"A trade deficit is not a gift; it is a loan. That loan must be paid back. The Europeans who take out the loan may be insufficiently long-term in their thinking, effectively borrowing against their own futures to consume in the present. It’s up to government to look out for the prosperity of future generations."
This paragraph confuses me. Could we not substitute "Europeans" with "Americans" and have the statement be just as true? I've followed your lead on the tariff issue all along -- I'm not an economist, so I have to pick one to follow. However, I don't recall you using this description when writing about Trump's tariffs. But I do understand your arguments about very targeted tariffs.
Yeah. This whole article feels like you could find and replace european with american and it would read like a more intellectual trump tariff justification. If having a trade deficit is such an issue for europe how is not also an issue for the US which is also struggling under the shadow of deindustrialization, permitting regulation, and an outflow of capital to china that does not return to the United States?
I'm genuinely trying to understand why this is an issue for the EU but not for the US. Surely that take in silver, spit out crap, model is being applied to us just as it is the Euros.
"This whole article feels like you could find and replace european with american and it would read like a more intellectual trump tariff justification."
Bear in mind that the Trump tariffs are on both allies and adversaries. If they were just targeted to China, that wouldn't be as big of a problem. It would also make sense to target more the Chinese products that present the most risk to the U.S., rather than doing it willy-nilly.
You could have easily substituted the US in the article for Europe. Unless Europe demands China trade with them, the outflows of Euros can develop into a problem. If China never redeems those Euros for goods, it means they didn’t get full value for their exports. Afterall what is China going to do with them?
If they redeem them at a later date, due to inflation, they will purchase less. If the amount of outstanding Euros is never used, it could be a liability if China wants payment in political favors. Let's say China sells Euros on an exchange for less, thereby lowering the Euro's value. That could be very bad.
China is looking for dominance; walking into the jaws of an alligator is plain dumb. My argument with Trump’s hamfisted tariff campaign is not that he is seeking a fairer trade. It is that he doesn’t look at services, only goods. He is tariffing intermediate goods that American manufacturers need to make their finished goods. America sells a large volume of services worldwide.
1) Social Compact: For years now, Europe has built a social compact of much bigger social safety net, long vacations, minimal spending on defense. It would seem this very basic compact will have to be revisited.
2) Innovation: Europe has great universities, but kills its startups with regulation. The AI bill being the latest example. This will have to change.
3) Markets change... a lot of this analysis is built on the passenger car market. Certainly a traditionally important market. However, this market itself is changing rapidly... A passenger car is a very expensive asset with very low utilization. Most of the "jobs" for the passenger car are being replaced by technology (online, ecommerce, micromobility). A rapid shift in this market is due, and will likely be led in Europe (better public infrastructure, higher population density).
In fact, the irony of the situation might well be that the old world of highways/cars/parking is replaced by a much more efficient world of virtual engagements, autonomous delivery, and minimal need for passenger cars.
The problem in 2) is more subtle: most EU countries have steep regulation thresholds for companies of certain size (25, 100, 500 employees), which incentivizes startups not to grow their headcount. This has been very problematic for them until now, but AI might change that; AIs don't count toward the headcount.
It is still about time to drop this sort of regulation. It is an aftereffect of the Industrial Age, where a single large employer was often responsible for all the economic activity in a given city and had to be restrained from abusing its position too much. This isn't a typical problem in current European megacities like London.
The danger of too much dependency on China is another point to consider: assume all cars, trucks, buses, trains in Europe come from China. Imagine China invades Taiwan. If EU were to complain, suddenly all the transport vehicles don't work anymore. Oops.
I see the national security concerns associated with deindustrialization, but the rest feels like a lot of vague hand waving of exactly the sort used to promote US protectionism you've regularly denounced.
"Another idea is to take a page from China’s book, and encourage Chinese companies to set up joint ventures with European companies in order to sell their products into the European market — or even force Chinese companies to do this, with “buy European” rules."
I've often wondered why it wouldn't be a good thing if the global trade order essentially agreed that 50% of any product sold to another country must be produced in the receiving country. I fully understand that there is not global trade order to make such a demand, so this would be voluntary, but what if Europe and the US made such a declaration on their own? A 50% production level couldn't happen overnight but surely could be required over a reasonable period of time, with each successive year requiring increased domestic production of the exporting country's goods. And what's good for one must be good for all, so the US would have to set up car factories in Mozambique, for example, within a set number of years of selling their first auto in Maputo.
