Since 2018, trade war has become a globally noted issue. US President Donald Trump initiated the conflict by announcing plans to increase tariffs on a large amount of imported goods from China. Then, it kicked off several rounds of China's counterattacks, US's counter-counterattacks, talks, truces, and then quarrels again, and so on and so on. It is obvious that trade war has become the most important economic news. Economics is certainly useful for analyzing the issue. The question is: armed with economics knowledge at only high-school level, perhaps one may find trade war is too complicated an issue, and will say that the issue is not understandable without more advanced knowledge of economics. Complicated as it maybe, however, I do believe that we can still learn some lessons from it, even if we know only high-school economics.
From the very beginning, China has insisted that trade wars generate no winners. The flip side of the same coin is that trade is a win-win situation for both countries trading with each other. From an economics viewpoint, this cannot be more correct. Any economics students have learned that trade is mutually beneficial. As we have learned, trades allow countries to specialize in producing goods that they have comparative advantages. This enhances each country's productivity. Hence, all trading countries are better off. Restricting trades is therefore damaging.
Trump's decision to wage a trade war reflects that he does not think so. He has repeatedly voiced out his concern about the US's trade deficit with China. From an economics viewpoint, this concern is not very sensible. While a company should always worry about its deficit, a country need not always worry about its trade deficit. A deficit to a company means that its sale value is smaller than its expense. A deficit will reduce a company's equity, which means the resource mastered by this company decreases. On the other hand, trade deficit means that a country can enjoy more goods from imports by supplying a smaller amount of export goods to another country. As a result, trade increases the resource that can be used this country, which is better off. Of course, there might still be a worry if we consider trade deficit is a debt of one country owing to another country. But trade deficit is not exactly equivalent to a debt. It is simply that one country (say China) takes up another country's (say US) assets in return for the goods supplied. If the assets (notably financial assets) are attractive, another country (say China) will be happy to hold them.
At this point, perhaps we have to conclude that Trump must be foolish, failing to understand even high-school level economics. But is he? Let us turn to a point where high-school economics students may often neglect: What does it mean when we say trade allows countries to realize their comparative advantage and so trade is "mutually beneficial"? Does it mean all the people in a country can benefit from trades? If so, we should expect that no one will complaint about trades. But this is obviously not true. Trade protests are very common. In fact, one particular relevant thing is: One reason why Trump won the US presidential election in 2016 is that his anti-trade position has attracted those losers in trade, basically the so-called blue-collar voters. They worked in traditional manufacturing industries but they lost their original high-paying jobs when companies moved to lower-cost countries. They hated trades and so voted for Trump.
Now, there is a problem: if not everyone gains from trade, why economists say that trade is "mutually beneficial"? You won't say a trade loser benefits from trade! Upon reflection, what economists say may simply mean this: trade increases the total value of products enjoyed in each trading country, and this is good for the country as a whole. Analogously, we may say trade makes the size of the cake bigger. Nonetheless, how to divide the cake is another matter. For example, suppose that before trade the size of the cake is 10 units. For two people to share it, each get 5 units. After trade, the size increases to 15 units. But now one person gets 11 units while another gets only 4 units. Though someone suffers, trade indeed brings about gains on the aggregate level. While it is not wrong to say trade is "mutually beneficial", the conflict hidden in the aggregate picture is not mentioned in this simple term "mutually beneficial".
At this stage, perhaps we may better understand what is going on. On the one hand, China is right in claiming that there are no winners in a trade war (or trade is mutually beneficial). On the other hand, Trump need not be stupid. On the whole, both China and US benefit from trade, and suffer from trade war. But this benefit (or loss) is at the aggregate level. Some US people benefit from trade. For example, US consumers get higher-quality or cheaper goods from imports. But behind the aggregate picture is that someone loses out. In particular, manufacturing workers lose out in the process. Trade theory says only that the total value of gain from trade is larger than the total value of loss borne by those losers. But it does not say the number of losers must be larger than the number of gainers.
If the number of angry workers is really large, and they are more willing to vote than those who marginally benefit from trade, their support may affect the election outcome. How crucial these angry trade losers' votes are is not exactly known. But it is likely that the number is really large as reflected in Trump's 2016 campaign, which was a success and made him the President. Of course, when time passes, this situation may change. What we can see from Trump's actions is, however, that he still believes that anti-trade policies will help him win the next election. On the one hand, he wants to get a better term in a trade deal with China. On the other hand, his tariff policies are reducing trade volume. While he may not be able to get the first thing, the second thing may already make certain voters, as losers from trade, happy. Are there sufficient voters who are made happier by the trade war? Will the trade war make Donald Trump be re-elected as president in 2020? We have to wait and see. But one thing is clear: whether one understands trade theory is an issue; whether one will wage a trade war is another issue.
