Trade, Technology, and Xi Jinping’s Question

July 7, 2018

Trade, Technology, and Xi Jinping’s Question

by Kaushik Basu Kausik Basu

Despite unprecedented technology-enabled development, the world is beset with challenges, from violent conflict to rising inequality. The underlying reason for these problems may be that we have reached a turning point in the march of technological progress – and we are navigating it very badly.

Image result for xi jinping at davosThe Protectionist (Donald Trump) is the Loser. The Globalist (Xi Jinping) will emerge the winner eventually.


NEW YORK – “It was the best of times; it was the worst of times,” said President Xi Jinping, quoting Charles Dickens’ famous line to open his speech at the 2017 World Economic Forum. “Today,” Xi continued, “we also live in a world of contradictions.” On one hand, “growing material wealth and advances in science and technology” have enabled unprecedented rates of development. On the other hand, “frequent regional conflicts, global challenges like terrorism and refugees, as well as poverty, unemployment, and a widening income gap” are generating deep uncertainty.

Xi then posed a potent question: “What has gone wrong with the world?”

Perhaps the answer lies with the very technology that Xi regards as the key to China’s rise to high-income status. Specifically, it may be that we have reached a turning point in the march of technological progress – one that we are navigating very badly.

Technology has been shaping and reshaping our lives ever since early human beings discovered how to make tools from stone. It is only natural for such a long process to include moments when technological change generates unprecedented challenges.

One such turning point was the Industrial Revolution. In mid-eighteenth-century Britain, the revolution’s birthplace, progress entailed considerable adversity. Some workers toiled 12-14 hours per day, yet inequality surged. And the incidence of child labor rose beyond the levels seen in some of the poorest Sub-Saharan African economies today.

But Europe rose to the occasion. Groundbreaking research in economics was carried out by the likes of Adam Smith and Antoine Cournot, leading to novel interventions like progressive income tax, as well as new labor laws and regulations. As a result, the Industrial Revolution accelerated economic development and human welfare.

Image result for china is the winner

Human development has seen other “industrial revolutions,” including the one that is currently unfolding. This so-called Fourth Industrial Revolution is centered on advances in digital technology, including “labor-linking technologies” (which enable workers across continents to work together in real time) and, more recently, artificial intelligence and robotics.

These advances have enabled economic globalization, which, like the Industrial Revolution, has brought unprecedented progress, as Xi acknowledged, while generating new challenges, including rising inequality and worker vulnerability. But instead of managing those challenges, as Europe did in the nineteenth century, much of the world is succumbing to political polarization, rising nationalism, and a toxic blame game. Most notably, the United States under President Donald Trump has initiated what is rapidly escalating into a tit-for-tat trade war – one that will be devastating for the entire world, but especially for the US itself.

What such behavior fails to take into account is that globalization is, fundamentally, a natural phenomenon. It is the result of billions of individuals going about their daily activities, making decisions based on the possibilities available to them. Arguing against globalization is as constructive as blaming gravity for a building’s collapse. As Xi pointed out in his WEF speech, it “is a natural outcome of scientific and technological progress, not something created by any individuals or any countries.”

Image result for The American Eagle on the decline

In the case of Trump’s trade war, US policy also reflects a misunderstanding – one that economists have repeatedly pointed out – about bilateral trade deficits. According to Trump, a trade deficit is essentially a loss, and the countries with surpluses vis-à-vis the US, such as Mexico or China, are behaving in unfair and exploitative ways. Thus, they should be made to pay.

To understand the fallacy, consider your interaction with the neighborhood grocery store. At the end of each year, you run up a large “trade deficit” vis-à-vis the store, because the store sells goods to you, whereas you do not sell anything to the store. To claim that China “owes” the US for its trade bilateral trade surplus would be like saying that your local grocery store owes you for the money you spent there during the last year. In fact, you were not cheated, just as your employer was not cheated by the bilateral deficit it runs with you. Rather, you made mutually beneficial transactions based on your needs.

The modern economy depends on bilateral trade deficits; it would collapse without them. In an age of advanced technologies and accelerating specialization, attempting to manufacture everything domestically or bilaterally would be prohibitively costly.

Image result for harley davidson eagle

The One and Only Harley defies Trump’s America First Trade Policy

For now, the US seems committed to its demands that its partners pay up. The more likely scenario, however, is that economies like Canada, Europe, and Mexico will seek to offset the impact of Trump’s tariffs by deepening their ties with China – an obvious win for America’s main global competitor. Meanwhile, US corporations will probably move production elsewhere to avoid retaliatory tariffs, as some – such as Harley-Davidson – have already threatened to do.

