President unconcerned with tariff effect on economic outlook

Trade correspondent L.C. reports:

With President Trump’s meeting with Chinese President Xi Jinping less than a week away, the outcome for trade and tariffs remains uncertain. Disagreement among the US president’s advisers continues. President Trump himself seems unconcerned with the impact the trade uncertainty is having on the health of the world economy.

On Thanksgiving Day during a long teleconference with members of the US military, President Trump was asked how he is preparing for the upcoming meeting with China’s president. He said,

“I’m very prepared. I’ve been preparing for it all my life…. it’s not like, ‘Oh, gee, I’m going to sit down and study.’ I know every ingredient… better than anybody knows it. And my gut has always been right…. China has lost trillions of dollars in value since I’m President…. [But] we are doing very well. I can say this: China wants to make a deal very badly.”

Debates over tariff incidence (who pays the bill)

Supporters of President Trump’s trade policies are taking heart from a study released on November 19^th by the European Network for Economic & Fiscal Policy Research (EconPol Europe) that claims that China’s producers are being hurt by the Section 301 tariffs much more than US consumers. According to the study, the US’s 25% tariff on Chinese exports pushes down Chinese producer prices by 20.5% but raises US consumer prices by only 4.5%.

The EconPol study has received considerable criticism, first of all because “just” 4.5% US inflation would in fact be large no matter the cause but more basically because its forecast is based on 2008 data and assumes perfect product elasticity (the ability of consumers to switch to an equivalent product at no additional cost).

In contrast, the OECD released a forecast two days later, on November 21^st, arguing that most of the “burden” of the US-China tariff war will fall on US consumers, while world trade will decline by 0.4% if the current tariffs remain in place and suffer even more if the tariff war escalates.

Goldman Sachs added to concerns by releasing a report warning that US economic growth could be cut in half by the end of 2019. A Goldman Sachs survey of corporate financial officers found that the trade war was their biggest current concern regarding the economic outlook.

China continues the policies that provoked the trade actions against it

On November 20th, US Trade Representative (USTR) Lighthizer’s office released a 50-page report titled, “Update Concerning China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation.” Lighthizer released a brief statement accompanying the report: “This update shows that China has not fundamentally altered its unfair, unreasonable, and market-distorting practices that were the subject of the March 2018 report on our Section 301 investigation.”

The update shows that China has not improved the abusive policies detailed in the initial report and may have even worsened some. In particular, the Chinese government continues to engage in or encourage theft of commercial secrets and intellectual property, force tech transfers, limit foreign investment, including through discriminatory licensing requirements, while encouraging outgoing investment in foreign strategic assets. Regarding cyber-theft, the report states: “China’s cyber-enabled theft against the US has increased in frequency and sophistication since the March 2018” release of the Section 301 report.

The report summarizes: “Despite repeated US engagement efforts and international admonishments of its trade technology transfer policies, China did not respond constructively and failed to take any substantive actions to address US concerns…. As the evidence gathered in this update demonstrates, China fundamentally has not altered its acts, policies, and practices related to technology transfer, intellectual property, and innovation, and indeed appears to have taken further unreasonable actions in recent months.”

Click here to go to the previous Founders Broadsheet (“Bad governments create externalities, a.k.a. refugees”)