michael barbaro

From the New York Times, I’m Michael Barbaro. This is “The Daily.” Today, years of multi-national efforts have failed to get China to play by the international rules of trade. Now, Donald Trump has launched an all-out trade war in which the U.S. is taking on China alone. It’s Wednesday, May 15th.

peter s. goodman

Hello?

natalie kitroeff

Hi, Peter.

peter s. goodman

How are you?

natalie kitroeff

I’m good. How are you?

peter s. goodman

Good.

natalie kitroeff

So, we’re talking trade.

peter s. goodman

Wait, this is Natalie calling?

natalie kitroeff

It sure is.

peter s. goodman

The thing about “The Daily” is you never know who’s calling. All right, Natalie, it’s great to hear from you.

natalie kitroeff

I’m glad that you’re glad to hear from me. [MUSIC]

michael barbaro

My colleague, business reporter Natalie Kitroeff, spoke to economics correspondent Peter Goodman about the story behind the trade war.

natalie kitroeff

So, Peter.

peter s. goodman

So, Natalie.

natalie kitroeff

When does this idea take hold that trade with China is a problem for the United States?

peter s. goodman

Well, the story really starts at a time when trade with China is seen as part of a solution. I mean, the U.S. is still fighting the Cold War with its allies, China is run by the Chinese Communist Party. The Communist Party has emerged from decades of isolation. Out of this comes Deng Xiaoping, who opens China to the world — at first very tentatively — and China becomes capable of producing more and more goods, but it doesn’t have access to world markets. It needs access to world markets. It’s running up against tariffs in much of the world. And the theory, at least the theory that’s advanced by the people who are pushing this, is, listen, if we let China into our club and China gets more and more integrated into the global economy, bit by bit through this engagement, China will become more like us. It will eventually become a free market-governed, liberal democracy. That was the sort of ultimate selling point. Of course, you know, the clear reality was that, at minimum, American companies wanted a crack at the Chinese market, which is, you know, in theory, the largest consumer market on earth. There’s a billion-plus people there. A billion-plus people is a couple billion feet needing to wear socks. I mean, that’s how the market is viewed. And China is, at that point, willing to trade — or at least this was the theory — some access to its market in exchange for the right to gain access to world markets.

natalie kitroeff

Right. So, this kind of grand idea that global trade will transform China into a liberal democracy doesn’t totally pan out. What about just the fact of China as a trading partner? How does that go for the United States?

peter s. goodman

Well, a lot of good things did happen for American economic life. We got access to an awful lot of low cost goods. A lot of American manufacturers got access to components they could use in their own factory productions. And, along the way, American companies get out from under having to deal with labor unions in their home country, minimum wage laws, environmental and workplace safety regulations. They can just go set about making stuff as cheaply and easily as possible in China. And, bit by bit, China becomes the factory to the world. We also saw hundreds of millions of people lifted out of poverty in China, which is no small thing. Those people entered the global marketplace, and they went out and bought a lot of goods, including some made or least designed in the United States. But we also missed a lot of stuff.

natalie kitroeff

And what do you think that was?

peter s. goodman

We missed something that had been understood since the beginning of modern economics, which is when you liberalize trade, there are winners and there are losers. I mean, you have whole towns in China that are organized to dominate making paint, making neckties, making shoelaces for shoes. Entire towns are organized in this fashion. And, so, if you are living in the industrial Midwest and you’re working at the same factory where you’ve been showing up for work for 20 years thinking that the fact that you’re good at your job and you work hard is going to be enough to get you to your pension, well, China has set up a system designed to undercut that. And American policymakers failed to prepare for that. So, they didn’t take the many benefits — and there were many benefits — of China integrating into the world economy — benefits for American companies — and distribute them so that the people who were hurt got something for their pain, or at least got help with their transition to the next thing. So, a lot of people were just left stranded and left to suffer what we now call deindustrialization. And downward mobility became the reality for tens of millions of people in the center of the United States.

natalie kitroeff

Right. So, we understood how American consumers and American companies would win. It was pretty much the American worker who we didn’t really think about.

peter s. goodman

That’s right. I mean, American workers in key industries were the ones who paid the price. And the failure was not, as I think many economists still view it, allowing China into the global trading system. It was the failure to cushion the blow for the communities that paid that price.

natalie kitroeff

In terms of all of this conversation that we’re hearing now about China being an unfair trading partner, does that depend on who you are?

