Must-Read: Martin Wolf: Donald Trump and Xi Jinping’s Battle Over Globalisation

Must-Read: This is a different degree of idiocy than we saw under Bush-Cheney or Cameron-Osborne. It could have been the case that Saddam Hussein had an active nuclear-weapons program. It could have been the case that the confidence benefits from fiscal austerity would have made it a good policy choice after 2010. It was unlikely in both cases. But there were possible worlds in which those things were true.

There is no possible world in which a VAT rebated at the border is an export subsidy:

Martin Wolf: Donald Trump and Xi Jinping’s Battle Over Globalisation: “[The Trumpists] believe, for example, that a value added tax not levied on exports is a subsidy to exports…

…It is not: US goods sold in the EU pay VAT, just as European goods do; and European goods sold in the US pay sales taxes (where levied), just as US goods do. In both cases, no distortion between domestic and imported goods is created. Tariffs are levied only on imported goods. So they do distort relative prices…. These people believe trade policy determines the trade deficit. To a first approximation, this is not so, because the trade (and current account) balances reflect differences between income and spending. Assume imposition of an across-the-board-tariff. Purchases of foreign exchange will fall and the exchange rate will appreciate, until exports fall and imports rise enough to return the deficit to where it started. Protection then just helps some businesses at the expense of others. The Trump proposals seem to aim at resurrection of the economically dead.

True, protection might lower the [trade] deficit by making the US a less attractive destination for foreign investment. But that hardly seems a sane strategy….

Unwise policies might do huge damage. The US president possesses the legal authority to do virtually whatever he wants…. Reneging on past deals is sure to make the US seem an unreliable partner. Its victims, particularly China, are also likely to retaliate…. In a full trade war, US employment might fall by 4.8m private sector jobs. The disruption of supply chains is likely to be especially serious. Beyond this are huge geopolitical consequences….

The rhetoric of “America First” reads like a declaration of economic warfare. The US is immensely powerful. But it cannot even be confident it will get its own way. Instead, it may merely declare itself to be a rogue state. Once the hegemon attacks a system it created, only two outcomes seem at all likely—its collapse or recreation of the system around a new hegemon…. Mr Xi’s vision is the right one. But, without Mr Trump’s support, it may now be unworkable. That would benefit nobody, including the US…