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November 15th 2010 print

Peter Smith

Trumping the Chinese

What the US needed at the just-concluded G20 meeting was not the mild-mannered Mr Obama trying to cajole the Chinese into allowing the Yuan to increase in value but the man of steel Donald Trump.

America’s next top model is one of those reality TV shows that my wife likes. She also likes a show called Survivor where people are marooned on some island or other and Project Runway where, so far as I can tell, mostly gay guy dressmakers compete with each other to make the best dress. Then there is Gordon Ramsey’s Hell’s Kitchen, where Gordon is extremely rude and abusive to some hapless subservient would-be chefs. Often these shows are copied. Australia’s next top model, for example. I think New Zealand may have one. There are lots of them.

I am not a fan of reality TV shows but we live in an apartment. I have no shed to escape to. I just can’t get to grips for example with people pretending to be marooned on an island and referring to themselves as a tribal council. It is not as though they are actors pretending to be part of a tribe. These are adult people who are willing apparently to make complete fools of themselves.

Another one of these shows is The Apprentice hosted by celebrity and real estate billionaire Donald Trump; famous also for his prominently quiffed hair style. A group of business wannabes hoping to become part of the Trump empire agree to jump through some contrived, competitive, business hoops, engage in infighting, and be lectured to by Donald and two of his grown children (Ivanka and Donald Jr.). A copy cat show is hosted by Alan Sugar in the UK. To give you an idea of the quality of the UK contestants, all of whom badly need elocution lessons so far as I can tell (know wha a mean), one, in catering for a kosher meal, had a chicken ‘blessed’ for the occasion in a halal butcher. The Jewish Sir Alan was unimpressed. By the way, it’s Mr Trump and Sir Alan to the lowly contestants.

Anyway I had never thought much about Donald Trump until I saw his show. He then popped up on Fox News with an accompanying teaser about whether Donald (excuse me I mean Mr Trump) might be thinking of running for president. It became clear that Mr Trump had no doubt at all about his capabilities. What would he do to create jobs he was asked. Impose a 25 per cent tax (in other words a tariff) on Chinese imports came the confident reply.

I immediately thought of a new reality TV show where Mr Trump, Sir Alan and the various hosts of other reality TV shows would compete in devising policies to create jobs in the US. And why stop there. Most countries need jobs. But then who would host the show and on what basis would the winner be decided? I thought, well I am a bit of an economist; maybe I could host the show. Fame and fortune lay in wait.

Okay then, as a test, what would I say about Mr Trump’s idea?

Since David Ricardo set down the theory of comparative advantage in the early 19th century, economists have known that specialisation and trade increases overall wealth. Sure the mercantilists have fought rearguard actions to the present day – consider Bob Katter – but economists have satisfied themselves that free trade is good. Everyone benefits. Now along comes Mr Trump. The main argument against tariffs is not that a tariff can’t potentially improve one country’s position if it acts judiciously and in isolation; it is that it will inevitably lead to retaliation and to everyone being worse off.

Mr Trump’s idea was not to impose a tariff on all imports but only on Chinese imports. Retaliation, if it came, would presumably come from China alone. The problem for China is that its exports of goods to the US – well over $300 billion per year – dwarfs exports of US goods to China – around $70 billion. Hence Mr Trump’s proposal. What could the Chinese do except, of course, to make a lot of noise. Not much is the answer. Maybe they would threaten to cease buying, or even to sell, US government debt? It comes down to that old saying – if you owe a thousand dollars you have a problem, if you owe a million dollars, the lender has the problem. The Chinese hold an amount of US treasury debt approaching one trillion dollars ($868 billion at a recent count). They have to hold it and buy more if they want to protect its value.

What the US needed at the just-concluded G20 meeting was not the mild-mannered Mr Obama trying to cajole the Chinese into allowing the Yuan to increase in value but the man of steel Donald Trump. Ably assisted by the Trump juniors, he would undoubtedly have threatened the Chinese with a tax or tariff if they didn’t play ball. It seems to me that the US is in the box seat and Mr Trump has put his finger on it. I might adjudge him the winner, unless of course Sir Alan came up with a better plan.

 

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics