Steve Bannon, White House adviser, advocated for a
trade war with China in a recent interview.
Bannon thinks China is taking advantage of the US and
that we must fight to keep global economic dominance, but
overlooks some basic facts about
what the US sells to China and how much US consumers depend on
A trade war would hit US businesses as hard as it hits
the Chinese, in particular those with employees in parts of the
country that are pro-Trump.
In an interview with Progress.org, the White House adviser
laid out a single specific goal for American “economic
nationalism” in the Trump administration — a geopolitically
defining conflict with China.
“We’re at economic war with China,” he said. “It’s in all their
literature. They’re not shy about saying what they’re doing. One
of us is going to be a hegemon in 25 or 30 years and it’s gonna
be them if we go down this path. On Korea, they’re just tapping
us along. It’s just a sideshow.”
What Bannon is talking about is a trade war, and it would be an
unmitigated disaster for both sides. Since the end of World War
II, the United States has tried to build global institutions and
rules for engagement that minimize conflict or at least provide
the steps for preventing them. In the case of trade, it’s the
World Trade Organization, which China joined in 2001.
He, and others in the administration, like Trade Council head
Peter Navarro, believe that China manipulated and abused the WTO
in order to gain an unfair advantage over the US, especially when
it comes to manufacturing. As proof, they cite the US trade
deficit with China — a measure that’s actually irrelevant to
economic health — and have sought to undermine decades of careful
diplomacy and negotiation.
Bannon, you see, does not care for our institutions. He
would like to see those all fall away.
Institute of International
“There is no winner in a trade war. We the relevant
people can refrain from dealing with a problem in the 21st
century with a zero-sum mentality from the 19th or the 20th
century,” Chinese Foreign Ministry spokesperson Hua
Chunying said in a
press conference on Thursday
when asked about Bannon’s remarks.
Together, the US and China account for 40% of the entire world’s
GDP — but never mind that.
From 2001 to 2016 US imports from China increased 3.5 times,
while US exports to China increased almost 6 times — but never
China consumes a ton of products made by Trump’s base. It is the
largest market for US soybeans (62% in 2016) and airplanes (25%
of Boeing passenger planes in 2016). It the second largest market
for US cotton (14% in 2016), auto (17% in 2016), semiconductors
(15% in 2016).
But never mind them, and never mind any of that.
And then there’s what a trade war would do to the cost of things
Americans buy. The Institute of International Finance touched on
this in a recent paper:
A trade war between US and China will hurt not only Chinese
manufacturers, but also upstream suppliers and downstream
distributors such as US retailers. Per China’s Ministry of
Commerce, the final US retail price of imported Chinese goods can
be several times of their imports prices.
For example, a regular down jacket selling for $200 in US
retailers usually costs only $40 to import from China.
Retaliatory measures from Beijing will also hurt China-based US
businesses, which made $517 billion in revenue and $36 billion in
profit in 2015.
If Bannon goes to war with China, he will find some of the most
powerful forces in American business (Wal-Mart, for example) are
on the other side. Our economies are intertwined now, and there
is no going back without destruction.
As another member of China’s Foreign Ministry, Lu Kang, said in a
rare candid interview with NBC right after Trump took office,
“the problem is that today’s world is quite interdependent,
countries are quite interconnected. So while trying to pursue the
interest in your country you’ll have to keep in mind the
implications worldwide, and these kind of implications might come
back to the policy issues at your own home.”
Possibly the most troubling thing about all this is that Bannon
is also wrong about what happened to US manufacturing. The way he
and his ilk tell it, China’s entrance into the WTO was a huge
part of what tipped it into decline. The truth is more complex.
It started during the Reagan administration. That’s when a
combination of Japanese manufacturing innovation and a lack of US
investment in its own economy by both the public and private
sectors shuttered factories across the country.
Professor William Lazonick, an economist at UMass
the results of that transformation in his 2012 paper,
“The Financialization of the US Corporation: What Has Been Lost,
and How Can It Be Regained.” It’s a
must-read for this kind of stuff.
“The adverse impact of Japanese competition on US
employment became particularly harsh in the double-dip recession
of 1980-1982 when large numbers of good blue-collar jobs
disappeared from US industry, as it turned out permanently
“From 1980 to 1985 employment in the US economy increased
from 104.5 million to 107.2 million workers, or by 2.6 percent.
But employment of operators, fabricators, and laborers fell from
20.0 million to 16.8 million, a decline of 15.9 percent (US
Department of Commerce 1983, 416; and 1986, 386).”
There was little appetite in the Reagan or HW Bush
administrations to spend money investing in
of these workers. Ideologically, they were more focused
on tax cuts and deregulation. By the time China joined the
WTO, American manufacturing was already on its heels and the
landscape of the American economy had changed
Bannon seems to think that if we don’t fly headlong into a
conflict with China, its economy will overtake ours in a matter
of years. To China-watchers, that’s more than far-fetched. To
understand why you have to understand what’s going on in China’s
For the past two years, China has been promising the world that
it will tackle a massive debt bubble that its built up in its
economy. In order to keep its economy growing during the
financial crisis, the government let money run wild. This
includes the country’s infamous bridges to nowhere and ghost
cities, as well as wealth management products kept off bank
balance sheets, and debt loaded quasi-state owned companies
over-producing goods like steel and coal on the verge of
Every year at the beginning of the year for the past few years,
world leaders gather at The World Economic Forum in Davos
furrow their brows in worry at Chinese officials.
Every year at the beginning of the year for the past few
years China’s economy goes on a wild ride as the government tries
or promises to rein in its debt binge.
Then, when the pain is too much for the world (yes, not
just China, the world), they open the debt spigots again. They
can only do this for so long. The longer it goes on, the more
painful it will be when it ends, and the country is only just
beginning to tackle these problems the International Monetary
Fund noted earlier
But the body also noted something critical — something Bannon has
“Executive Directors acknowledged that China’s continued
strong growth has provided critical support to global demand,”
the IMF said in the report.
China’s debt bubble has helped to prop up the global economy.
During the Financial Crisis, the government’s refusal to go under
helped to keep the world from total ruin, but that also did
long-term damage to the country’s domestic economy that must be
dealt with sooner rather than later. It’s a matter of months or a
And so China will have a rocky time deleveraging, but we should
hope for our sake’s that it is a rough landing and not a
crash. If China slows, the world slows, we
slow. If China hurts, the world hurts, we hurt.
Bannon knows that— he just doesn’t seem to care.