No Winners in Trade Wars

【编辑：红枫林，作者：Patrick Law】Everybody knows that there are no winners in trade wars, well, everybody except Donald Trump and some of his hard-core supporters. In fact, just a couple of weeks ago, Trump tweeted that he could easily win a trade war.

You know, I kind of believe him; as we all know Donald Trump is an advocate of “Might is Right”. Considering world’s strongest military is at his disposal, we could easily understand his logic and the reason why he would truly believe he can solve any disputes, in his favor.

As I have been pondering about this topic for a while, it brought my memory back to the 1800’s; there was a huge trade imbalance between China and Great Britain, which proportionally may even be bigger than that of the current US-China imbalance. For those of you not too familiar with recent history (yes, events happened within 200 years are recent in the history of mankind, for people whose country has a history of only 2-3 hundred years, may think that 200 years is ancient history), let me fill you in with a brief synopsis: prior to the opium war, the upper society of Europe, particularly England, had developed strong likings for Chinese luxury goods like silk, lacquer and porcelain. Possession of such goods became a status symbol, and the public were particularly fond of the taste of Chinese teas. Trade was indeed very one sided, i.e. silver bullions flowed from England to China year after year for the ever-increasing demand of these fine products only available from China. China on the other hand, showed no desire whatsoever for any British goods, which eventually drained the British coffers.

To counter this perceived unfair trade practice, the British resorted to smuggling opium through its East India Company into China. Before long, the flow of silver started to reverse; London coffers started to fill up with Chinese silver bullions; whereas the Chinese streets were filled with Opium dens (see attached picture of such an Opium Den). Thousands upon thousands of Chinese became drug addicts. Emperor Dao Guang (道光) realized this just cannot continue and ordered a special commissioner Lin Zexu (林则徐) to put an end to this illegal trade, and Lin, a hardliner against the opium trade, carried out his duties forcefully. Lin confiscated 3 million pounds of opium from the British merchants and burned them by the sea shore of Tiger’s Gate (Humen, 虎门).  This banning and burning of an illegal drug smuggled into China directly triggered the Opium War, and the Chinese swords, spears and sampans were no match against the British rifles, canons and steel boats, and the result was the signing of the Treaty of Nanking.

After signing of Treaty of Nanking, the Chinese doors were blown wide open by other European sea faring powers plus Russia and Japan, a series of unequal treaties were signed by the weak Qing government, practically under gun barrels. The hundred years of humiliation officially started, and by the early 1900’s, China was nearly carved up into many pieces by all these colonial powers (see the two cartons attached at the end of this article); it lasted until 1949.

Now that you know the relevant history, probably would understand why I said in the beginning that I kind of believe Trump, when I read his tweets that he can easily win trade wars.

Fast forward to 21st century, globalization has been with us for quite a while. It has generally shrunk the world, made the utilization of world resources more efficiently, and dispersed the world wealth more widely (hopefully more evenly someday). A lot of work still needs to be done; a lot of mechanism still needs to be fine-tuned to make it better, but we cannot deny that it did contribute greatly to the overall growth of the world economy. During this period, China, with one sixth of world GDP, and contributed 30% of world economic growth, no other country to come even close. With world trade so interwoven, the whole world has benefited, including the US, whose consumers have enjoyed more than two decades of cheap products and low inflations.

During Trump’s 2016 election campaign, he accused China for stealing American jobs, manipulated currency and unfair trade practices, citing the imbalance of trade numbers as his proof. What a nonsense! Sounded familiar? How ironic, the British also accused China for unfair trade practices 180 years ago.

Let me share with you a personal experience. During the 70’s, I worked for an American subsidiary of an appliances manufacturer as a Cost Analyst. One day during the summer, we received a letter from head office saying the Canadian operation will be closed at year end; production would be moving to a southern state (Kentucky as I recalled). The reason is the powerful Canadian Labor Unions had driven the wage to a level that the company can no longer be profitable.

Did Kentucky “steal” Canadian jobs? Or the greedy American just moved the jobs to where they can make more profits?

Years later, more and more companies moved their factories to China, not with the intention to make China grow, but to make more profits for themselves of course.

The same question here - did China steal American jobs? Or the billionaires of America moved their productions to China out of greed?  An interesting contrast is: now China’s workers are making several hundred percent of what they used to make a decade ago, and a lot of Chinese factories have been moved to Vietnam, Laos, and Bangladesh etc., but you won’t hear China screams, hysterically like the US, that these countries stole our jobs.

As for currency manipulation, we all know the world currency of trade is the US dollar. Since Richard Nixon scrapped the convertibility of dollar to gold in 1971 (the US thus single handed ended the Bretton Woods Agreement of 1944), the US can literally print US dollars at will. Its “quantitative easing” is the highest level of currency manipulation that no other country can imitate. The US’s accusation of any other country’s currency manipulation fits perfectly into the proverb: a thief is shouting “thief! thief!” (贼喊抓贼)

What’s the impact on the world economy? Should a trade war break out between the US and China? Let’s hope it’s not an “all out” conflict. The world had just started to recover from the 2008 financial tsunami and deserves a chance to ride the Chinese economic recovery engine for a better future.

The impact could be so large that the world may take years, if not decades, to recover, or could just be a minor ripple that most won’t feel a thing.

If the worse does happen, it could be of a catastrophic scale, bigger than the Great Depression, because the world is way more intertwined than it was during the 30’s. It could also be just minor skirmishes with thunder and lightning, but no rain drops (雷声大而雨点小), or the barking dogs don’t bite (叫得大声的狗多数不咬人). Let’s hope the wiser minds will prevail over hotter heads.

Since there are no winners in a trade war, many of you may want to know who would suffer more. China would suffer more in the beginning. Should the trade war escalate to a larger scale and lasted for longer period, then it becomes a question of who can tighten their belts more. As a nation, China had withstood many adversaries and hardship the cushy Americans cannot imagine, and each time they endured and came out stronger and better. The total blockade of the 50’s and 60’s resulted in China becoming a nuclear power. The advanced weapon’s blockade of the 80-90’s resulted in the development of the world class missile technology, including the world renown DF series of ICBM. The IT technology blockade resulted in China now owns the world’s fastest super computers.

As for the average Americans, how many are willing to tighten their belts, and for how long? The very people that helped vote Trump into the White House are the ones going to suffer the most in a trade war, because they are the ones that can least afford a higher price for everything, well, almost everything.