The art of the flail

If you’ve been watching stock markets, you’re probably feeling seasick. The Dow is crashing! No, it’s bouncing back! Wait, it’s crashing again!

In general, trying to explain stock fluctuations is a mug’s game. But in this case it’s pretty clear what’s going on. Whenever investors suspect that Donald Trump will really go through with his threats of big tariff increases, provoking retaliation abroad, stocks plunge. Every time they decide it’s just theater, stocks recover. Markets really, really don’t like the idea of a trade war.

So is a trade war coming? Nobody knows— even, or perhaps especially, Trump himself. For while trade is one of Trump’s two signature issues—animus toward dark-skinned people being the other—when it comes to making actual demands on other countries, the tweeter-in-chief and his aides either don’t know what they want or want things that our trading partners can’t deliver. Not won’t—can’t.

As a result, incoherence rules. The administration lashes out, then tries to calm markets by saying that it might not carry through on its threats, then makes a new round of threats.

Let’s talk in particular about the will-he-or-won’t-he confrontation with China.

In some ways, China is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment. And to be fair, Trump officials do sometimes raise the intellectual property issue as a justification for getting tough.

But if getting China to pay what it owes for technology is the goal, you’d expect the U.S. both to make specific demands on that front and to adopt a strategy aimed at inducing China to meet those demands.

In fact, the U.S. has given little indication of what China should do about intellectual property. Meanwhile, if getting better protection of patent rights and so on is the goal, America should be trying to build a coalition with other advanced countries to pressure the Chinese; instead, we’re alienating everyone in sight.

Anyway, what seems to really bother Trump aren’t China’s genuine policy sins but its trade surplus with the United States, which he has repeatedly said is $500 billion a year. (It’s actually less than $340 billion, but who’s counting?) This trade surplus, he insists, means that China is winning— in effect stealing $500 billion a year from America.

As many people have pointed out, this is junk economics. Except at times of mass unemployment, trade deficits aren’t a subtraction from the economies that run them, nor are trade surpluses an addition to the economies on the other side of the imbalance. Overall, the U.S. trade deficit is just the flip side of the fact that America attracts more inward investment from foreigners than the amount Americans invest abroad. Trade policy has nothing to do with it.

Beyond this conceptual confusion, there’s a raw fact few people—and, as far as I can tell, nobody in the Trump administration—seem to appreciate: China no longer runs big trade surpluses.

This wasn’t always true. A decade ago China’s current account surplus—a broad measure that includes trade in services and income from investments abroad—was more than 9 percent of GDP, a very big number. In 2017, however, its surplus was only 1.4 percent of GDP, which isn’t much. Meanwhile the U.S. ran a current account deficit of 2.4 percent of GDP, a bit bigger but also much smaller than the imbalances of the mid-2000s.

But in that case, why is bilateral trade between the U.S. and China so unbalanced? The answer is that it’s largely a kind of statistical illusion. China is the Great Assembler: It’s where components from other countries, like Japan and South Korea, are put together into consumer products for the U.S. market. So a lot of what we import from China is produced elsewhere.

It’s not clear why we should demand that China stop playing that role. Indeed, it’s not clear that China could even do much to reduce its bilateral surplus with the U.S. To do so, it would basically have to have a completely different economy. And this just isn’t going to happen unless we have a full-blown trade war that shuts down much of the global economy as we know it.

Now, Trump himself might be OK with large-scale deglobalization. But as we’ve seen, his beloved stock market hates the idea, and with good reason: Businesses have invested heavily on the assumption that a closely integrated global economy is here to stay, and a trade war would leave many of those investments stranded.

Oh, and a trade war would also devastate much of pro-Trump rural America, since a large share of our agricultural production—including almost two-thirds of food grains—is exported.

And that’s why things seem so incoherent. One day Trump talks tough on trade; then stocks fall, and his advisers scramble to say that the trade war won’t really happen; then he worries that he’s looking weak and tweets out more threats; and so on. Call it the art of the flail.