"There is nothing that China wants to import, nothing it does not believe it can make better and cheaper, nothing for which it wants to rely on foreigners a single day longer than it has to."
Does this sound like China in the 19th century, and what prompted the Opium Wars?
It sounds like Europe needs to do what you recommended the US do: tariff finished goods and instead import parts and processed materials. Stockpile them, even, as long as China is essentially giving them away. Use those parts and materials alongside local manufacturers to build up their militaries to counter Putin in Ukraine, and to develop their more advanced industries. Let Putin be the one to complain to Xi about China’s dumping materials on the West. In the meantime, set up alternative sources for those imported parts by investing in Africa and the poorer parts of Eastern Europe. If cheap stuff from China is like a loan, treat it like a loan: use it to invest instead of to consume.
I agree with the military capability arguments, but am lost on the trading of goods for IOUs. I thought the explanatory framework is that China exchanges subsidized goods for Euros, which then need to be reinvested or spent in Europe. Thus Europe gets cheaper goods and capital.
"enjoy the high-quality cars". Honestly it's what I expect from someone who likely moves everyday by means other than a personal car. I tried Chinese cars (even briefly owned it, sadly, note: from a huge and famous Chinese brand) and they're some of the worst pieces of crap ever driven (not all, of course, but likely the vast majority). 70% of them just feel and drive like 90s/early 2000s cars.
The key is that they're very cheap in some markets because they are horrendously subsidized by the Chinese government.
Not saying that everything is crap, and they certainly made huge advancements, it's just that this unconditional praise sounds like someone I would read from a urbanist obsessed with walkable cities who drove his last car in 1998. Maybe.
Might we say China learned a lesson from 18th and 19th century European mercantilism and the following opium wars. China lost then, now it appears they have turned the table and plan to be the winning side.
The bigger China's external surplus, the lower its currency's external value. That is mercantilism and it is predatory. The ECB, the BoJ and the Fed should launch a coordinated plan to depreciate their currencies by using them to RMB-denominated financial assets.
I'd agree about targeted protectionism, both for Europe and the U.S. (and much of the rest of the world), but I'd make an exception for solar panels, batteries, inverters, and associated gear--items which will last for 10-40 years and will further a decline in fossil fuel use and a decrease in the cost of electricity. If China subsidizes these productive items, the rest of the world should buy everything they can make.
Simultaneously, the rich countries should heavily subsidize their own industries production of these goods, so that when the Chinese clean-tech goods reach end-of-life, they can be replaced by domestic production (if energy production has not by then been again revolutionized by fusion, deep geothermal, or some other means).
Noah, I'm sure you have previously addressed this but can you please point me to your take on what the US should be doing facing, in essence, the same challenge from China.
I bought a second hand BYD Dolphin in April this year. It cost the same £24k as the Ford Focus I had bought new in 2018. £3.5K of the price was VAT which went to HM Treasury. It is a bigger, more comfortable car than the Focus, which was small and comfortable. The glory of an EV is that it can travel 250 miles for a charge cost of £8 on home charging and £30 if using a service station charger.
If your article was dated 1970 then Japan would have been the problem because the Japanese viewed any import as a luxury that could not be provided by their own manufacturers. You touch on tariffs, as Trump did, and China mentions rare earth minerals, and suddenly tariffs vanish. China is in the same position that Japan was in 1970, except that Japan was only allowed to take 11% of the UK car market. By the end of the 1980’s Japanese companies had the Nissan factory in Sunderland and several brands made in Derby. I expect that by 2040 the Chinese will have done the same. The competition with Japanese cars caused most of the British car manufacturers to cease trading during the 1980’s. It will be interesting to see how the British built car companies react to the efficiency of the Chinese competitors.
"A trade deficit is not a gift; it is a loan. That loan must be paid back. The Europeans who take out the loan may be insufficiently long-term in their thinking, effectively borrowing against their own futures to consume in the present. It’s up to government to look out for the prosperity of future generations."
