Chicken Little

ECB's economic model shows US losing trade war but neglects politics

main 0202621803 AP – Donald Trump US president Xi Jinping Chinese China trade war dispute WTO
Not trading favors. Source: AP

Economists at the European Central Bank have joined the ranks of other European experts in forecasting doom and gloom from US trade policies.

In a new study, ECB economists predictably use forecasting models replete with somewhat arbitrary hypotheses to conclude that the US will suffer most from its benighted disruption of free trade. The ECB forecast echoes earlier studies from British and French central banks.

The ECB study posits two years of escalating trade disputes spiraling into a mutual 10 percent tariff across the board with negative impacts on the US and global economy. In this scenario, GDP in the US would be 2 percent lower in the first year alone, and global trade would decline by almost 3 percent. China would gain, at least in the short term, the ECB experts believe, as exports to third countries replace those of goods previously shipped to the US.

In a separate study released Wednesday, Germany’s five major economic institutes warned in their joint fall report that escalation of the trade dispute could lead to recession in Germany and the EU. Retaliation by the EU could soften that recession while pushing the US into a downturn, the German economists believe.

Stop China’s cheating

Whatever merit these economic models have, they have little to do with the real world. To begin with, they ignore the political dimension. Administration officials from President Donald Trump on down have made it fairly clear that the punitive tariffs and threats of tariffs are brinksmanship designed to achieve a more level playing ground in trade and above all to stop China’s cheating on world trade rules.

China’s infractions in trade have become so commonplace that the world seems resigned to accepting them. While not mentioning China by name, Mr. Trump minced no words in his speech Tuesday to the United Nations General Assembly in criticizing its practices.

Washington hardly expects the dispute to escalate and run over two years, even though it has established these are not empty threats. Rather, US officials expect China and other affected trading partners to come to the table and negotiate a clearer set of rules that will actually be observed.

The chicken-little studies from the ECB and others are beside the point in this context. They recall the bon mot from US journalist Salena Zito during the 2016 presidential campaign. Critics of Mr. Trump take him literally but not seriously, while his supporters take him seriously but not literally.

I'm as mad as hell and I'm not gonna take this anymore! Source: Reuters

At the UN General Assembly, Mr. Trump again spelled out what the world should take seriously: China’s deplorable record as a WTO member, which it has been since 2001. “Countries were admitted to the World Trade Organization that violate every single principle on which the organization is based,” the US president said. “While the United States and many other nations play by the rules, these countries use government-run industrial planning and state-owned enterprises to rig the system in their favor. They engage in relentless product dumping, forced technology transfer, and the theft of intellectual property.”

Mr. Trump suggested many in the assembly agreed “the world trading system is in dire need of change.” In any case, he repeated the US is not willing to accept these abuses any longer.

It may be the US president has miscalculated and the United States does not have the economic leverage to win a trade war. But perhaps the ECB economists could put their time to better use by calculating the harm to the global economy from all those state subsidies, dumping, forced technology transfer, and IP theft on China’s part.

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