multilateral agreements and rules to limit unilateral action, was from the beginning a crucial piece of the Pax Americana. It was as integral to the postwar order as the I.M.F., which was supposed to provide a safety net for nations having balance of payments trouble, or for that matter NATO.

And Trump’s trade war should correspondingly be seen as part and parcel of his embrace of foreign dictators, lack of respect for our allies, and evident contempt for democracy, at home as well as abroad.

But wait, you say: China is neither an ally nor a democracy, and it is in many ways a bad actor in world trade. Isn’t there a reasonable case for confronting China over its economic practices?

Yes, there is — or there would be if the tariffs on Chinese products were an isolated story, or better yet if Trump were assembling an alliance of nations to confront objectionable Chinese policies. But in fact Trump has been waging trade war against almost everyone, although at lower intensity. When you’re imposing tariffs on imports of Canadian steel, on the ludicrous pretense that they endanger national security, and are threatening to do the same to German autos, you’re not building a strategic coalition to deal with a misbehaving China.

What you’re doing, instead, is tearing down what’s left of the Pax Americana.

Wasn’t this inevitable in any case? I don’t think so. True, U.S. economic dominance has been eroding over time, not because we’re getting poorer, but because the rest of the world is getting richer. But there was reason to hope that a relatively peaceable international order could be sustained by an alliance of democratic powers. In fact, until a few years ago it seemed to me that we were seeing exactly that taking place for the world trading system, which was transitioning from largely benign U.S. hegemony to a comparably benign co-dominion by the U.S. and the E.U.

At this point, however, things look a lot bleaker. It’s not just Trump. And it’s not even just Trump plus Brexit. The Europeans are also turning out to be a big disappointment. As I said, if they can’t even deal with the likes of Viktor Orban within their own community, they’re definitely not up to providing the kind of leadership the world needs.

But where the Europeans are weak, Trump is malign. He’s working actively to make the world a more dangerous, less democratic place, with trade war just one manifestation of that drive. And the eventual negative consequences for America and the world will be much bigger than anything we can capture with economic modeling of the effects of tariffs.

Initial image: President Trump in the Oval Office earlier this month. Sarah Silbiger/The New York Times

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Bob Nelson
1  seeder  Bob Nelson    2 weeks ago
Trump is malign. He’s working actively to make the world a more dangerous, less democratic place, with trade war just one manifestation of that drive.
 
 
 
Nerm_L
2  Nerm_L    one week ago

Dr. Paul Krugman has clearly stated, once again, that trade policy has not been about economics.  Krugman has been a stalwart proponent of establishing global interdependence based on trade; justified by the idealistic notion that trading partners dependent upon each other won't fight wars.  However, using trade policy for political purposes (rather than economics) transforms trade into geopolitical warfare.  

Why does China need access to the United States market?  China's population is almost four times larger than the United States.  The much larger size of the Chinese market means that supplying its own population should create an economy that is larger than the United States economy.  China needs the United States to become dependent upon Chinese production for geopolitical reasons not economic reasons.  China can grow its economy by supplying its domestic market.  China doesn't need the United States but the United States has become dependent upon China.

The 75 years of Pax Americana has been a trade war that has weakened the United States.  Shipping containers have proven as effective as bombs for destroying the industrial base of the United States.  US industry can't supply what is needed to sustain the US economy any longer.  The United States has become dependent upon imports to sustain itself.  The economic weakness of the United States has transformed geopolitical foreign policy into being reactionary rather than providing leadership.  

 
 
 
Bob Nelson
2.1  seeder  Bob Nelson  replied to  Nerm_L @2    one week ago
Krugman has been a stalwart proponent of establishing global interdependence based on trade; justified by the idealistic notion that trading partners dependent upon each other won't fight wars.

I've been attentive to everything Krugman has written, for quite a few years. I know of no such position. Do you have a link?

China's population is almost four times larger than the United States.  The much larger size of the Chinese market means that supplying its own population should create an economy that is larger than the United States economy.

Yes. And indeed, internal consumption has taken an ever increasing share of China's economy over the past few years.

China needs the United States to become dependent upon Chinese production for geopolitical reasons not economic reasons.

