01 Oct 2018

“The United States has an $800 Billion Dollar Yearly Trade Deficit because of our ‘very stupid’ trade deals and policies,” President Trump tweeted in March this year. “Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!”

His reasoning is that America has a certain amount of wealth stored up, like a pile of gold. In his own scenario, when the US runs a trade deficit against China—when the US spends more on Chinese goods than it earns from selling to China—this wealth runs down, because the US has to pay for all that excess spending. Gold leaves the US and heads for China. The US is poorer; China is richer. They win; we lose.

From this perspective, the US has not started a trade war with China, but is simply trying to recover lost ground. "We've already lost the trade war,” Trump said. “We don't have a trade war. We've lost a trade war."

The problem is, this isn’t actually what happens with international trade. Yes, the US runs a trade deficit—though in 2017 it was $568 billion, not $800 billion. While the US deficit dwarfs the rest of the world’s deficits, this has been the trend for the US since 1976. But countries benefit from global trade because it enables them to buy goods and services that they do not and would not want to produce on their own. And, by doing so, they can focus instead on the production of goods and services for which they have a comparative advantage.

Imposing tariffs on other countries’ goods can indeed affect America’s trade deficit, in that American consumers will no longer find it as attractive to buy from these countries because those tariffs will cause an increase in the prices Americans face. But the underlying desire for these goods will not have changed. If American consumers are not able to reduce their consumption, they will need alternative sources for those taxed goods. Either way, Americans will be forced to absorb the costs of the tariffs, and America’s trade deficit will still remain high – just against a different country now.

And China’s retaliatory tariffs, in turn, make it harder for American businesses to sell their goods in China. Trump’s 25 per cent tariffs on imported auto parts and steel and aluminium could destroy hundreds of thousands of American jobs.

“Imposing tariffs places the cost of China’s unfair trade practices squarely on the shoulders of American consumers, manufacturers, farmers and ranchers,” explained Tom Donohue, the president of the US Chamber of Commerce. “This is not the right approach.”

Trump’s trade war with China comes against the backdrop of a global power transition. China’s economic clout is on the rise, while the American economy’s significance in global trade has waned considerably.

America has been global hegemon for the last seven decades. When America defeated others in military conflict, it sought to bring those fallen enemies back into the global system. America provided the rest of the world a security umbrella, as well as economic and financial underwriting in a stable liberal rules-based trading system. America led the way in science and innovation, and it helped other countries to develop.

But, in Trump's words, “Those days are over.” As Robert Kagan noted, “It would be comforting to blame America’s current posture on Mr. Trump. But while he may be a special kind of president, even he can’t create a public mood out of nothing.” America is now stepping back from its role as benevolent leader, no longer finding it gainful to supply the world order that the international community needs—and there is no guarantee of a reversal when Trump steps down from the presidency.

When supply declines but demand remains high, there is a need to fill the gap. The community of nations can work together to build their own refreshed international system—one that provides sufficient inclusive space for all. But questions remain: Will America allow others to restore equilibrium in the supply and demand for world order? Or will America refuse to lead but also refuse to let anyone else do so?