On March 1, 2018, US President Donald Trump claimed, “Trade wars are good and easy to win.” However, Trump’s decision to wage a trade war against China turned out to be a suicidal move.
The last two and half years have witnessed that trade war significantly hurting the US economy. Besides, the ongoing technology war between the world’s two largest economies is pushing the US economy to the brink amid the Covid-19 pandemic and proving China to be self-reliant and resilient. The trade and technology war has been more pain than gain for the US economy.
Trump’s team looks clueless and mediocre. Trade adviser Peter Navarro, Secretary of State Mike Pompeo, Trade Representative Robert Lighthizer, and Treasury Secretary Steven Mnuchin have been claiming that they have been punishing China. They drove Huawei out of the US and some allied countries successfully. Eventually, they believe, they will win the trade and technology war against China.
However, the contrary is true: They are punishing American producers, consumers, workers, and suppliers. They are abandoning the United States’ core principles that were supposed to be the most influential in the post-World War II world.
Free-market capitalism upholds some core principles. Its supporters, including the most ardent – the US – consider it to be superior to any other system in the realms of production, distribution, consumption, and trade. There are voluntary production and consumption of goods and services with freedom for every individual to make their own choices.
The system promotes and protects free international trade, and free movement of capital, labor, ideas, knowledge, skills, and technology, and focuses on ease of doing business. Government intervention to affect the outcomes of market activity is very limited. Consumers’ tastes and preferences determine the optimal allocation of resources.
Free-market capitalism is supposed to be so efficient in production and distribution that it ensures optimal resource allocation by providing incentives for competitive prices and profits for producers. It leads to competition-driven innovation and invention, providing quality products for consumers at reasonable prices.
Free-market capitalism, in other words, ensures freedom of choice.
These underlying tenets of free-market capitalism are the foundation for political liberty in the US. The American dream for a better life, liberty, and the pursuit of happiness depends on the free market.
In a free-market economy, if consumers have to pay for goods and services than the utility they receive, it is seen as consumer exploitation. Similarly, if producers have to sell their products at a higher price than they would prefer because of high production costs, that is producer exploitation.
Consumer or producer exploitation is an outcome of government intervention in the market through tariffs, quantitative restrictions, or monopoly. Such exploitation reduces the optimal allocation of economic resources and, as a result, reduces consumers’ economic welfare.
The US government tries its best to avoid these exploitations through legislation. To that end, it has strict antitrust laws. The core of these law was created by three legislative acts, namely the Sherman Anti-Trust Act of 1890, the Federal Trade Commission Act, and the Clayton Antitrust Act. All these legislations aim to protect consumer welfare, keep business competitive, and ensure efficient allocation of resources.
The purpose of these antitrust laws is to maximize the American people’s economic welfare through free-market capitalism. However, the trade and technology war is doing the exact opposite. It minimizes consumer welfare, maximizing consumer and producers exploitation, making business less competitive, and thwarting innovation and invention.
Trump declared, “We can’t continue to allow China to rape our country.” Trump announced tariffs on more than $550 billion worth of Chinese goods from July 2018 to August 2019. China announced retaliatory tariffs on more than $185 billion worth of US goods. However, 30 months later, it turns out that it is Trump who has “raped” American consumers, producers, workers and material suppliers, innovators, and inventors economically.
For instance, Forbes magazine senior contributor Stuart Anderson claims that Trump’s tariffs cost the average household $2,031 in 2019. The 139.68 million US households paid almost $283.7 billion in 2019 as a deadweight loss. This is what the exploitation of American consumers looks like.
Similarly, tariffs imposed by Trump to punish China cost American producers $46 billion from February 2018 to January 2020. As a result, American companies’ profit margins reduced significantly.
Thus the burden of Trump’s tariffs has been shifting to both American producers and consumers, not foreign exporters.
Besides, it caused substantial wage cuts and job losses for the US workers, and price hikes for both consumers and producers.
Additionally, innovation and invention are being interrupted as the technology war continues.
The technology war between China and the US has made many US companies losers and forced Chinese companies to find alternative suppliers. As a result, Chinese companies have emerged as a winner. The hawkish US policy is now pushing China to be more resilient and self-sufficient. America’s semiconductor giants will be the biggest losers. Besides, the technology war will make the US less innovative and less inventive in the future.
US companies earn by selling high-priced goods and services based on intellectual property such as software for computers and electronic devices, trademarks, patents, production technologies, and their franchises. But with the technology war, it seems the US is shooting itself in the foot.
Suppose the technology war continues. China successfully develops its own software and operating systems for mobile phones, computers, and other electronic devices and makes them publicly available. In that case, the US companies will lose significant revenue they are receiving now from China’s companies and the rest of the world. No one pays for software if substitutes are available for free.
Besides, the US is losing the market of the world’s largest middle-class country, one that can consume expensive American products.
Most important, the United States has abandoned the core of the free-market economy, which is at the center of its power to form alliances and inspire many countries worldwide.
Just as democracy, fair elections, the rule of law, an independent judiciary, and human rights are the cornerstones of the West’s political system, so is free-market capitalism. Most of America’s allies have faith in the US because of its economic, philosophical, and ideological foundations. But Trump’s team has punished likeminded US allies through the trade and technology war.
Trump’s recent threat to quit the plurilateral trade institution, the World Trade Organization, and the crusade against Huawei depict the US as not committed to free-market principles and international rule.
Americans are behaving like Japanese warriors of old who happily accepted seppuku. That was a ritual practiced by Japanese samurai warriors to die voluntarily to command honor in society rather than avoiding the shame of being caught and likely tortured by their enemies. This trade and technology war is ultimately leading American free-market capitalism to seppuku.
If the US doesn’t reset the course on its trade and technology war and resume the plurilateral mechanism, it will not only hurt American consumers and producers, but it will also lose its allies.
The Americans should keep economics out of domestic and international politics for their own benefit.