Today, Explained - 1, 2, 3, 4... I declare a trade war

Episode Date: April 9, 2018

President Trump said he would “always be friends” with China’s leader, but the two countries have been acting anything but these past few days. First, the U.S. slapped China with $50 billion in tariffs. Then, China retaliated with $50 billion in tariffs on U.S. goods, like soybeans and airplanes. Now, the U.S. has replied with $100 billion more. Vox’s Matthew Yglesias explains why this could escalate to a trade war, and really hurt Trump’s base. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Please buy our toothbrushes. No, that's, wait, I don't think we could say that. Oh, really? No, that's, that's... That's not what this is about? That's like, that's begging. Oh, I can't beg. No, it's just about, like, letting people know.

Oh. There's an option to go to getquip.com slash explained. Please know that we have toothbrushes. How do you start a trade war? President Trump is going heavy metal tonight. He says he will impose tough new tariffs on imported steel and aluminum. You start with tariffs. I am taking action to impose safeguard tariffs on imported residential washing machines and all solar products.

Then you express your feelings. The Chinese are saying that they are watching and waiting to see whether or not President Trump's threat turns into action. And if it does, they say they are ready to slug it out until the bitter end. And then, of course, there's retaliation. Monday, China slapped back pork, soybeans, and other crops in the crosshairs. From there, things can get kind of nasty. Beijing's promising it's ready for a fight after Donald Trump threatened another round of tariffs on $100 billion worth of goods from China.

So what happens when the two biggest economies in the world stop playing nice? This is Today Explained. Okay, first things first. The entire trade war so far is hypothetical. But that doesn't mean people aren't freaking out. On Friday, Wall Street staged one of its biggest single day drops this year as investors fled U.S. stocks after President Trump threatened more tariffs on Chinese goods. President Donald Trump is sort of obsessed with Chinese trade. When the Chinese traders come in and they want to make great trade deals and they make the best trade deals and not anymore, because we can't continue to allow China to rape our country.

And that's what they're doing. His obsession has a lot to do with the trade gap between China and the United States. It's big, like China exports almost 400 billion dollars more worth of stuff to the United States big. Everything's made in China, for the most part. And frankly, they're sending stuff over here, and we're paying for it. And, you know, it's sort of interesting. Very little tax, if any, paid. But that's just what's happening in plain sight. A specific concern that has been of longstanding is that

Chinese companies violate American intellectual property. Matthew Iglesias writes about economic policy at Vox. He says the president's even more worked up about the stuff that China's doing behind the scenes. So there's two or three broad categories of stuff happening here. One is counterfeit goods. So there might be something and it says it's a North Face jacket or it's a Patagonia jacket, but really it isn't. It's just something else

that came out of a Chinese factory. It's labeled wrong. If Canal Street has taught me anything, it's that there is nothing we have that the Chinese can't just make themselves. I mean, that's where I get all my fuchi from. A second thing that happens is just pirating of intellectual property content. You go to a Chinese market, you can see DVDs of Western movies for

sale, boxes of Western computer software, often for very cheap, often without appropriate copyrights being paid. Pirated DVDs. Look at this picture. These are DVDs that often appear right on the Third, and sort of probably most significantly, American companies often feel pressured to bring Chinese managers into their operation when they go to China. It'll be a sense that if you want to sell airplanes in China, you need to produce some through a joint venture with a Chinese company. And then there can be industrial espionage in which trade secrets are sort of stolen from the American factory. The know-how is transferred to Chinese companies. It's important because it erodes America's sort of advantage in high-end type manufacturing. You could also say, why is it in America's interest to even worry about this, right? I mean, if an American company decides that it wants to offshore production to China because they're going to save money by paying people less,

the fact that Chinese companies might steal their trade secrets, that's like a reason to not do that. A good reason to keep production back at home might be that you don't want your Chinese partners to rip you off. Obviously, American companies would like to have it both ways, right? They would like to be able to locate all their factories where it's cheap, but benefit from the American government's rules and protections. At any rate, these are the three buckets of issues.

Trade secret theft, counterfeit products, and just sort of straight up illicit copying. And so is this the real reason the trade war began, all this theft of American intellectual property? So American governments from time immemorial have wanted China to stop this or change something. Encouraging China to play by international rules, I say again, is an important step toward a safer, saner world. The Trump administration has not laid out an incredibly clear goal.

It's not like we want you to do X and then we won't do it. It's like we want you to fix this problem or else we're gonna have these tariffs. So we'll see if that actually happens. Then the Chinese said, no, no, no, if you put these tariffs on us, we're gonna put tariffs on your stuff, particularly soybeans,

airplanes, some kinds of pharmaceuticals, and possibly certain kinds of cars. And why those specific things? Are those our major imports into China? Well, there's a mix of sort of motives that they have. So US agricultural products, I think, are attractive to the Chinese because they think that Trump needs to pay attention politically to what it is that American farmers think. Airplanes is potent because there are only two companies in the world that make wide body passenger airplanes, Boeing in the US and Airbus in Europe. So if you put a 25% tax on American airplanes, we're going to lose the whole Chinese market.

