Trump Off Base

Donald Trump at a press conference announcing ...

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A number of MTD readers found Trump on China interesting, but thought I didn’t go far enough. They thought I should have commented on what Trump had to say.

With Trump now polling second as the Republican nominee for President, it’s even more important that his views not go unchallenged. Therefore, in the spirit of the baseball season that has just gotten underway, here is why Trump is off base on China, just like that would-be base stealer who is picked off taking too big a lead off first.

In business or politics, it’s never smart to publicly embarrass your counterpart. No matter how large your differences may be, doing so will only harden positions and make it that much more difficult to have productive follow-on discussions. Under certain circumstances, it could even provoke a nasty negative reaction.

Trump should know this, which is why his comment about denying President Hu Jintao a state dinner and asking him to go to McDonald’s instead is totally inappropriate for someone who aspires to the highest office of the world’s leading power. Even the most thick skinned country leader would find such an action insulting, but in the case of the Chinese, as sensitive as they are to “face” issues, it would be the kiss of death.

In fact, in the unlikely event that Trump ever reaches the White House, any meaningful dialogue with China is probably already doomed by his comment. If Trump doesn’t know this, his knowledge of world affairs has to be questioned. If he knows this and said it anyway, he lacks the judgment necessary for the leader of such a great country.

Likewise, telling China that “if you don’t straighten out your manipulation of the currency — and I mean fast; I mean really fast — we are going to tax your products 25 percent,” may appeal to some voters, but it would hardly solve the U.S. trade deficit with China.

Trump seems to think that imposing a large tariff on Chinese goods would cause manufacturing to move back to the United States. Being U.S.-centric, he doesn’t realize that there are 6.8 billion people in the world, only 1.0 billion of which live in North America, Western Europe, Japan and Australia. The other 5.8 billion people, including those in China, live in countries that have much lower wage rates than those in the United States. Slapping a 25 percent tariff on Chinese goods would not cause jobs to move back to America, but would instead be a boon to the other developing countries of the world.

Moreover, in blaming an undervalued Chinese currency for the loss of American jobs, Trump has fallen into the same trap that many politicians have fallen into before him. In spite of what they believe is an obvious connection between the currency exchange rate and the trade deficit with China, the empirical evidence does not support such a connection.

Since July, 2005, the yuan has appreciated by 21 percent against the dollar, yet this has had no impact on either the amount of imports from China or the U.S. trade deficit with the country. In 2005, the U.S. imported $244 billion of goods from China and ran a trade deficit of $202 billion. By 2010, despite the increased value of the yuan, imports had increased by 50 percent to $365 billion, and the trade deficit had increased by 35 percent to $273 billion.

Trump also isn’t worried about a trade war with China, and somehow believes that the U.S. will fare well if a punitive tariff on Chinese goods leads to such an outcome.

Trump may be a good businessman, but he is certainly no historian. United States Senator Reed Smoot and Representative Willis C. Hawley tried that same tactic in 1930, sponsoring a law that raised tariffs on over 20,000 imported goods to record levels. The Smoot-Hawley Tariff, and the retaliatory tariffs by U.S. trading partners that followed afterwards, reduced American exports and imports by more than half. Some economists believe that the tariffs contributed to the severity of the Great Depression. We don’t need more of that.

Every time that the United States imposes tariffs on tires, steel or some other Chinese product, China counters with an equal response. If President Trump were to levy his 25 percent tariff, expect the Chinese to respond accordingly. Chances are that much of the $92 billion that U.S. manufacturers exported to China in 2010 would evaporate as China switches purchases from Boeing and other U.S. companies to suppliers in Europe, Japan and other parts of the world.

I must admit, though, that it’s hard to argue with Trump’s comments about counterfeit products. The protection of intellectual property rights is a legitimate issue for the United States to press with China’s leaders. Unfortunately, they will have little incentive to be cooperative if the relationship sours, as it certainly would, with a Trump presidency.

Despite the latest polling data, I’m not particularly worried about Trump eventually reaching the White House — the American people are smarter than that. I am worried, though, about the negativity towards China that his continued alleged candidacy will foment. The sooner he goes back to running casinos, the better.

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