Trade War May Be A Blessing in Disguise

Most human brains don’t seem to be wired for “general equilibrium” thinking. It’s hard for us to compute / envision the long-term consequences of short-term events and actions. Short-term curses can turn out to be long term blessings, and vice versa.

Disruptions of the existing equilibrium in the economy is perceived as bad– trade war makes the stock market shriver at the uncertainty, and companies and workers in both countries scramble to adjust.

But in the long term, if it incentivizes both countries to improve the balance and diversity of their economies, the curse may turn out to be a blessing.

For the US, higher import tariffs may help create the circumstances needed to bring the industrial sector back to the country, which I think is necessary for the country’s long term prosperity. For why this is so, see this note.

On the other side of the Pacific Ocean, I think the Chinese economy has come to a point where it can be sufficiently self reliant and self generating. It’s not yet fully so, but it can be. Unlike smaller countries in the neighborhood, China at this point doesn’t really need to depend on foreign demand to keep growth going. The short-term curse may just be the push needed to level up the systemic integrity of the economy.

Free trade has been a tremendous economic innovation in human history. But too-much-of-a-good-thing is a real thing. Less trade and more domestic diversification is not the doomsday that efficiency-obsessed economic intellectuals fuss about. It’s a blessing for everyone, in disguise.

© 2021. Natasha Che. All rights reserved.