Nobody's going to buy a Boeing plane if it costs 25% more than a European plane. So that would be a big dramatic sort of problem that would catch people's attention. Then they have a lot of niche goods, things like orange juice, certain kinds of liquor and luxury goods. And what's the latest? China's threatening like over 100 US products. And the list has all kinds of things like pipes, pork, roasted macadamia nuts. Right. And it's different categories of business equipment, essentially, that are made in China. A lot of agricultural

machinery is on the list. Okay. Tools that are used in American factories to build things. And so that's what was on the initial list. Now, Trump has said he wants to come up with a bigger list, right? So that if the Chinese retaliate, that he's going to retaliate with tariffs on twice as much stuff. What might the practical realities of this trade war be if it starts to happen? Yeah, I think if we go down the road that has been laid out by the American and Chinese governments, you are going to see most people probably okay,

but people who have strong ties to agriculture suffering quite a bit. And that's not just because you're a farmer, but if in the community that you live in, the secondary industries involve providing services to agriculture, there should be quite a significant hit simply because the price of agricultural commodities will go down. And that tends to depress, you know, the whole economy in the Midwest and in

other significant swaths of the country. Brewing talk of a trade war with China could devastate rural voters who back Trump, providing an opening for vulnerable Democrats in red states. A lot of these things that China says they're going to do seem like they'll affect Donald Trump's base, his peeps. Yeah, I mean, it seems like a big goal of targeting American agricultural products is to try to impact the Republican Party, Donald Trump's base. They've succeeded in getting a lot of Republican senators from farm states to be very critical of him. These tariffs are a terrible idea. Tariffs always hurt us. Ultimately, nobody ever wins a trade war. Both sides lose a trade war. This could cost him votes in Ohio, where they grow a fair

amount of soy in Florida, who has a significant citrus fruit industry that might be targeted here. And that, you know, could be perilous to the president's political standing. That's not the kind of thing that's going to swing an election. If the Chinese do hit American agriculture, that could be a significant problem for Republicans, both because it might cost Trump votes in rural areas, it might cost Republicans votes in rural areas in the midterms, but it also could generate infighting inside the Republican coalition. So far, Republicans in Congress have been very supportive of Trump on a whole range of ethics issues, you know, lots of stuff relating to his conduct. If farm state Republican senators get really mad at Trump and feel like they need to do something to try to change his behavior, there's

a lot they could do to work with Democrats on oversight, investigations, things like that. So that could factor into Trump's thinking. Up next, the last time the United States had a real trade war, it was straight up bananas. This is Today Explained.

Kainaz Amaria, visuals editor here at Vox. What kind of toothbrush do you use? I have a mechanical toothbrush. Is it equipped? It is not yet toothbrush. Is it a Quip? It is not yet. Are you happy with your brush? I believe I am happy, but I could be convinced otherwise. Can I tell you an issue I have with my current mechanical brush that makes you think of switching to Quip?

Okay, okay, yeah. Once I'm done brushing, sometimes there's toothpaste coming down, like some residual watery toothpaste mix. And it kind of like gets on the ridges of the brush. Do you have to wash your toothbrush? Yes, actually, now that you mention it. Seriously? Why didn't I mention that?

Yeah, my toothbrush, standalone toothbrush, as much as I love it, does sort of have toothpaste. The gunk. The gunk. You get the gunk. Yeah, and so I do have to rinse the actual toothbrush every time I brush my teeth. Wouldn't it be nice if there were a toothbrush that was like sleekly designed

that didn't get gunky? Oh my gosh, I completely fell into this trap. Yes, I would love that. What if it started just $25 and came with a free pack of refills? Yes, I would do that. Oh my gosh started just $25 and came with a free pack of refills? Yes, I would do that. Oh my gosh. You know what you should do, Kyle?

You should go to getquip.com slash explain. I sold. When was the last time we saw a good trade war? Matthew Iglesias, host of The Weeds podcast? I think you really have to look back to the banana wars of the early George W. Bush years, in which the United States and the European Union were in a vicious battle with each other for control over banana markets. It could be a spin doctor's nightmare on either side of the Atlantic if a row about selling bananas sparks a multi-billion dollar trade war. There eventually were tariffs on American whiskey, some kinds of French wines.

I believe there were allegations about unpasteurized soft cheeses and whether that was really a health measure or a covert trade measure. And it got quite comical. It didn't really impact people in a concrete way, though. China is a, this is a bigger deal. Has there been a trade war that wasn't laughable?

