Grandmasters of Trade
- Revival of the Mortgage Market
- The Yen’s Strength Presents Problems for Japan
This autumn, an American will have the chance to win the World Chess Championship for the first time in nearly half a century. Fabiano Caruana earned the right to challenge current holder Magnus Carlsen in a qualifying tournament last month.
The matches will evoke memories of Reykjavik, 1972: Boris Spassky, the dour chess champion from the Soviet Union, was challenged by Bobby Fischer, the temperamental American enfant terrible. The contest was surrounded by political overtones and dogged by controversy. (Fischer, angry over the placement of cameras, forfeited one game.) But the event captured the world's attention and generated immense enthusiasm for the game.
I was smitten. My father, who was an accomplished player, served as my tutor. He stressed that mastering the movement of pieces was only a first step; anticipating your opponent's reactions, many steps in advance, was key to success. One should never, ever, telegraph strategy. And sometimes, a draw is not a bad result.
The United States and China are now engaged in thrusts and parries over trade. The actions are controversial, and they have attracted global attention. The stakes, for now, are small, but they could grow over time. Neither side has a clear path to a winning position.
Over the past generation, curtains and walls have fallen and trade channels have opened. Economic defenses have been dismantled to allow the advance of international commerce.
The global flow of goods and capital has grown geometrically. Developed countries have prospered, and emerging economies have emerged. Wealth has been created, and millions have been lifted out of poverty. But in 2008, global linkages became channels of contagion, transmitting economic misfortune from one country to another. Many countries recovered very slowly, prompting their leaders to contemplate whether being so interconnected was really in the national interest. The number of trade barriers has been moving resolutely upward ever since.
The key ballots of 2016 were a major tipping point, as voters in the United Kingdom and the United States expressed their displeasure with the new world order. Last week, Washington acted on the will of the electorate and sought to redefine trade terms with China.
The measures and countermeasures announced recently are at once consequential and inconsequential. The new tariffs cover exactly the same volume of products. Both are strategically aimed at perceived vulnerabilities: the U.S. is targeting technological products, seeking to arrest China's plans for leadership in that sector. China's response focuses on agricultural products; a map of the affected areas corresponds interestingly with the strongest base of support for the president. The consequent market volatility could also shake the resolve of American policy makers.
But the measures aren't as directly worrisome as the headlines might suggest. Each side's tariffs won't become fully binding for a number of months, leaving an opening for negotiations. Total gross domestic product (GDP) for the United States and China totaled more than $31 trillion last year; the new restrictions cover a very small fraction of that sum. It should be noted that the presence of tariffs does not automatically mean imports will shift; that takes time, and some producers will choose to accept lower margins to preserve market share.
But openings aren't last moves. A middle game follows: gambits are pursued, and sacrifices are offered, as each side hopes for an end game where it has a material and territorial advantage. Much depends on where the play progresses from here.
At this early juncture, China appears much better prepared. One gets the sense that it has been planning for this situation ever since the 2016 election. China is better structured to play the long game; a recent castling move provided President Xi Jinping the opportunity to stay as long as he likes. Internal dissent is carefully controlled; you will not see open expressions of concern from business groups. China has immense financial reserves, which can be used to ride out any storms or to apply strategic leverage.
Meanwhile, the Americans have done everything they can to telegraph their strategy. When Peter Navarro was promoted to the post of assistant to the president for trade policy, it was fairly clear what was coming. (Navarro directed a film that gives a clear outline.) Patience may be limited; with expanding national debt, the United States can ill afford an interruption to the current economic expansion. November's midterm elections could diminish the president's support, and further muddy the course of trade strategy.
But in the aggregate, China would seem to have more to lose. Its exports to the United States represent 4% of China's GDP; U.S. exports to China total less than 1% of U.S. GDP. It will be difficult for China to find other sources for all of the soybeans it purchases from the U.S.; the tariffs will therefore raise the prices of tofu and soy sauce paid by Chinese consumers.
It's a pity it has come to this. In classical economics, trade leaves all parties better off. Arguably, its modern expression has delivered on this promise. But the benefits of trade are often subtle, while the consequences for certain populations are all too apparent. Proponents of global commerce have done a poor job of making their case, while antagonists have their elevator speeches down cold.
There a few black and white issues in trade. What is clear is that a prolonged conflict is unwinnable. When those situations arise in chess, the players will confer and agree to end the match on even terms. That might not be a bad outcome for China and the United States.