peter s. goodman

There’s now a fairly universal view regardless of who you are that China has taken some very serious liberties with the global trading system and has not lived up to the spirit of what it agreed to when it entered the W.T.O. A lot of Western companies — American companies — have not gotten the access to the Chinese market that they were promised. China has cracked down on the internet, has not allowed major internet companies to set up in China. China has continued to force many Western companies to engage in these joint ventures where they are required to transfer in technology, which leads to their intellectual property getting stolen from them. China has, by and large, used the W.T.O. for its own benefit and has not delivered on the market-opening elements of what it promised.

natalie kitroeff

And are those issues you raised, are those violations of the terms of being a W.T.O. member?

peter s. goodman

Sometimes yes and sometimes no. I mean, let’s remember what the W.T.O. is — a bunch of countries that were more like each other than not — you know, they had the same level of education and innovation in their workforces — they all agreed that they were going to lower tariffs to one another, and trade expanded dramatically, and so did living standards. And it just wasn’t built for an enormous economy like China, which is not at all like the wealthy, developed countries that started the global trading system. It’s a poor country that has hundreds of millions of people who are desperate who will take jobs at very low wages, who are so eager to elevate their living standards that they’re not initially all that concerned about labor standards, workplace safety standards. There’s no democracy. There’s no free press to bring to light abuses. And, so, the W.T.O. finds itself dealing with a whole range of cases. But the W.T.O. process is very slow. It can take years to get a result. And, in the meantime, your company or your industry can be wiped out.

natalie kitroeff

Right. So, give me an example of how China has been able to take advantage of this setup.

peter s. goodman

Well, take steel, for example. China needs to employ large numbers of people — not only in industrial areas, it needs to create a lot of jobs for farmers who are falling behind the people living in Chinese cities who are increasingly wealthy. And one key way of creating those jobs is to invest in steel plants. And, by the middle of the 2000s, China is making a whole lot of steel — a lot more steel than it can possibly use at home. And, so, what does it do? It doesn’t want to fire a bunch of people working at steel mills. It says, well, we’re going to have to go find a place to sell all this steel. And that place is the rest of the world. So, China starts selling steel at low prices — much lower prices than steel is being manufactured in places like the United States and Canada and Italy and Germany and Japan. And steel, Chinese-made steel, becomes very attractive to much of the industrial world, because it’s increasingly high quality, and it’s cheap. So, that’s great if you’re buying steel. It’s not so great if you work at a plant that makes steel. And, for workers, it looks like their paychecks are under fire from somebody who’s not playing fair. And they’re angry about it.

natalie kitroeff

How exactly did China not play fair?

peter s. goodman

From China’s perspective, it’s simply taking advantage of what’s available. But, when you get people to speak candidly in China about this — it’s important to remember that for China, history doesn’t start in 2001 when it enters the W.T.O. History doesn’t start when Deng Xiaoping opens up to the world. History starts centuries ago. And, for a lot of those centuries, China is the victim of colonialism. In the dominant narrative amongst party officials, is this not wrong notion that for centuries Westerners have been coming and pillaging. They’ve been taking advantage of a weak China. So now, China’s in the W.T.O. in 2001, and it’s going to take advantage of what’s available to catch up.

natalie kitroeff

It’s like payback.

peter s. goodman

I don’t know that it’s seen as payback. It’s seen as we’re not suckers. We’re not defenseless. We’ve now got a plan. We’ve lived through decades of chaos, but we figured it out now. And we’ve carefully studied how the rest of the world works. We understand how Britain and the United States and France and Japan have turned themselves into these very wealthy societies. And now that’s what we’re going to do. And the way we do it is we exploit our advantages. And our advantages are that we’re a huge country with an awful lot of hardworking people and a central bureaucracy that has got a formula for how to rapidly industrialize. So, I mean, China’s view is we made this deal under the W.T.O. The rules were what they were. The process of adjudication was what it was. I mean, that’s the Chinese view. Now, clearly, there are ways in which China is not complying, and that poses a serious problem, and over the last decade, what’s happened is those unhappy about China have expanded from the workers in select industries finding themselves in direct competition with Chinese companies and often vulnerable to losing their jobs — that’s expanded to the corporate ranks. I mean, banks are angry that they don’t have access to the Chinese market — even auto companies. Technology companies are angry that they’ve had to hand over technology that Chinese companies have then used to undercut them making their own products. So, the sense has taken hold, broadly, in American life that the U.S. has been victimized by China, and that the consumer benefits are simply not enough. [MUSIC]

natalie kitroeff

You said China didn’t see itself as a bunch of suckers. The U.S. obviously doesn’t like to see itself as a bunch of suckers either. Is that how we find ourselves in this raging trade war?