There is no denying that the technological turning point at which we find ourselves has caused strain for all countries. But instead of blaming one another for the challenges generated by technological progress – an approach that will only bring about the worst of times – we should work together to address them. Any country that refuses to do so will create strain for all – and end up condemning itself to being left behind.

Kaushik Basu, former Chief Economist of the World Bank, is Professor of Economics at Cornell University and Nonresident Senior Fellow at the Brookings Institution.

4 thoughts on “Trade, Technology, and Xi Jinping’s Question

  1. On Trade,China will eventually emerge the winner because Xi Jinping embraces globalisation and pursues prosper thy neighbor trade policies.

    Competition will make China an efficient producer of goods and services for the world. Any dissent? CLF, LaMoy, and Conrad, where are you, guys? –Din Merican

    Dato Din, share with us how did read1968 then?
    It almost feels like what happen then is happening again. There was flower power in California then. There is weed power today. There were McCarthy and Martin Luther King Jr all sharing the same time space in America. There are similar tension today.

    There was a cultural revolution in China then (which embarrassingly .. I didn’t get to learn about it in Malaysia. I wonder how many in Malaysia would know about this today?) There is a strong revival sense of nationalism within China today. Then, 1969 took place in Malaysia and rather similar tension taking place within Indonesia. There was race to the moon then.. there is ..

    My Potus would want to wait to handle deal until after midterm election.
    Midterm elections. Depending on what happens this midterm elections..

    Trade, Technology… Or something else? Reading too much into the past to find what it is happening today?
    In 1968, we had no internet. That meant there was no social media. But we had The Washington Post,The New York Times, NBC, ABC, and CBS, Talk Shows and Television. We knew what was happening in Vietnam. Being in Washington DC, I used to visit Arlington National Cemetery on the weekends to witness the moving and solemn burial ceremonies of Americans killed in that unpopular war. Thanks to the free media, we were fully informed.

    I was told that the students at UC Berkeley were the prime movers of Anti-War Movement (1967), although the protest culture was associated with the civil rights movement which was led by Martin Luther King Jr and friends in Birmingham. Alabama.–Din Merican

  3. Trump has fired the first shot and his trade war with China is officially underway. And China retaliates immediately. In fact, Trump is now fighting trade wars with the whole world!

    Those who subscribe to Trump’s points of view – that trade is an “Us versus Them” proposition – probably think that Trump is doing the right thing in subverting the institutions of global trade and provoking trade wars. More sycophantic supporters consider Trump’s strategy to be ingenious. Apologists who know better say that Trump is merely fulfilling his campaign promises – and how refreshing is it that a politician is making good on his promises! All are complicit in the unenlightened, provocative and possibly unhinged trade policy that Trump has wrought. And I see Trump’s trade wars are incoherent, angry and misguided.

    13 presidents have come and gone since Franklin D. Roosevelt signed into law the watershed Reciprocal Trade Agreements Act in 1934, These 13 presidents considered trade to be mutually beneficial for their fostering of economic growth and good relations among nations. They aimed to avoid trade wars and committed their administrations to reducing barriers, respecting the rules, and supporting the institutions of trade.

    But Trump sees the world differently. He has departed from more than 80 years of US trade policy continuity, charting a new and deeply troubling course. Although Trump is not the first president to blame foreign trade practices for problems real and imagined, he may be the first to believe that protectionism is essential to making America great. He is certainly the only head of state ever to tweet that “trade wars are good, and easy to win.” Trump’s trade policy is motivated by a toxic blend of ignorance, petulance and nationalist grievance.

    Tariffs have become Trump’s preferred negotiating tool when it comes to trade, an approach that he says will give the US leverage and force countries to change their policies. He has said that the US trade deficit is proof that the country is losing on the global economic stage. It is troubling that Trump continues to assume that the imposition of tariffs will convince China and other countries, friend or foe, to resolve complex trade issues, and irresponsible to downplay the impact on American workers and businesses. The decision to impose tariffs on Chinese goods will harm American consumers and businesses without addressing discriminatory and systemic Chinese trade practices and policies. Trump has systematically weaponized tariffs to serve a small-minded, protectionist, “America First” trade policy.

    Economic fallacies inform Trump’s trade views. Unlike his predecessors, he sees trade not as a win-win proposition, but as a zero-sum game with distinct winners and losers. Exports are Team America’s points and imports are the foreign teams’ points. Since the trade scoreboard shows a large overall deficit, and many bilateral deficits with individual countries, the US is losing at trade – and it’s losing because Trump believes his predecessors were bad negotiators and because the foreign teams cheat.