Oh, yeah. The banana wars of the early 21st century were mostly funny. Yeah. To see really large-scale trade war, right, what people worry about, the sort of big apocalyptic scenario is what you saw in the late 1920s and early 1930s, where one country after another would put tariffs on the rest of the world to say, well, we need to protect our domestic industries. Each country just kept putting higher and higher taxes up on foreign imports. And the end result of that was that everybody was paying more for everything.

It was just a sort of overall big negative hit to the world economy. And it took decades of sort of careful diplomatic work to reopen the basic bounds of trade that had been disrupted by that Depression-era sort of trade war. So that would be the really bad scenario. They created an organization after that big Second World War we had to deal with this kind of thing, right? Yes. This is – it was originally the General Agreement on Tariffs and Trade. It's now the World Trade Organization. It's WTO.

WTO. The WTO now has fingers in a lot of pies, but the basic idea of the WTO is to say that these things should be governed by a big meeting of a lot of countries all together through something resembling a legal or a diplomatic process rather than each country going off on its own, sort of firing shots. What makes people a little queasy about what Trump is doing here and what he did earlier on the steel and aluminum is that he's going outside the boundaries of that process and invoking powers that he has under older pieces of legislation in a somewhat ad hoc way. Is China playing by the rules with the WTO? No.

I mean they have signed commitments to crack down on intellectual property theft. OK. Intellectual property theft continues to happen in China. Now something they will tell you, right, is like we have laws. We are up to our WTO compliance. We can't be held responsible for the fact that some people break the law. Now, Americans say back at them like, look, you have this authoritarian political system. If you didn't want factories making counterfeit clothing, like you could put a stop to it.

What's clearly true is that since American companies keep being willing to put factories in China, the Chinese government is not that concerned about them getting ripped off. What would really make the Chinese worry about protecting intellectual property is if companies were saying, no, we're not going to invest here. We're not going to use your suppliers here. We're not going to try to play in your market because we're concerned about getting ripped off. But the attraction of China, both the size of the client base you could reach by selling things to China and the advantages to producing in China are so big that American companies keep wanting to put their facilities there, even though they are at risk of loss of trade secrets, loss of control over their copyrights. And to me, that's the fundamental issue, right?

If you don't want the Chinese to be able to steal your production methods, you have to not put your factories in China. But companies really want to put their factories in China. President Trump, more so than like any president in my lifetime has really villainized china yes and is constantly complaining as far as i can tell about their dodgy trade practices and and tactics is he right um because you're saying they're constantly ripping stuff off and and plagiarizing and and falsifying and stealing. Yeah, I mean –

Is he just the first person to come out and say it in a long time? I think he's the first person to fully embrace the critical view of China that some American companies have, right? If you talk to different American business people, you get very different views about China depending on what line of business they're in and how it is that they feel about it. There's also, I think, real disagreement about what cheating means. On the metal stuff, a lot of people, talk to anyone in the American steel industry, Canadian steel industry, European steel industry, they'll all tell you, look, the real problem here is the Chinese. They're cheating. So what are the Chinese doing with steel? Well, they're producing a ton of steel, like lots and lots and lots of steel comes out

of Chinese factories. And it's cheaper. And it's making the price of steel on the world market really low. So foreign steel producers want them to stop doing that. I, though, you know, I don't work in a steel factory, but I do like live in a house. I work in an office building. I buy stuff that's made of metal. To me, like, is it so bad that the Chinese are coming in here and giving us all this cheap steel so that we can like have cool buildings and drive cars and stuff like that? Is that really cheating

or is that progress? Nobody likes it when somebody else comes in and undercuts them on price. It's really easy to understand why that makes the people who compete with Chinese metal producers unhappy. The question of what's fair and unfair, I find a little bit challenging to sort of get my mind around, right? I mean, the big accusation against the Chinese on the trade front over the past 20 years has been that they are providing Americans with discount manufactured goods. And that just doesn't sound that bad, fundamentally. Matthew Iglesias is a co-founder of Vox. I'm Sean Ramos for him. This is Today Explained. You can find our show on Twitter at today underscore explained. Just to be clear, I did not think this conversation would go this way. Really?

Yeah. You didn't think I would sell you on this? I thought I was fine. Yeah. Yeah. The design is all like metal-y, and I think you could just wipe anything off right quick. I'm a sucker for good design. You are.

I'm a visuals editor. You're speaking my language. Yes. When's your birthday? July 4th. That's coming up. It is. So maybe I can get you one for your birthday.

Do I have to wait that long? I feel like I could just. You can be an early birthday gift. Sure, absolutely. You know, my birthday just passed, so... Oh, happy belated. And maybe as a belated gift. Okay, so I'll buy you...

Did you just sucker me into buying you a toothbrush? But I'll buy you one, too. All right. It's really reciprocal. Let's do it. All right, great. Hey, Kynize, thanks. Thank you, Sean.

Oh, getquip.com slash explain. That's where we have to go. Yes.