peter s. goodman

Well, in part. While there is now pretty close to unanimity that China’s a problem, there is a very significant divide over what to do about that. So, in the Trump view, the idea is you work out everything in a bilateral arrangement between two countries. Because, in any bilateral arrangement, the U.S. should have the upper hand, because the U.S. is the richest, most powerful country, and every other country has a greater interest in getting access to the American market than the U.S. has getting access to the other market. That’s not how most of the American power structure has historically viewed things. So, multilateral solutions and international institutions have been at the center of economic policy. And the counter view is, O.K., if the W.T.O. is not working properly, we don’t scrap the W.T.O. because if we scrap the W.T.O., then we’re just living in the law of the jungle. And, at the moment, the U.S. might be the biggest, toughest animal in the jungle, but that’s not forever by any means. I mean, China may very well become a larger economy than the United States sooner than we think, and then we’ll be at a disadvantage. So, better to have institutions that focus on creating rules and norms with enforcement mechanisms that actually deal with the sorts of problems that we deal with in modern society. So, if the W.T.O. is not set up to deal with intellectual property and technology, well, then let’s sit down and write some rules that actually govern the problems that we’ve got now.

natalie kitroeff

Peter, I take your point. On the other hand, don’t you think we got to a point in American society where there was just this backlash against these free trade deals?

peter s. goodman

Definitely.

natalie kitroeff

And there was a kind of feeling among those workers that you talked about that the multilateral approach hasn’t worked.

peter s. goodman

Yeah. Well, first of all, as a matter of political reality, there’s no question that that argument didn’t win the favor of people in a lot of key parts of the industrial Midwest. And there’s no question that there’s no simple solution when it comes to dealing with China. So, China represents an economic problem that we’ve just never seen before. And if there were an obvious solution to this problem, we’d have found it already. [MUSIC]

natalie kitroeff

So, Peter, the bilateral approach that we’ve seen President Trump take, which has resulted in a year-plus of trade war, is it working?

peter s. goodman

Well, it’s certainly not working by the president’s own scorecard, because the trade deficit has gone up, not down. There is some evidence that some jobs that might have gone outside of the United States are now staying in the United States, but there’s very little evidence that that has turned into more American jobs. So, if you’re an American company and you now fear building a new factory in China, it’s not that now you’re going to build in the United States, it’s now maybe you’ll build in Vietnam. Maybe you’ll explore a venture in India or some other low-wage country in the world.

natalie kitroeff

So, it’s not as if these jobs are going to be flooding back to the U.S. — that American workers are going to benefit from this approach.

peter s. goodman

Well, some of these jobs are even jeopardized by this approach. I mean, I was in western Michigan last December, and I was visiting a factory that makes the electronics that go into auto lights. And this is a company that’s been in Michigan for decades. They resisted going to Mexico after the U.S. entered Nafta in the mid-90s. These are Republicans who think tribally about their American identity and they really don’t want to look abroad. And, suddenly, they’re finding that the components that they’re importing — electronics from China, some steel products — are going up in price because of Trump’s tariffs. And they were telling me very sheepishly, we’re having to explore the possibility that we’re going to have to shut down this factory or at least move some of the production to Mexico, because the economics just don’t make sense with these tariffs in place.

natalie kitroeff

So, if this is not in accordance with mainstream economic thought, if this approach could actually hurt American workers, hurt those people in Michigan you talked to rather than give them their jobs back, who would be most likely to support the president’s approach?

peter s. goodman

Precisely those people I talked to in Michigan, and people in general who have found themselves in recent decades competing against Chinese industry. I had dinner in western Michigan with a guy whose family business had really been ravaged by cheap Chinese imports more than 15 years ago. This guy’s got his own company, and he’s discovering that he is having a hard time getting his hands on low-priced steel because Trump has put tariffs on steel. He talked about cutting people’s bonuses at Christmas and holding off on hiring and really being concerned about the future of the company. And, yet, he was effusively praising Trump for taking on this fight. I mean, in his telling, no one has had the guts to challenge China. And when I pressed for a coherent explanation about how this trade war was ultimately going to better him, I didn’t get very satisfying answers. But what I got was a deep, emotional sense — a sentiment that Americans have been systematically cheated in the global economy. I mean, the United States is certainly the greatest beneficiary of globalization of any country in history. How it distributes the winnings of globalization is another question, and a lot of people have not gotten their slice of the pie. But there is this deep sense that the U.S. has been fleeced. And this guy I had dinner with was just so happy that his country was now represented by somebody who was willing to take the gloves off. And if he got caught in the midst of this conflict and it cost him some money, that was O.K. by him. He looked at it as, eventually, some good will come out of this, because, if nothing else, Trump is restoring our pride.

