China and the U.S.: The analysis of Trump’s trade war should include psychology

12:22 by Hubert Fromlet, Kalmar

Kina och USA: Handelskriget kräver också psykologisk analys

Sammanfattning på svenska

Som det skrivits tidigare på denna bloggsida, leder traditionell västerländsk analysteknik mestadels ej till riktiga slutsatser avseende det pågående handelskriget – speciellt inte för finansmarknader. Väldigt mycket i den växande protektionismen handlar om psykologi, både på USA:s och på Kinas sida.

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The ongoing trade war between the United States and China has been widened further only recently. Also Mexico was included in American trade protectionism only a few days ago.

Protectionism is not a new phenomenon. It showed up historically in politically and/or bad economic times. The main objective of protectionist measures used to be the support to less competitive industries at home.

The American president still uses this historical explanation of protectionism. But he has also widened this historical application by adding political and immigration issues to the list. China and Mexico are hit in this specific case.

In recent months, I was persistently doubtful about president Trump’s suggested progress during negotiations with China and North Korea – particularly due to his frequently exaggerating and changing attitudes. Trump functions  simply this way and will most probably do so in the future.

Economists are no psychologists and have, of course, no professional skills to analyze people’s behavior more deeply. But we should understand that neither Trump nor the Chinese apply traditional Western ways of thinking. This fact make them different in analytical terms.

Trump lives in a world with five foreign main opponents: China, Iran, Mexican immigrants, German/EU non-American car buyers and mostly – but not always – North Korea. Fundamentally, the current American president regards China and Mexico as the outstanding challenges: China because it may threaten the American global supremacy and Mexico because of its refugees and emigrants still coming to the U.S. Also in this latter context, Trump shows no empathy.

The currently relevant psychology of the Chinese is different from the American. The Chinese do not want to be treated as second after “America first”. The Chinese want to be respected and be regarded as equal partners – partners who also would compromise themselves quite a bit in difficult trade issues. The key words for the Chinese are doubtless “respect by the Americans”. This has indeed a lot to do with psychology.

The French economist Frederik Bastiat wrote roughly 200 years ago: “When goods do not pass borders, soldiers will”.

Nowadays soldiers are not relevant in this context anymore – but certainly trade barriers. Four months ago, previous Fed chairwoman Janet Yellen seriously questioned Trump’s skills in macroeconomics and economic policy. We are still waiting for Trump to prove the opposite.

Altogether: This shortcoming and peculiar psychological conditions will make it extremely difficult also in the future to comment on potential negotiation progress between the U.S. and China.

President Trump is certainly by action  neglecting all harmonizing research in foreign trade. Professor Greg Mankiw, for example, writes on this issue: “Economists are famous for disagreeing with one another…But economists reach near unanimity on some topics, including international trade…”

We learn from this analysis that the U.S. currently applies trade policy in a non-conventional way. Therefore, psychological aspects gain currently momentum in Trump’s trade protectionism.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

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