One of the parts that has always puzzled me is why people think there is this enormous amount of damage being done. There are a couple of specific issues looking at the damage and ability to adjust. Follow me a moment. First, what products does China export to the US 1/n
that have low elasticity of substitution? In other words, tshirt manufacturing can be moved easily, cell phone less easy. What we have seen is the high elasticity goods (tshirts) move easily. Middle and low elasticity good are various degrees to planning/moving. This matters 2/n
Because it basically indicates costs on the US will be more subdued. Second, as I have long argued, on pure product competition, the US does not compete with China. Vietnam and Mexico compete with China on products. This means trade not going to China will flow to others. 3/n
The real loser from Chinese economic policies is NOT the US but other emerging market countries. Third, what we are seeing empirically absent friction costs of moving or starting a new factory is that trade is going elsewhere. Take a simplified example. Two stock markets 4/n
where you can trade the same stock and now stock market A has a 10% tax on trades. If you want to buy a stock you just go to the other stock market to buy your stock. That is what we are seeing in a liquid global trade market place. Fourth, absent adjustment/friction costs 5/n
which are decidedly not zero, this is growth neutral. Assume you have a desired level of output/consumption and all of a sudden you cannot trade with country A but you can trade with country B. You still have your desired level of output less transaction/friction/adjustment 6/n
This is why the US remains pretty much on historical growth trend recognizing growth in 2018 was anomalous due to numerous one time shocks such as the tax cut. Yes, there are costs to the trade war. However, a little bit of perspective about what we can reasonably 7/n
Expect to happen and what we see empirically happening is always nice. Done.