natalie kitroeff

I’ve had so many conversations exactly like the one you described with workers and business owners all across the country. It’s almost as if that guy and the people that I’ve talked to see the fight between the U.S. and China as bigger and more important than the personal cost that it might have to them in the short term. And they value the fact that President Trump is willing to fight that fight, it’s — patriotic.

peter s. goodman

Oh, no, that’s right, and I think this is part of why we should get our minds around the distinct possibility that this trade war could go on a long time and a deal might either be very hard to strike, or it could be that this administration doesn’t really want to strike a deal because this is but one element in what has become a kind of holy war. And, so, on the American side, we’re having this battle over whether we’re simply trying to readjust the terms of engagement with a China that we’re going to have to deal with one way or another versus those who view us as now being in almost a new kind of Cold War where our own security and our own prosperity is dependent upon isolating and containing China.

natalie kitroeff

And what about on the Chinese side? If this is a big, bilateral war — bigger, in our minds, than just a trade war — how is this war playing in China?

peter s. goodman

Well, let’s imagine how the world looks to a Chinese business owner who’s now dealing with declining sales and higher costs because of the tariffs that China’s imposed on American goods as part of this trade war. That Chinese business owner isn’t any happier than the guy I had dinner with in Michigan. But Trump has now elevated this trade war to an issue of sovereignty, and allowed the Chinese propaganda machine to present this as an attack on China’s dignity, on China’s destiny, on China’s national integrity by an American president who’s trying to keep China down. So, the Chinese business owner, much like the Michigan business owner, has a reason to think, well, I may have to hurt for a little while in exchange for the longer-term goal of boosting China’s place in the world and China’s security. [MUSIC]

natalie kitroeff

And it seems to me like that dynamic might make this more intractable.

peter s. goodman

There’s no question that on both sides what began as a trade issue has escalated into something that’s tapping deeply into nationalist sentiments, into long grievances and narratives of getting cheated. This is on both sides. And, for significant numbers of people, national pride and dignity is on the line. That does not lend itself to one side backing down.

natalie kitroeff

Thank you Peter.

peter s. goodman

Thank you, Natalie.

michael barbaro

On Tuesday, the president continued to promote his trade war with China.

archived recording (donald trump) I think it’s going to be — I think it’s going to turn out extremely well. We’re in a very strong position.

michael barbaro

Saying that the 25 percent tariffs he has imposed on $250 billion worth of Chinese goods would benefit the United States, and that he was considering imposing additional tariffs on nearly every Chinese import.

archived recording (donald trump) Our economy is fantastic. Theirs is not so good. We’ve gone up trillions and trillions of dollars since the election. They’ve gone way down since my election.

michael barbaro

The president suggested he was in no rush to end the fight, but held out the possibility that an agreement could be reached.

archived recording (donald trump) If they want to make a deal, it could absolutely happen. But in the meantime a lot of money is being made by the United States and a lot of strength is being shown.

michael barbaro

We’ll be right back. [MUSIC] Here’s what else you need to know today.

archived recording (donald trump) My son spent, I guess, over 20 hours testifying about something that Mueller said was 100 percent O.K., and now they want him to testify again. I don’t know why. I have no idea why, but it seems very unfair to me.

michael barbaro

On Tuesday, the president’s oldest son, Donald Trump Jr., agreed to testify before the Senate Intelligence Committee as it investigates whether he was honest in his previous testimony about a 2016 meeting with a Russian lawyer who allegedly promised incriminating information about Hillary Clinton. Donald Trump Jr. had resisted testifying for weeks, prompting a subpoena from the committee’s Republican chairman, Richard Burr, followed by calls from several other Republicans, including Senator Lindsey Graham, that Donald Trump Jr. ignore the subpoena.

archived recording (lindsey graham) If I were Donald Trump Jr.‘s lawyer, I would tell him, you don’t need to go back into this environment anymore. You’ve been there for hours and hours and hours, and nothing being alleged here changes the outcome of the Mueller investigation. I would call it a day.

michael barbaro