This paragraph confuses me. Could we not substitute "Europeans" with "Americans" and have the statement be just as true? I've followed your lead on the tariff issue all along -- I'm not an economist, so I have to pick one to follow. However, I don't recall you using this description when writing about Trump's tariffs. But I do understand your arguments about very targeted tariffs.
Yeah. This whole article feels like you could find and replace european with american and it would read like a more intellectual trump tariff justification. If having a trade deficit is such an issue for europe how is not also an issue for the US which is also struggling under the shadow of deindustrialization, permitting regulation, and an outflow of capital to china that does not return to the United States?
I'm genuinely trying to understand why this is an issue for the EU but not for the US. Surely that take in silver, spit out crap, model is being applied to us just as it is the Euros.
"This whole article feels like you could find and replace european with american and it would read like a more intellectual trump tariff justification."
Bear in mind that the Trump tariffs are on both allies and adversaries. If they were just targeted to China, that wouldn't be as big of a problem. It would also make sense to target more the Chinese products that present the most risk to the U.S., rather than doing it willy-nilly.
Has Noah come out against tariff's on China? My understanding is:
1. Tariffs on China should be paired with alliance/free-trade strategy with allies (mirrors this post)
2. Tariffs on China should be avoided on intermediary manufacturing goods (this article doesn't grapple with this, or preclude it)
You could have easily substituted the US in the article for Europe. Unless Europe demands China trade with them, the outflows of Euros can develop into a problem. If China never redeems those Euros for goods, it means they didn’t get full value for their exports. Afterall what is China going to do with them?
If they redeem them at a later date, due to inflation, they will purchase less. If the amount of outstanding Euros is never used, it could be a liability if China wants payment in political favors. Let's say China sells Euros on an exchange for less, thereby lowering the Euro's value. That could be very bad.
China is looking for dominance; walking into the jaws of an alligator is plain dumb. My argument with Trump’s hamfisted tariff campaign is not that he is seeking a fairer trade. It is that he doesn’t look at services, only goods. He is tariffing intermediate goods that American manufacturers need to make their finished goods. America sells a large volume of services worldwide.
Interesting article. Three further points...
1) Social Compact: For years now, Europe has built a social compact of much bigger social safety net, long vacations, minimal spending on defense. It would seem this very basic compact will have to be revisited.
2) Innovation: Europe has great universities, but kills its startups with regulation. The AI bill being the latest example. This will have to change.
3) Markets change... a lot of this analysis is built on the passenger car market. Certainly a traditionally important market. However, this market itself is changing rapidly... A passenger car is a very expensive asset with very low utilization. Most of the "jobs" for the passenger car are being replaced by technology (online, ecommerce, micromobility). A rapid shift in this market is due, and will likely be led in Europe (better public infrastructure, higher population density).
In fact, the irony of the situation might well be that the old world of highways/cars/parking is replaced by a much more efficient world of virtual engagements, autonomous delivery, and minimal need for passenger cars.
The problem in 2) is more subtle: most EU countries have steep regulation thresholds for companies of certain size (25, 100, 500 employees), which incentivizes startups not to grow their headcount. This has been very problematic for them until now, but AI might change that; AIs don't count toward the headcount.
It is still about time to drop this sort of regulation. It is an aftereffect of the Industrial Age, where a single large employer was often responsible for all the economic activity in a given city and had to be restrained from abusing its position too much. This isn't a typical problem in current European megacities like London.
The danger of too much dependency on China is another point to consider: assume all cars, trucks, buses, trains in Europe come from China. Imagine China invades Taiwan. If EU were to complain, suddenly all the transport vehicles don't work anymore. Oops.
I see the national security concerns associated with deindustrialization, but the rest feels like a lot of vague hand waving of exactly the sort used to promote US protectionism you've regularly denounced.
A good article Noah 👍
"Another idea is to take a page from China’s book, and encourage Chinese companies to set up joint ventures with European companies in order to sell their products into the European market — or even force Chinese companies to do this, with “buy European” rules."
