Paul Krugman: "Maybe it's worth laying out the incoherence of Trump's trade war a bit more, um, coherently...
...There are three issues that seem to be flashpoints:
- Chinese bad behavior on intellectual property
- China's overall trade surplus
- China's bilateral surplus with the US 1/
Of these, (1) is a real issue—but should be addressed by a coalition of advanced countries, except that Trump is stirring up trade war with our allies too. And Trump has offered no specifics on what China should do. Meanwhile, (2) is far less important in, say, 2010: the Chinese surplus is smaller relative to GDP, and the U.S. is no longer at the zero lower bound with high unemployment, so demand drag from foreign surpluses is less of an issue. Still, there is some case for shift in Chinese macro policy.
But (3) is just stupid: China would have a large bilateral surplus even with balanced trade, because it's the Great Assembler of goods whose value added comes largely from other countries. Yet (3) seems to be what Trump mainly focuses on. So what are the Chinese supposed to deliver? They don't even know what concessions might satisfy Trump, and have good reason to believe that nothing would do the trick—after all, Canada is also in the crosshairs, and does nothing important wrong. So the only policy that makes sense for China is retaliation—make this as painful as possible for Trump, and hope that this pushes him into either backing down or at least making comprehensible demands. Not saying they're good guys; but Trump is not offering any useful options...