In one of National Review’s hit pieces against Republican presidential frontrunner Donald Trump (“What Trump Doesn’t Understand – It’s a lot about our Trade with China”), correspondent Kevin D. Williamson called Trump a “dangerous buffoon” because he would threaten tariffs upon China’s products and thus risk a trade war with China.  But it’s not Trump who is the buffoon on trade; it is National Review!

Trump plans to take on the huge U.S. trade deficit with the world, and especially with China.  He threatens to place upon Chinese products a tariff like the 45% tariff that China recently placed upon some U.S. cars.  Such a threat could lead to negotiations between the U.S. and China about balancing trade, and Trump wrote the book on negotiations.

When an article tears into a candidate for having his facts wrong, the magazine that prints it probably should check to make sure that the candidate is actually wrong.  But; National Review failed to fact-check this piece.  Its correspondent, Kevin D. Williamson, wrote:

China did put a punitive retaliatory tariff on some cars made by GM and Chrysler…. That was a 12.9 percent tariff, incidentally, nothing like the 45 percent that Trump imagines, and it is being withdrawn. Chinese buyers in fact love American cars — a Buick is a much bigger status symbol in China than in New Jersey.

But Chinese tariffs on big-engine American-made cars were in addition to China’s already existing 25% tariff on all U.S.-made vehicles.  The Guardian, a British newspaper, got it right when the new tariff was announced.  It reported on December 14, 2011:

General Motors faces the greatest impact, almost 22% extra on some sports utility vehicles (SUVs) and other cars with engine capacities above 2.5 litres. Chrysler faces a 15% penalty, while a 2% levy will be imposed on BMW, whose US plants make many of the cars it exports to China.

Existing taxes and duties already push up the cost of US imports by 25%, and the new levies make it even more expensive for Chinese consumers to buy American.

Let’s add up the numbers.  China’s base tariff on American vehicles is 25%.  In 2011, it announced that it would add an extra 22% on some cars.  If you add 22% to 25%, the total is 47%, which is much closer to the 45% that Trump stated than to the 12.9% claimed by National Review.

The U.S.-China Trade Relationship

The unwritten rule of U.S.-China trade is simple.  The U.S. buys Chinese products, but China won’t buy American products unless they can’t be produced in China.  As a result, the U.S. trade deficit (goods and services) with China has been growing, ever since President Bill Clinton gave China “most favored nation” status and WTO membership in 2001, in return for reductions in China’s tariff rates.

During the year from October 2014 to September 2015, as shown by the right-most line in the graph below, the U.S. trade deficit with China was a record $338 billion:

Given that the average American manufacturing worker produces about $170,000 worth of value-added each year, that $338 billion represents about 2 million productive manufacturing jobs that could be gained in the United States by balancing trade with China.

Williamson correctly reports that China loves Buicks, but he doesn’t mention that those Buicks are all made in China.  China’s 25% tariff on U.S vehicles forces U.S. automakers to produce in China in order to sell in China.  And the Chinese government requires that GM share its proprietary technology and half its profits with Chinese partner SAIC Motor Corporation, which sells cars on its own using GM's technology.  Bloomberg Business reported in March 2010:

SAIC and other Chinese carmakers that work with overseas companies are introducing their own models to boost margins in a country set to become the world's biggest auto market this year. Foreign automakers typically have no remedy because Chinese law forces them to work with a local partner.

Williamson correctly notes that China imports only about 30¢ from the United States for every $1 that the U.S. imports from China.  But he claims that this is an accident due to the fact that the Chinese people don’t want the things that the U.S. sells.  He writes:

A pair of made-in-the-U.S.A. Frye boots costs a month’s pay in China, and very poor people don’t buy a lot of what the United States exports: airliners, software, pharmaceuticals and medical devices, etc.

Actually, China does want Boeing airliners but prefers Boeing airliners that are made in China.  According to the September 23, 2015 Seattle Times:

When Boeing Chief Executive Dennis Muilenburg introduced Chinese President Xi Jinping before about 600 Boeing workers and Chinese airline guests in Everett on Wednesday, he trumpeted the good news of orders and commitments from China for 300 jets.

The more contentious news — that Boeing had signed deals to put a 737 jet-completion and delivery center in China and to move more parts work there — was not mentioned from the stage….

Boeing and China’s state-owned jet maker Commercial Aircraft Corporation of China (COMAC) will jointly operate the new completion center at a yet-to-be-decided location, Boeing confirmed after Xi spoke.

How China Grows Its Trade Surplus

According to Williamson, China’s trade surplus with the U.S. is simply due to China, the world’s second largest economy, being such a poor country.  He writes:

We will not have more-balanced trade with China until Chinese people have a standard of living that is more like that of Americans. 

What nonsense!  The U.S. has balanced trade with almost every poor country in Latin America – the exceptions being Mexico and Venezuela, which, like China, manipulate currencies.  Also, the U.S. has large trade deficits with several rich countries, including Germany and Japan.