I've often wondered why it wouldn't be a good thing if the global trade order essentially agreed that 50% of any product sold to another country must be produced in the receiving country. I fully understand that there is not global trade order to make such a demand, so this would be voluntary, but what if Europe and the US made such a declaration on their own? A 50% production level couldn't happen overnight but surely could be required over a reasonable period of time, with each successive year requiring increased domestic production of the exporting country's goods. And what's good for one must be good for all, so the US would have to set up car factories in Mozambique, for example, within a set number of years of selling their first auto in Maputo.
"There is nothing that China wants to import, nothing it does not believe it can make better and cheaper, nothing for which it wants to rely on foreigners a single day longer than it has to."
Does this sound like China in the 19th century, and what prompted the Opium Wars?
This sounds like China for centuries and centuries. China imported silver and little else; good horses from the steppe tribes being an exception.
It sounds like Europe needs to do what you recommended the US do: tariff finished goods and instead import parts and processed materials. Stockpile them, even, as long as China is essentially giving them away. Use those parts and materials alongside local manufacturers to build up their militaries to counter Putin in Ukraine, and to develop their more advanced industries. Let Putin be the one to complain to Xi about China’s dumping materials on the West. In the meantime, set up alternative sources for those imported parts by investing in Africa and the poorer parts of Eastern Europe. If cheap stuff from China is like a loan, treat it like a loan: use it to invest instead of to consume.
I agree with the military capability arguments, but am lost on the trading of goods for IOUs. I thought the explanatory framework is that China exchanges subsidized goods for Euros, which then need to be reinvested or spent in Europe. Thus Europe gets cheaper goods and capital.
This was my exact understanding as well.
"enjoy the high-quality cars". Honestly it's what I expect from someone who likely moves everyday by means other than a personal car. I tried Chinese cars (even briefly owned it, sadly, note: from a huge and famous Chinese brand) and they're some of the worst pieces of crap ever driven (not all, of course, but likely the vast majority). 70% of them just feel and drive like 90s/early 2000s cars.
The key is that they're very cheap in some markets because they are horrendously subsidized by the Chinese government.
Not saying that everything is crap, and they certainly made huge advancements, it's just that this unconditional praise sounds like someone I would read from a urbanist obsessed with walkable cities who drove his last car in 1998. Maybe.
Might we say China learned a lesson from 18th and 19th century European mercantilism and the following opium wars. China lost then, now it appears they have turned the table and plan to be the winning side.
The bigger China's external surplus, the lower its currency's external value. That is mercantilism and it is predatory. The ECB, the BoJ and the Fed should launch a coordinated plan to depreciate their currencies by using them to RMB-denominated financial assets.
I'd agree about targeted protectionism, both for Europe and the U.S. (and much of the rest of the world), but I'd make an exception for solar panels, batteries, inverters, and associated gear--items which will last for 10-40 years and will further a decline in fossil fuel use and a decrease in the cost of electricity. If China subsidizes these productive items, the rest of the world should buy everything they can make.
Simultaneously, the rich countries should heavily subsidize their own industries production of these goods, so that when the Chinese clean-tech goods reach end-of-life, they can be replaced by domestic production (if energy production has not by then been again revolutionized by fusion, deep geothermal, or some other means).
Noah, I'm sure you have previously addressed this but can you please point me to your take on what the US should be doing facing, in essence, the same challenge from China.
I bought a second hand BYD Dolphin in April this year. It cost the same £24k as the Ford Focus I had bought new in 2018. £3.5K of the price was VAT which went to HM Treasury. It is a bigger, more comfortable car than the Focus, which was small and comfortable. The glory of an EV is that it can travel 250 miles for a charge cost of £8 on home charging and £30 if using a service station charger.
If your article was dated 1970 then Japan would have been the problem because the Japanese viewed any import as a luxury that could not be provided by their own manufacturers. You touch on tariffs, as Trump did, and China mentions rare earth minerals, and suddenly tariffs vanish. China is in the same position that Japan was in 1970, except that Japan was only allowed to take 11% of the UK car market. By the end of the 1980’s Japanese companies had the Nissan factory in Sunderland and several brands made in Derby. I expect that by 2040 the Chinese will have done the same. The competition with Japanese cars caused most of the British car manufacturers to cease trading during the 1980’s. It will be interesting to see how the British built car companies react to the efficiency of the Chinese competitors.