Trade wars are good? Not for the U.S. or Trump

The public should know this by now; whenever the U.S. administration is in deadlock at home, it has historically looked for sideshows abroad, to create an external crisis, a shifting backdrop so for the public to focus on a new dramatic event.

Washington dismantling a global system that has far delivered unparalleled advantage to itself

The public should know this by now; whenever the U.S. administration is in deadlock at home, it has historically looked for sideshows abroad, to create an external crisis, a shifting backdrop so for the public to focus on a new dramatic event. That’s when John Kennedy’s job approval rating went up after the April 1961 failure of the Bay of Pigs, Lyndon Johnson’s rise after the 1965 intervention in the Dominican Republic, and Ronald Reagan’s after the 1983 invasion of Grenada. The public has not only come to accept but to expect that foreign nations as changeable backdrop in the theater of domestic politics. So it has been regarded a war or a trade war by the Trump’s administration as inevitable. What’s less comprehensible is the indiscriminate targets the administration chooses, and the collective damage that public is expected to endure.

Trade wars are good, and easy to win,” according to President Trump. They are good because “the U.S. has been ripped off by other countries for years.” The fact that $800billion imports arrived in the U.S. in 2017 demands some form of retribution is a logic best summed up in Trump’s inaugural address. “One by one, the factories shuttered and left our shores, with not even a thought about the millions upon millions of American workers left behind.  The wealth of our middle class has been ripped from their homes and then redistributed across the entire world.” All existing trade deals are therefore “one-sided,” and “a disaster,” and must be stopped or renegotiated.

How the president is planning to win his trade wars across all fronts from Europe to Canada to Mexico to China all at the same time no one knows. But the core belief that America is the victim, and rustbelts and ghost towns are the consequence of foreign trade, and the current trade regime harmed the economy is a curious one. It is curious because that’s not how America’s lead in advanced technologies emerged, a sector that added 200,000 jobs in 2017, with an estimated 11.5 million workers, valued at $1.6 trillion, and gave the U.S. almost a monopoly of the world’s most valuable companies.

Take Apple, the world’ biggest export company, with sales of $ 200billion in 2017, which have led the Dow Jones Industrial Average through the longest stretch since the recession, and a company on which every pensioner of Fidelity directly or indirectly depends. The central processor inside an iPhone is designed in the United States, but its battery, displays, and most of its other parts are made somewhere else. The iPhone has hundreds of components, and approximately 90% of which are produced with the help of workers in Germany, Singapore, South Korea, Taiwan, China, and elsewhere. Thus when I asked Siri—the virtual assistant—where she’s from, I was told: “Like it says on the box… I was designed by Apple in California.” On the back of my iPhone, a second line reads, “Assembled in China.”

The manufacturing of the central processor, or the brain of the iPhone, happens in three stages—design, wafer fabrication, and assembly. In the 1960s, the United States started to send low-skilled assembly to Asia. Skilled wafer fabrication followed in the 1980s, and within the last decade, some of the most complex design works have also moved overseas, mostly because of the sheer size of engineering talents abroad. TSMC in Taiwan and Samsung in South Korea, for instance, are the critical component suppliers to IBM, Apple, HP, and Dell. The point is, technological advances that have fueled the rise of our laptops, smartphones and self-driving cars hinge on this very global supply chain.

So, who’s the biggest winner in the rise of computing power, supported by this intricate network of foreign suppliers? Corporate America. Kenneth Kraemer from UC Irvine together with two other researchers from UC Berkeley and Syracuse University estimated that from an iPad sold for $499, Apple captures about 25% of the sales price as income, while LG and Samsung, through supplying display and memory chips, account for 7% of the retail price. Since China only provides manual labor, an estimated $25 is spent on the Chinese workers. In other words, while each iPad sold in the U.S. will add about $250 to the trade deficit (the import factory cost declared at customs), the value captured by China from an iPad sold at $499 is “at most about one-tenth that amount, and probably less.” That maybe why Warren Buffett loves Apple. “We bought about 5% of the company. I’d love to own 100% of it.”

The reason why the global supply chain disproportionally leans in favor toward Apple or American companies, but not others, can be in part explained by the way it is structured. The regulatory governance through U.S.-style administrative law, demands transparency, participation, reason giving, and review in administrative decision-making. “If we don’t write the rules, China will write the rules out in that region,” former president Obama once said. It is a governance that encourages Western companies to innovate and thus avoid being caught up by copycat competition, and in the process, capture value and generate wealth.

So the current Whitehouse is an administration, in the pursuit of a distraction, in search for a changing backdrop, systematically dismantling a global norm that has so far delivered unparalleled advantage to the nation’s own economy. And in the pursuit of a cynical narrative, the administration is convincing its citizens that global trade is a zero-sum game, and an inward-looking, protective regime is what’s needed today.

Not everyone shares the same view. Yan Xuetong, dean of Tsinghua University’s Institute of Modern International Relations, believes Chinese leaders see Trump as “the biggest strategic opportunity” for a new world order, one that is led by China. When pressed by a New Yorker reporter for how long that window of opportunity would last, Yan replied, “As long as Trump stays in power.”

Originally published on South China Morning Post.

Trade wars are good? Not for the U.S. or Trump -

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