Today we have a special guest blog from Charles Sauer. Charles is President of the Market Institute and a longtime liberty activist. This piece is an excerpt from his book Profit Motive, explaining why the US is likely to lose any trade wars with China.
If you like this piece (and I think you will), you can buy Profit Motives here. Charles is a principled and knowledgeable defender of the free-market. Liberty activists will benefit from his writing as they prepare to defend economic liberties against Bernie bros, AOC groupies, conservative protectionists, and big government corporatists who control both parties.
My book, Profit Motive: What Drives the Things We Do, lays out the seemingly simple idea that everyone, and every organization, is Market motivated to profit. But, the key idea that the book develops and provides insight into is how these motivations effect the world around us, and therefore how the reader can leverage them.
For instance, most entrepreneurs understand that the main goal of their business is to make more money than they spend, but many entrepreneurs fail to realize that their employees have different motivations. Employees might want the company that they are working for to prosper, but their primary drive is their own pocketbook and their own quality of life, their drive to spend more time with their family, or take more vacations, or learn more, or gain more power in their organization.
When we apply this theory to government, even more can be explained. We all can debate the merits of any given government program, but at the end of the day it is people – or bureaucrats – that are making the decisions and implementing the programs. The bureaucrats, like the employees of the company, might support the mission of the program, but their primary motivation to come to work everyday isn’t necessarily the success of the program. They are motivated to keep their job, make more money, spend more time with their family, or amass more power.
Now let’s put the theory to work.
Trade is good. President Trump seems to understand some of this – he celebrates other countries dropping trade barriers – but doesn’t seem to understand other parts like his focus on the trade deficit as a negative. In focusing on the trade deficit, the President is missing the fact that this merely means that US citizens and companies have money to pay for goods that are being sold in other countries at a good price. And, if other countries are helping those specific industries then it is like trade charity to the US, and it means that US citizens are able to obtain a higher quality of life.
Unfortunately, the trade deficit seems to be the President’s favorite metric. He has set out to rectify what he sees as an injustice to US companies and workers. This has largely worked for him. Countries have agreed to change the way that they treat trade with the US. They have agreed to remove barriers, remove tariffs, and generally make the trade between the countries freer.
However, his strategy is unlikely to work with China.
Like the other countries that President Trump has set out to establish even more profitable trade agreements with, China has policies in place that tilt the trade balance in their favor. They support industries in order to give those industries a comparative advantage – and they do this in markets from steel to party supplies. Additionally, they have enacted tariffs, and they are even likely manipulating their currency in an attempt to secure these advantages. And, if we put ourselves in their leader’s shoes – and put on their communist thinking caps – these policies all make sense. They are protecting jobs, creating jobs (pay no attention to the long-run costs – remember you are wearing a communist thinking cap), and trying to build industry within China.
The difference between China and other countries that President Trump has targeted is that China has the resources and drive to fight back against President Trump’s trade war.
We can debate the merits or the cost/benefit of a short-term trade war – when it ends up with a freer trade agreement at the end, but there is no argument that the costs of a trade war fall directly on consumers in each country involved. That is where the “Drive” issue rears its ugly head with a trade war in China.
Both leaders want to win – their motivation is a better economy in their own country (based on their own metrics). Both countries have ample resources – enough manufacturing capacity and labor to support their own economies (given at a lesser efficiency). So the winner of the trade war will come down to who wants it the most, who is more motivated to win, or who has the bigger Profit Motive in the end.
And, anyone paying attention to what the Chinese government is willing to do, and seemingly what their businesses and citizens are willing to let the government do, would put all of their gambling money on China when it comes to their drive to win a trade war.
President Trump is willing to weather a few bad polls, his supporters are willing to weather a few lost jobs, and some higher priced goods. However, as the trade war continues to expand and prices start to increase even further – fewer of his supporters are going to overlook the pain and economic damage that his trade war is causing. The potential “profit” at the end of the trade war diminishes as the US economy diminishes – and the potential “profit” diminishes as President Trump’s re-election odds diminish.
A bluff isn’t going to work with China.
A “free trade” agreement with another country doesn’t guarantee that the optimal relationship is codified by that agreement. But, if the President can step back and look at his end goal – a strong US economy, good jobs, happy citizens, and a successful re-election bid – then he hopefully will come to the conclusion rather quickly that his trade war with China won’t have a happy end if taken to all out economic warfare – and accepting the sunk costs earlier (stopping the bluff) is better than attempting to save face and losing everything.
Everyone has a different Profit Motive – but understanding that motivation can help navigate everything from a lemonade stand – to an international trade war between economic superpowers.