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How Trump should think about China

As China’s example shows, a country needs to invest in its future prosperity. Tariffs and tax cuts are no way to get there

By: EBR - Posted: Tuesday, July 03, 2018

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In particular, Trump lacks a set of innovation and industrial policies that countries like China and Germany deploy to build strong industry. Rather than investing in America, Trump pushed through a major tax cut that slashes investment and jeopardizes the United States’s ability to do so in the future. According to the Congressional Budget Office, the tax cut will widen the deficit to $1 trillion per year in 2020.
In particular, Trump lacks a set of innovation and industrial policies that countries like China and Germany deploy to build strong industry. Rather than investing in America, Trump pushed through a major tax cut that slashes investment and jeopardizes the United States’s ability to do so in the future. According to the Congressional Budget Office, the tax cut will widen the deficit to $1 trillion per year in 2020.

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by Kevin P. Gallagher*

President Trump’s barrage of tariff hikes may bring short-term relief to battered industries and their workers. But Trump’s preferred package of measures doesn’t add up to a sensible economic policy even for the United States itself.

First, while these moves are significant, they will eventually squeeze workers in other sectors like autos and construction that rely on steel as an input, as was the case when President George Bush put in place similar tariff hikes in 2002.

Second, deregulating financial markets as Trump also did recently, deregulating environmental regulation and health care make Americans less stable and less healthy.

Third and most importantly, trade deals are not ends in themselves but tools to implement broader economic policy goals.

In particular, Trump lacks a set of innovation and industrial policies that countries like China and Germany deploy to build strong industry. Rather than investing in America, Trump pushed through a major tax cut that slashes investment and jeopardizes the United States’s ability to do so in the future. According to the Congressional Budget Office, the tax cut will widen the deficit to $1 trillion per year in 2020.

Learning from China

The United States should adopt a China-like strategy. In the early 1980s, China started to further integrate itself within the global economy. China’s strategy was to invest heavily into infrastructure, industry and innovation in the country. It did so to the tune of more than 40% of annual GDP for decades.

China also kept a tight rein on financial markets to ensure credit and investment were steered into strategic industries that would someday become globally competitive.

When U.S. and other multinational companies flocked to invest in China, these firms were lured by the prospect to tap into the fastest growing market in world history. In exchange for that access, they were happy to trade technology and knowledge.

Alongside many joint ventures, China invested heavily in associated technology parks, research and development and education through the public purse and a series of national development banks.

We know the story from there. The former World Bank economist Branko Milanovic has shown that the winners from the various globalization strategies were China and the richest segments of the population in the United States and the rest of the industrialized world. The losers were by and large the middle classes in the United States and across the industrialized world.

China’s average income has jumped by a factor of ten in the past decades. Chinese wages are higher now than in parts of Europe. According to the World Bank, in 1990, more than 750 million people in China lived in extreme poverty (less than $1.90 per day), representing almost 70% of the entire population. Now, just one percent of all Chinese is extremely poor.

The U.S. “strategy”

The United States pursued the opposite course. The U.S. “strategy” was to largely de-invest in infrastructure and industrial innovation, deregulate financial, labor, social welfare and environmental protections to reduce the cost of doing business and make incumbent U.S. multinational firms and finance more globally competitive.

To add insult to injury, the United States locked these policies in through unbalanced trade deals that let these same firms govern the world economy.

According to the World Bank, the overall investment level in the United States has fallen from 25% of GDP in 1980 to 19% now. According to the Hamilton Project, wages for all but the top 1% of wage earners have remained stagnant or declined in the United States since the early 1980s. What’s more, the country has lost competiveness in key well-paying industries.

As the United States takes this shallow, remarkably non-strategic approach to change, China is doubling down on a new round of investment and innovation. While Trump denies the science of climate change, China accepts the inconvenient truth of climate change, caps the use of fossil fuels and invests in renewable technologies that have become the envy of the world.

In his new book, Can Democracy Save Capitalism, Robert Kuttner reminds us that we don’t have to mimic China’s political system to put together an economic strategy for long run prosperity for all Americans.

In fact, we invented the wheel with the New Deal that put tight reigns on financial speculation, provided health care, enabled collective bargaining so that workers gained their share of profits and created a trading system that prioritized global trade while allowing for nation states to deploy policies for employment and prosperity.

In that sense, what the U.S. economy needs is a return to those very sensible roots. Unfortunately, both political parties in the United States have lost sight of what brings success and now President Trump is inflicting some of the worst damage yet.

Driven by ideology, they are relentless in their joint effort to tear down as much of that sensible economic fabric that laid the foundations of U.S. prosperity for decades down.

*Professor of international relations at Boston University

**First published in theglobalist.com

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