    In those US trade deficits, Trump also sees illusory leverage. Countries registering surpluses, Trump reckons, are more dependent upon the US market than US exporters are on theirs, making the threat of tariffs, even trade wars, an effective and powerful tool to compel foreign governments to cave in to his demands. Yet, so far, there has been very little acquiescence to those demands. Under the threat of steel tariffs and US withdrawal from their bilateral trade agreement, South Korea opted to put out the fire by agreeing to limit its exports of steel and raise its quota on imports of US automobiles. Other countries with economic heft, however, are fighting back.

    It might be true that the US would be less weakened than other countries by a trade war. After all, the US economy depends less on trade than almost every other country. Imports plus exports account for 27% of US gross domestic product compared to a world average of 53%. But the damage to the US economy would be considerable nonetheless. Inviting a trade war because US “casualties” would be lighter betrays a worrying absence of understanding of how trade and the global economy really work.

    Most global trade today is in intermediate goods – the purchases of producers, who have decentralized and diversified their operations to improve efficiencies, reduce costs and compete more effectively. Most of a company’s production and assembly in the past took place in one location, often under one roof. The factory floor today has broken through those walls and now spans borders and oceans. Taxing imports today is akin to erecting a wall through the center of that past assembly line, impeding production and raising costs in similar fashion. That helps explain the preponderance of opposition among US manufacturers to Trump’s trade tack. US tariffs raise their costs, and the resulting retaliation from foreign governments will reduce their export revenues, squeezing profits from both ends. When Trump claims that protectionism will revitalize manufacturing and bring back jobs, one can only wonder where he thinks the investment will come from without the profits his tariffs will chase away.

    Trump’s trade policy is driven by misleading statistics and the fallacious narrative that trade destroyed US manufacturing. Trump pines for the days when US industry was unrivaled in the world, accounting for a larger share of the US economy, and employing a significant chunk of the labor force. Manufacturing’s share of the US economy peaked in 1953 at 28.1% and has been on a downward trajectory ever since. In 2017, that share was only 11.6% of GDP. But in 1953, US manufacturing’s value-added amounted to US$110 billion, whereas in 2017, it reached a record high of US$2.24 trillion. A sector that today produces more than six times the value in real terms than it produced when it was of much greater significance to the US economy can hardly be described as declining. The sector employs about two-thirds the number of workers as it did at its peak of 19.4 million in 1979, but that reflects massive increases in output per worker, which is attributable primarily to the adoption of new technologies.

    Trump seems to believe that manufacturing is the only part of the economy that matters – or the only part of the economy, period. When citing trade balances, he and his advisers simply ignore US services, where the US is most competitive and growing fastest. It’s as if Google and Amazon, financial services and insurance companies, tourism and intellectual property licensing don’t exist. Last year, US services exports amounted to US$800 billion and generated a US$250 billion trade surplus.

    For a nation whose consumers spend twice as much on services than on goods, and where 90% of the workforce is employed outside the manufacturing sector, the obsession with manufacturing is misplaced. But even Trump’s concerns about manufacturing are reserved for just a few heavy industries, such as steel and automobiles. He fails to recognize – or at least his policies fail to reflect – the diversity of industries within manufacturing, many of which are worried about the pain from Trump’s steel and aluminum tariffs. For every US$1 that steel producers add to GDP, steel users add US$29; for every one job in steel production, there are 46 in steel-using industries. While Trump wants credit for “protecting” the steel industry with a 25% import tariff, he and his advisers downplay the adverse impact on steel-consuming producers.

    Although it’s difficult to discern any coherent trade-policy strategy, Trump administration’s incoherent strategy seems to be to intentionally foment a climate of uncertainty. Some suggest the policy dissonance is intended to distract the public from Trump’s mounting domestic legal and ethical woes, but the persistent noise may be conducive to the administration’s goal of repatriating global supply chains.

    Trump has sought to deter US companies from investing abroad. His tweet-shaming of US firms that were considering establishing assembly operations in Mexico, and his threats of 35% taxes on re-importation into the US dissuaded a few from moving forward with their plans. Trump’s repeated threats to withdraw the US from the NAFTA; his insistence that any revised NAFTA agreement should require that products contain more US content to qualify for preferential treatment; and his demand for a five-year sunset clause under which NAFTA would automatically terminate unless the parties affirmatively agree to extend its terms are all designed to create uncertainty. Why?

    Trump fears that trade agreements, which extend preferential access to the US market, encourage investment diversion and outflows from the US to the economies of its trade agreement partners. And he believes that by convincing the world that US trade barriers could rise at any moment, foreign companies will want to hedge their bets by investing in the US – inside the tariff wall. It may sound cynical and self-defeating, but this kind of thinking permeates the strategy sessions of America First nationalists, who like to think the specter of Ronald Reagan’s threatened tariffs on automobiles induced Honda to build the first foreign automobile plant in the US in 1982.