But Williamson has a second explanation that is much closer to the truth.  He claims that China’s trade surpluses are the result of China’s high savings rate:

Chinese families generally save a quarter or more of their income, because they don’t believe that they can rely on the government to take care of them when they get sick or old or face other troubles. So even though they’re earning a lot of U.S. dollars with their exports, they aren’t using those dollars to buy a lot of U.S. goods — rather, China holds a lot of dollars in its reserves, in effect lending us a portion of the goods we consume or, looked at another way, financing our purchases with negative real interest rates. 

Indeed, the Chinese government is marshalling its people’s savings and using them to buy U.S. reserves (i.e., bonds and stocks) in order to build up “dollars in its reserves.”  But it is not doing so in order to earn negative real interest payments.  Who wants to lose money by lending it?  It is doing so in order to manipulate currency exchange rates to keep the dollar high and the yuan low, so that Chinese products can undersell U.S. products in U.S. and Chinese markets.

Prominent Chinese economist Heng-fu Zou is one of the foremost experts on mercantilism, the strategy of running intentional trade surpluses.  His mathematical model demonstrates that the more a mercantilist country accumulates foreign assets (mainly bonds, stocks, and gold) and keeps out foreign products (through tariffs and other barriers), the faster it grows in wealth, power, and long-run consumption.

Zou doesn’t mention it, but in order for one country to have a trade surplus, its trading partner must have a trade deficit.  The effect upon the trading partner is exactly the opposite of the effect upon the mercantilist country.  In the short run, the trading partner gets extra consumption by buying things on credit, but in the long run, the trading partner loses wealth, power, and consumption.

Williamson claims that Trump’s threatened tariffs would harm U.S. consumers, who would indeed have to pay higher prices for goods imported from China.  But the tax would yield substantial tariff revenues, which could be used to ameliorate the burden on consumers.

Moreover, he doesn’t seem to realize that the harm is only short-term and that there are benefits.  In order to grow, a country needs increased income, and one way for the U.S. to get increased income would be to require that trading partners to buy as much from us as we buy from them.

Balancing Trade Is the Conservative Solution

Not only does National Review not understand mercantilism, but it also does not understand conservatism.  Is it really conservative to help totalitarian China pass the United States in economic and political power?  In the past, conservative leaders tried to preserve U.S. power and freedom:

·      In 1971, conservative U.S. President Richard Nixon took advantage of a provision for trade-deficit countries in GATT rules (i.e., WTO rules) by imposing the across-the-board 10% tariff that got the negotiations going, which brought U.S. trade into balance by 1973.  

·      In 1981, conservative U.S. President Ronald Reagan threatened unilateral action to balance trade with Japan.  In the negotiations that followed, he got Japan to “voluntarily” restrain its automobile exports to the United States.  As a result, Japanese automobile companies built automobile plants in the U.S. that continue to employ American workers and continue to buy parts from American producers.

National Review is not entirely wrong.  Trump’s policy prescription of threatening an ordinary tariff upon Chinese products could, indeed, elicit Chinese counter-tariffs.  Trump has a much better alternative available to him.  He could threaten to impose our invention, the Scaled Tariff, which is immune from trade retaliation.

The Scaled Tariff has a separate variable rate with each trade surplus country, and that rate is adjusted quarterly so as to take in half of the U.S. trade deficit with that country as tax revenue.  If China were to react by increasing its tariffs upon U.S. products, it would be increasing the U.S. tariff rate upon Chinese goods, resulting in the U.S. buying, instead, from countries like Canada and Brazil, since no tariff would be applied to the goods of countries that buy as much from us as we buy from them.

Instead, China would probably respond by increasing its imports of American products in order to reduce the U.S. tariff rate upon Chinese products.  And the Scaled Tariff would not violate international law, since it complies with the same special rule for trade-deficit countries that made Nixon’s 1971 tariff legal.

The purpose of trade is to exchange an amount of goods and services that a country considers less valuable for an amount of goods and services that it considers more valuable.  Economists are unanimous that both countries benefit when trade is balanced.

But the trade deficits that the U.S. has experienced for decades have converted the U.S. from the world’s leading creditor nation to the world’s leading debtor and have caused the loss of millions of American manufacturing jobs, have reduced American power, and have retarded U.S. economic growth.

Williamson and National Review would let totalitarian China continue to expand its trade surplus with the United States and eventually replace the U.S. as the world’s premier economic and political power.  They consider their position “conservative.”

But Trump is right to seek balanced trade with China.  He could get the negotiations going by threatening to impose our Scaled Tariff.  And if the negotiations were to fail, the Scaled Tariff would balance trade regardless.

The Richmans co-authored the 2014 book Balanced Trade: Ending the Unbearable Costs of America’s Trade Deficits, published by Lexington Books, and the 2008 book Trading Away Our Future, published by Ideal Taxes Association.