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Larry Summers on the Tariff War with China-Relevant Observations

08/12/2019

Adding gravitas to the growing criticism by professional economists concerning the White House trade conflict with China, Prof. Larry Summers, ex-Treasury Secretary and President Emeritus of Harvard University, concurred with those expressing concern over escalation. Speaking on the Fareed Zakaria program Global Public Square aired on CNN on Sunday August 11th Summers characterized the current sequence of retaliatory tariffs as “the riskiest moment since the financial crisis” His rhetorical question is whether the “foolish trade conflict” is advancing U.S. interests, presumably in the intermediate and long term.

 

In responding to a question on whether China is hurting more than the U.S. he noted that our adversary is prepared to endure short-term pain and that the leadership of China does not have to face their electorate in November 2020.

 

Summers opined that our actions have engendered a deep-seated antagonism towards the U.S. in China and the implications of an extensive trade war have raised concern and damaged our credibility with traditional allies.

 

The imposition of protective tariffs to preserve jobs is regarded as an economically fallacious tactic costing in the region of $1 million per position, although generating short-term political capital. Summers noted the high cost of bailing out foundering industries. He was alluding to a recent study that confirmed that steel tariffs had preserved 12,700 domestic jobs in that industry at a cost of $11.5 billion in tariffs ultimately borne by consumers.

 

It is axiomatic that once protective or punitive tariffs are imposed it is extremely difficult to rescind them. Industries become habituated to their “cheese” and use every lobbying tactic to preserve their benefits. In 1964 when Volkswagen planned to market a light truck in the U.S., a 25% tariff was imposed by President Lyndon B. Johnson on imports of this category of vehicles that is still in effect 55 years later.

 

It would be advantageous for the White House to listen to a broader range of economists and strategists and devise a program to resolve issues with China by negotiation. The only bargaining chip left to the White House appears to be to ramp up the tariff from 10 percent to 25 percent on the remaining $300 billion in annual imports from China. Apart from currency manipulation, China has many other arrows in their quiver.

 

Economists are predicting a third quarter GDP growth of 1.2 percent even if there is no further escalation in tariffs. In the event that we go “full Monty” the result will be a global reduction in trade precipitating a recession. The current White House strategy is reminiscent of the Tariff Act if 1930 (“Smoot-Hawley”) In retrospect this law turned a recession into a depression. The extended title of the legislation was “An act to provide revenue, to regulate commerce with foreign countries, to encourage industries of the United States, to protect American labor and for other purposes” Does this sound familiar?

 

If we did not have tariffs and with normal trade the U.S would be pouring chicken and pork into China, given the geographic spread and prevalence of African swine fever. As it is we are excluded from this market.

 

 Let us develop a program devised to achieve stepwise progress with negotiations based on an understanding of the needs of both the U.S and China and the restrictions that limit their acquiescence. We will never have a Grand Bargain negotiated over a steak dinner. We will never achieve our objectives by bluster and inflicting mutual economic pain.

 

The concession of delaying imposition of the September 1st tariffs announced by tweet, on Tuesday morning at 10H00 sent the DOW Index up by over 450 points   within minutes reversing the 400 point decline the previous day. We will now see if China reciprocates by importing corn, soybeans, pork and even chicken. The alternative to accommodation is continued escalation with disruption of trade, the need to support farmers, a rising national debt and an inevitable recession