    Either way, things have changed since then. The US is still the world’s top destination for foreign direct investment, but its share of the global stock of FDI has decreased from 39% to 17% during the first two decades of the 21st century. The determinants of investment are diverse and many, and the number of viable destinations competing for that investment has increased as countries have developed. Obviously, the size of the market is important, but so are many other factors, including ease of access to supply chains, respect for the rule of law, policy predictability, and certainty in the business and regulatory climate.

    Trump is betting that by making policy less predictable and creating an environment of “regime uncertainty,” investment will flow into the US. Not only is the success of that approach doubtful, but the objective of attracting investment itself is at odds with his primary goal, which is to reduce the trade deficit. When Americans buy more goods and services from foreigners than they sell to them (trade deficit), then they also sell more assets to foreigners than they buy from them (capital surplus). Increasing inflows of investment and reducing the trade deficit cannot happen at the same time, hence the conclusion of policy incoherence.

    A sense of grievance also permeates the America First narrative. Trump and several of his advisers see the US as a benevolent giant, having selflessly provided the resources, security and generosity of spirit to rebuild Western Europe, East Asia and the rest of the free world after the Second World War. Under the US security umbrella, the rest of the West took advantage of America’s kindness, took more from the till than they put in, skirted the rules to obtain artificial advantages in certain industries, adopted policies to promote their own interests at the expense of the US industrial base, became economic rivals and began to adopt views about foreign policy and geopolitics that weren’t in lockstep with the US government’s. Or so the story goes.

    Expectations that other governments will acquiesce to US foreign and economic policy positions and accept the premise of American exceptionalism predominate this mindset. That the US isn’t treated with deference within the international trading system, especially by the WTO’s Dispute Settlement Body, for its selfless leadership in establishing the rules and institutions of trade is an affront to Trump and his advisers. This premise is the well-spring of Trump’s outrage in learning that Canada, Mexico, the European Union and China would even consider retaliating against the US for imposing punitive tariffs on steel, aluminum and technology products.

    The Trump administration’s concerns about China’s mercantile industrial policies have some validity, but its approach to resolution has been an unmitigated disaster. The US doesn’t need China to agree to buy US$200 billion more US exports per year. Reducing the bilateral trade deficit is a silly, misguided objective. Instead, the US should be pursuing deeper, enforceable commitments from China that it will operate within the letter and the spirit of the rules-based trading system. The way to do that is to stand shoulder-to-shoulder with like-minded governments and demonstrate to Beijing that certain behavior won’t be tolerated. Instead, the Trump administration has done the opposite. It pulled out of the TPP trade accord, it picked fights with allies by hitting them with steel and aluminum tariffs, it transgressed WTO rules to impose sanctions unilaterally and it isolated the US as an international scofflaw. These missteps must be reversed, if that’s still possible.

    The only explanation is that Trump’s trade war with China differs from those trade wars with other countries. It is not about trade deficits. The US-China tariff tussle must be seen in the context of the game-changing geopolitical and economic Big Picture, for this tariff tussle is linked to Beijing “Made in China 2025” and Belt and Road strategies, which are Xi Jinping’s Chinese Dream mantra billed as “the great rejuvenation of the Chinese nation”, and which will transform the global economic and geopolitical landscape. The White House has framed the whole process as a battle against China’s “economic aggression” and sees China as “a strategic competitor using predatory economics”.

    This US-China rivalry could last for decades. Trump has underestimated Xi’s determination to fulfill the Chinese Dream. He thinks he can use trade tariffs to bully China into submission making concession on their national interests. China has consistently said it doesn’t want a trade war, but is determined not to give up their national interests. Xi believes he can outlast Trump. If necessary, China has decided on a “perish together” strategy. We’ll have to wait and see who will blink first.

    For now, it is unclear – or whether – the trade war might conclude. With no official talks scheduled between the two countries, and disagreements within the Trump administration about how best to proceed, a quick resolution seems unlikely. An escalation of the trade war is expected to ripple through global supply chains, raise costs for businesses and consumers and roil global stock markets, which have been volatile in anticipation of a prolong trade fight between the US and almost everyone else.

    Trump knows nothing about trade and economics. The irony is that he has a bachelor’s degree in Economics from the renown Wharton School. But we all know that he did not get admitted into Wharton through his ability. And his professor, the late William T. Kelley, said “Donald Trump was the dumbest goddamn student I ever had.”

  4. Both Xi and Trump have imperialistic designs. One is seeking to win through economic conquests while the other has lost direction and is just thrashing around and hoping to solve the jigsaw puzzle without knowing what that puzzle is.

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