Thursday, April 5, 2018

A Question About "Trade Wars" With China

We're now a few weeks into an ugly tit-for-tat on tariffs between the US and China.  Trump started it, but Xi seems perfectly happy to keep up or even escalate it.  This seems like it could easily become a Very Bad Thing.

Still, it begs a question:  How much is the flow of American imports into China controlled by pricing, and how much is controlled by industrial policy?

Suppose we have a US good that's tariff-free into China, but it doesn't sell very well.  Are the bad sales because the seller has misjudged the demand for the item on the open market, or does it sell poorly because the word's gone out that companies in which the Chinese state has a significant investment shouldn't buy the product?

China's state-sponsored capitalism model makes this an important question.  If a lot trade is choked off simply because the state is acting as a semi-monopsony, then a trade war featuring Chinese tariff hikes is largely cosmetic.  Nothing actually changes, because the game is fixed somewhere else.

If this is true, then the Trump strategy might be a pretty good one.  China has had an asymmetric advantage with relatively free trade, because they can get clean treatment by the free market when they export their goods to the US, but in the reverse case, the game is rigged opaquely by the Chinese state.  By imposing tariffs, the US gets an asymmetric advantage while remaining fairly transparent.

I don't actually know to what extent the Chinese state twists the arms of its client companies on things like this.  If it's small, then the tariff wars are going to end very badly for the US.  But if the arm-twisting is significant, the US gains a considerable advantage out of the tariffs.

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