Trade Lessons For President Trump: Sniper Fire, Not Cluster Bombs

Instead of all-out trade war, this is how US President Donald Trump can better his approach to trade negotiations.

Instead of his all-out trade war, Donald Trump should laser-focus his trade attacks, says 

(Photo: The Quint/ Shruti Mathur)

Video Editor: Mohd Ibrahim

Trump unleashes debilitating trade wars;

Global economy precariously poised at the edge of a 1930s style crash;

Ordinary people’s heads are spinning with such hyperbolic headlines. But can President Trump convert his “trade war” into a “surgical strike” instead of a scatter bomb hurting both him and the free world?

It was President Richard Nixon, another maverick, who changed the world in February 1972 with his Shanghai Communique, recognising Taiwan as a part of One China, and yanking an isolated China into the global mainstream, away from the Soviet Union’s communist embrace; and boy, was it successful!

Deng Xiaoping, China’s legendary leader, “brutally” extracted economic surpluses from the Chinese people in the first couple of decades of reform (1970s/80s):

• From tillers: Peasants were ruthlessly evicted on a paltry compensation, and the land was sold to foreign investors to build factories and world class infrastructure.
• From labor: Wages were kept artificially low, creating super-profits in the hands of factory owners.
• From savers: Interest rates were suppressed, thereby transferring surpluses from individual savers.
• From consumers: By keeping the Chinese currency (Renminbi) under-valued via a government fiat, consumers were forced to pay higher prices for imported goods, while exports to America and the rest of the world were subsidised. Foreign investors were able to buy Chinese assets at artificially low prices, giving the Chinese government a permanent chest of hard currency to play with.

Now Deng played his master-stroke, combining a Soviet-style extraction with a leaf from Japan, opening China to foreign trade, travel, influences, and investments, unlike the isolation of The Warsaw Pact countries.

He then funneled those trillions of dollars of surpluses into physical and social infrastructure, creating productive assets – roads, bridges, railways, ports, power plants, airports, new cities, hospitals, schools, universities, etc – on a scale hitherto unknown to human civilisation. 

In my book, I’ve called it the “escape velocity” model of infrastructure creation – ie, a country invests its surpluses so aggressively and rapidly, that it escapes the gravitational pull of lingering low growth; instead, it discontinuously leaps on to a higher trajectory of growth, income, and wealth creation.

America too gained big time through China’s growth mayhem. Cheap Chinese imports fueled an American consumption boom through the 90s and early 2000s.

As China used its hard currency trillions to buy American treasury bonds (as a liquid, safe-haven investment), US interest rates fell to their lowest point ever, triggering an amazing rise in asset prices (stocks and real estate). It was an idyllic world that was too good to last. It didn’t.

Three things went wrong.

1. American prosperity entered an unreal bubble that burst in 2008 (as capitalist greed, excess and fraud created a toxic balloon).
2. China proved to be an evil, untrustworthy global citizen, reportedly accounting for nearly $ 250 billion of US Intellectual Property (IP) theft every year.
3. And finally, as grunge blue-collar jobs moved to China, America’s rust belt saw big layoffs and joblessness.

It was a perfectly volatile cocktail, waiting for … Donald Trump! For his polarising message of “whip China, force Asian marauders to pay for stealing our jobs, and make America great again!”.

But then, where has Trump messed up his counter-attack?

He should never have pulled out of the Trans-Pacific Partnership or Paris Climate Accord. He should have strengthened trade alliances with the free world, from NAFTA to EU to Australia, Japan, and India.

He should have used his free-world alliances, the “concert of democracies”, to raise hell against China at the WTO; and under the cover of that righteous din, he could have attacked China with a few hard-hitting, exceptional tariffs; he would have gotten away without creating today’s bedlam!  

Perhaps there is still time, if President Trump gets free from tweeting and sacking colleagues.