It's a mutual need. Revenue has remained flat for most Americans for thirty years. The only way to give them an impression of improving living standards has been to lower purchase prices for consumer goods. That wouldn't be possible with production in America. China's ever-improving efficiency has kept the lid on potential social strife in America.

At the same time, you're right that China has taken advantage of American dependence to take a role internationally that would otherwise not be possible.

 
 
 
Nerm_L
2.1.1  Nerm_L  replied to  Bob Nelson @2.1    one week ago
I've been attentive to everything Krugman has written, for quite a few years. I know of no such position. Do you have a link?

Dr. Krugman clearly states the purpose of interdependence based on trade in the seeded article:

"For trade policy isn’t just about economics. It’s also about democracy and peace.

This is obvious and explicit in Europe, where the origins of the European Union lie in the Coal and Steel Community of the early 1950s — an agreement whose economic benefits, while real, were in a way incidental to its real purpose, preventing any future wars between France and Germany. And membership of the E.U. has always been contingent on democratization — which is, by the way, why the E.U.’s limp reaction to the de facto collapse of democracy in Hungary and, it appears, Poland represents such moral failure."

Pax Americana has been about using trade to prevent warfare.  It seemed like a good idea when the United States was the only industrialized nation that escaped the destruction of World War II.  However, using trade as a geopolitical tool required the United States to buy what developing economies produced to ensure that trade provided a positive incentive for maintaining peace.  Adversaries aren't going to trade with each.  It was necessary to transform the United States into a common marketplace for the global industrial base and utilize access to that marketplace as a political incentive for maintaining peace.

Self sufficiency provided by the industrial base of the United States was deliberately sacrificed to pursue a political theory.  The reality of that political theory is the the United States has become the most dependent upon international trade.  And that dependency has placed the United States in the position of using the military to pursue economic ends, just as happened with Germany following the first world war.  What the political theory of globalization espoused by Dr. Krugman got wrong was that economic self sufficiency is also necessary to maintain peace.  That, too, is an important lesson from the European conflicts.

It's a mutual need. Revenue has remained flat for most Americans for thirty years. The only way to give them an impression of improving living standards has been to lower purchase prices for consumer goods. That wouldn't be possible with production in America. China's ever-improving efficiency has kept the lid on potential social strife in America.

No, China does not need the United States to grow its own economy.  Trade with the United States provides China more geopolitical benefit than economic benefit.  As the last half century has demonstrated, trade has not been mutually beneficial for the United States.  The loss of the domestic industrial base means that the United States can only produce war, just as Germany used warfare for economic purposes in the first half of the 20th century.  However, unlike Germany, the United States just might have the ability to actually conquer the world militarily.

The United States does not have to buy what it needs from China.  China does not have a comparative advantage.  There is very little, if anything, that China produces that the United States cannot produce for itself.  Until the United States takes the steps to become self sufficient, the United States will have less and less influence in foreign affairs.  History does have numerous examples showing that countries who are dependent upon trading partners are not world leaders unless they dominate trade.

 
 
 
Bob Nelson
2.1.2  seeder  Bob Nelson  replied to  Nerm_L @2.1.1    one week ago

You said

Krugman has been a stalwart proponent...

Then you said

Dr. Krugman clearly states the purpose of interdependence based on trade in the seeded article

They aren't the same. The first indicates a personal preference. The second observes the world situation, but takes no personal position. The second is right.

 
 
 
Bob Nelson
2.1.3  seeder  Bob Nelson  replied to  Nerm_L @2.1.1    one week ago
The reality of that political theory is the the United States has become the most dependent upon international trade.  And that dependency has placed the United States in the position of using the military to pursue economic ends

Where do you see the US "using the military to pursue economic ends"? I don't see that. It seems that me that the military is a huge expense for... not much

 
 
 
Nerm_L
2.1.4  Nerm_L  replied to  Bob Nelson @2.1.2    one week ago
They aren't the same. The first indicates a personal preference. The second observes the world situation, but takes no personal position. The second is right.

Did you read the seed?  Dr. Krugman states that the economic aspects of a trade war are the least important.  The quotation provided in my previous comment is Paul Krugman explaining his position on the importance of trade and that importance doesn't have anything to do with economics.

Dr. Krugman is stating that tariffs threaten global democracy and peace.  Krugman isn't making an argument that tariffs harm the economy; he blows off that argument.  Krugman's complaint, in his own words, "What you’re doing, instead, is tearing down what’s left of the Pax Americana."  The brunt of Krugman's opinion is that trade policy is more about geopolitics than economics.

