5 Questions on the Midterms with Trade Expert Sharyn O'Halloran

November 01, 2018
Sharyn O'Halloran

The list of American tariffs imposed on China since Donald Trump assumed the presidency runs to more than 200 pages, according to the Office of the U.S. Trade Representative—from tilapia and sea urchins to aircraft engines and oil drilling platforms. News reports now say the Administration is preparing to issue $250 billion more in tariffs—effectively on everything that China exports to the U.S.

Sharyn O’Halloran, the George Blumenthal Professor of Political Economics and Professor of International and Public Affairs, is an expert in trade policy and regulations. She has consulted with the World Bank’s International Finance Group and its Regulation and Competition Policy Group on the impact of trade and political institutions on economic growth and performance. Here she explains the status of the trade war between the U.S. and China.

Q. What are the options to solving this standoff?

A. The key is for the Trump Administration to change the conversation with China.  The real issue with China is not over the tariff; tariffs represent only a small part of trade restrictions.  Rather, the concern that has been raised by the Trump administration is non-tariff barriers.  There is a view that China does not play by the same rules and standards as every one else and therefore has an upper hand in trade relations. While it is true that China does not wholly conform to World Trade Organization standards and has been given a number of exceptions, it is also important that for many reasons previous administrations have seen China's participation in the world economy as beneficial both to long-term economic growth and geopolitical stability. The U.S. needs to focus on steps to more closely integrate China into the global economy, find openings for foreign direct investment, protection of intellectual property rights, and so on.

Q. Are there better ways to solve inequities in U.S. trade policies?

A. Globalization has fostered enormous expansion of economic productivity, efficiencies in a global supply chain and the advantages of flexible production processes. These benefits have come with alienation of segments of the U.S. labor force that have not benefited from the technology and shifts in productive capacity worldwide.  Those jobs will not return to the United States. Much of the standardized work is being automated and the skills that workers need will be very different than before. It is the obligation of U.S. companies and the government to provide opportunities for training and skills attainment that enable workers to move up the life-cycle of technological change and benefit from U.S. trade policies that enhance economic growth and prosperity.

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Q. Is Donald Trump's view of how trade works supported by economic theory or facts? 

A. President Trump mixes up relative and comparative advantage. In a recent speech he stated: "Think of it, we're importing lumber and timber and trees from other countries, and we have 10 times more than they have! Explain that one!" One of the key insights of economics is that just because you are endowed with an abundance of something does not mean that you should produce it. The theory of comparative advantage highlights that countries are better off if they specialize in production of the good they have with the lowest relative opportunity cost or can produce at the lower relative marginal cost prior to trade. This is one of the numerous cases where President Trump misuses the obvious to support his policies.

Q. What is the fallout so far?

A. We are beginning to see both the political and economic ramifications of President Trump's foreign and domestic policies.  Internationally, the U.S. has become increasingly isolated.  In areas where the U.S. has traditionally played a leadership role - as in the military, Middle East negotiations, or Russian containment - other countries have pushed their agenda, including Russian and China.  With domestic policy, the tax reform legislation provided little sustained stimulus or investment in infrastructure to lay the ground for long-term growth; it has created significant government deficits; and has led to concerns of price instability, leading the Federal Reserve to raise interest rates.  Politically, the midterm elections usually see the party out of power gaining seats.  In this case, however, we may see two things that are extraordinary: 1) Democrats have an opportunity to regain control of the House and maybe even the Senate; and 2) both Democratic and Republican challengers are disproportionately, young, female and viewed as political outsiders.

Q. Are there ever any winners in a tariff war?

A. While tariff wars are always inefficient, there could be relative winners and losers.  Regarding the tariff conflict with China, it is clear that the short-term effects have been most pronounced on the Chinese economy.  This is forcing China to look to alternative markets for its strategy of export lead growth, including expanding its domestic consumer market. In the long term, however, if China is successful in building its Silk Road trading partners and igniting a home consumer base, the U.S. economy will become less important to its overall growth strategy.

—by Bridget O'Brian