The reality is that the United States can no longer afford to buy the peace; Pax Americana is failing for lack of funds.  China is taking steps to become the world's largest economy.  Paul Krugman needs to confront the reality that continuing the idealistic notion that trade interdependence maintains global peace is going to require convincing China to become responsible for buying the peace.  

 
 
 
Bob Nelson
2.1.5  seeder  Bob Nelson  replied to  Nerm_L @2.1.4    one week ago
Dr. Krugman states that the economic aspects of a trade war are the least important.

Not exactly. Not "of a trade war", but "of this trade war". This one is particular for two reasons: Trump doesn't understand international trade, and he is motivated by stoking his base, rather than the actual situation.

The quotation provided in my previous comment is Paul Krugman explaining his position...

I explained in my previous post. When Krugman presents an analysis, "For trade policy isn’t just about economics. It’s also about democracy and peace", he is stating fact, not taking position. Here he states that binding Germany and France together had peace as a long-term objective. He does not give any personal opinion on the wisdom of that effort.

The brunt of Krugman's opinion is that trade policy is more about geopolitics than economics.

Not exactly. Trade policy is often largely in service to some other purpose. In the present situation, our understanding of Trump’s motives is further clouded by his apparent incomprehension of the basic mechanics of international trade, and by his incessant posturing.

The reality is that the United States can no longer afford to buy the peace; Pax Americana is failing for lack of funds.

I don't understand you here. The US is the richest country in the history of the world. America chooses to not engage its wealth - chooses to not use the incredible wealth of the ultra-rich.

Meanwhile, China focuses all its means on its objectives.

 
 
 
Nerm_L
2.1.6  Nerm_L  replied to  Bob Nelson @2.1.5    one week ago
Not exactly. Not "of a trade war", but "of this trade war". This one is particular for two reasons: Trump doesn't understand international trade, and he is motivated by stoking his base, rather than the actual situation.

That lawyerly political argument will not change that Paul Krugman has been a staunch proponent and defender of free trade.

Not exactly. Trade policy is often largely in service to some other purpose. In the present situation, our understanding of Trump’s motives is further clouded by his apparent incomprehension of the basic mechanics of international trade, and by his incessant posturing.

For Krugman, free trade is always for purposes other than economic benefit.  Trump's motivation has been obviously based upon economics but Paul Krugman views the importance of trade as serving other purposes than economics.  Krugman tends to argue against using free trade between nations for only economic benefit; there must be a social benefit derived from free trade.  Trump's arguments concerning economics of trade have no merit in Krugman's worldview.  Krugman doesn't attempt to refute those economic arguments, Krugman simply dismisses those economic arguments as unimportant.

Pax Americana hasn't been about global economics.  The underpinning of the idea of Pax Americana has been about using free trade for purposes other than economics.

I don't understand you here. The US is the richest country in the history of the world. America chooses to not engage its wealth -chooses to not use the incredible wealth of the ultra-rich. Meanwhile, China focuses all its means on its objectives.

And what are China's objectives? 

The United States has adopted monetary and fiscal policy  that utilizes capital to pursue the objective of creating money and concentrating capital.  Those policy priorities have been necessary to maintain Pax Americana through using finance to buy the peace.  The United States has attempted to become the world's financier.  By controlling the global currency, the United States can leverage finance to pursue political objectives rather than economic objectives.  The problem is that creating money does not create wealth.  Without the productive capacity to create real wealth (that provides value for currency), the policy objective of creating money only debases the currency and increases value of wealth through artificial shortages and hoarding behavior.  The United States is no longer a producing nation because that is not the objective of government monetary and fiscal policy.  

Trump's argument is that government monetary and fiscal policy needs to be redirected toward the objective of the United States being a producing nation.  Trump has been arguing that the United States should receive an economic benefit from trade.  Trump's argument is contrary to underlying objectives of Pax Americana.  And Trump's argument is contrary to Paul Krugman's espoused purpose for free trade to provide a social benefit.

 
 
 
Bob Nelson
3  seeder  Bob Nelson    one week ago

I'm afraid that your ideas are a bit too unorthodox for me.

 
 
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