Subject: Joseph Stiglitz - sunday times-tariffs
JOSEPH STIGLITZ
China holds the cards over Trump — and a united Europe could too
The economist, winner of a Nobel memorial prize, says rejecting America’s trade war is about far more than business and the state of the stock market
Joseph Stiglitz
Sunday May 04 2025, 12.01am BST, The Sunday Times
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Collage of Xi Jinping and Donald Trump with Chinese flag and currency.
Many of President Trump’s “liberation day” tariffs have now been paused, but what conspicuously remains is a hefty 145 per cent tariff on many goods coming out of China. Beijing is not backing down and has retaliated with a 125 per cent tariff on American goods, meaning that Trump has begun a trade confrontation that could define the direction of the 21st century.
The key question, then, is whether Trump and America actually hold a better hand than China. My guess is that China holds more of the cards.
Trump’s mistake is simple. He just looked at the trade numbers. Since China exports more than it imports, he seems to have reasoned, the United States can hurt China by choking off its exports through high tariffs.
But what matters for assessing the balance of power in this trade waris something called substitutability. China can impose punishing tariffs on America’s agricultural exports, soya beans and sorghum with little or no inflationary consequence at home, simply by substituting these imports and buying elsewhere in the global market.
Farmer planting soybeans with a tractor.
Dan Duffy plants soya beans on his farm near Dwight, Illinois
SCOTT OLSON/GETTY IMAGES
At least in the short term, the US has no substitutes for China’s rare earths and minerals, crucial in so many areas, and China knows this.
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This is also true of many other countries, such as Japan, Australia, India and Turkey, which conduct more trade with China than they do with America and which will not want to stymie the flow of important goods by taking the US’s side over China’s.
Reducing US dependence on certain Chinese imports is not a straightforward task. Manufacturing of iPhones, for example, could move elsewhere — India has been mooted — but it will take a long time and will be costly. China now has a comparative advantage in logistics, manufacturing supply chains and engineering. It is no accident that China dominates in the production of smartphones and so many other products: it is far cheaper to produce them there. Prices of these products will rise as supply chains are reconfigured.
This is the second way in which things are unbalanced: the trade war is mainly causing a shock for the US in terms of what it can import (a supply problem) and a shock for China in terms of finding adequate markets for its goods (a demand problem).
But China has the knowhow, the determination and the resources to make up for this deficiency of demand, and it may be able to do so quickly. It could do this by stimulating domestic demand, which it has ample room to do because domestic consumption is a low percentage of GDP.
A worker in a Chinese factory sorts festive goods for export, including items decorated with American flags.
Many Chinese businesses have had orders for American-bound goods cancelled
KEVIN FRAYER/GETTY IMAGES
China’s GDP in purchasing power parity (what goods people can actually buy with their money — the standard way economists compare the size of economies when prices differ) is higher than America’s, which could again give it room to grow domestic demand for goods.
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China can also strengthen its systems of social protection and increase wages; labour share remains lower than in most other countries.
There is scope for large increases in government expenditure. This could be in science and education, which would extendits lead over the US in engineering, or the environment and health, or making it easier for tens of millions of citizens to move from the countryside to towns and cities.
It can thus make up for the deficiency of aggregate demand from loss of exports to the US without resorting to “dumping” them on the rest of the world, though there is some evidence of this happening in the short term.
The supply-side adjustments that the US needs in such a trade war are far harder to implement and would require years of increased investment, training and infrastructure.
Moreover, the US has made the challenge of this adjustment all the greater. The on-again, off-again tariffs, combined with the drastic public sector cuts implemented by Doge — the so-called Department of Government Efficiency — have wreaked havoc on private and public sectors alike. Moving production to the US will require massive upfront investment yet, because of all this disruption, no firm can be sure about the economic environment three months from now, let alone four years from now.
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Even the trade deficit may worsen. Trump talks about bringing back manufacturing jobs, but manufacturing jobs today make up less than 10 per cent of US employment. He is looking to the past, not the future. Even if he were successful in resuscitating American manufacturing, it would not create good jobs for workers in the deindustrialised parts of the country. Cars these days are made by robots, with the best companies employing as many engineers and researchers as production workers, and the production-line work is often not paid well.
Jaguar E-Pace SUV assembly line in Changshu, China.
Workers on the production line at the Chery Jaguar Land Rover Automotive Co plant in Changshu, China
QILAI SHEN/BLOOMBERG/GETTY IMAGES
Today, it’s the service and knowledge sectors that really matter, yet almost surely America’s longstanding trade surplus in these services will diminish, particularly given the damage Trump is doing to its considerable soft power: tourism is falling off a cliff, foreign students are discouraged from studying in the US, the rule of law is being tested and the president is waging a massive battle on the country’s leading universities.
The last point makes the long-run prospects even bleaker, because universities produce the advances in science that are the cornerstone of this country’s technological dominance. There goes a source of our enduring competitive advantage in America. China, meanwhile, has built dozens of new universities over the past decade.
It’s understandable why China, with its enormous economic heft, would find Trump’s trade demands unacceptable, especially given his treatment of other countries as second-rate entities, subservient to the new American emperor and required to approach him deferentially to get a better deal.
But Europe should find Trump’s demands unacceptable too. Its combined GDP is greater than that of the US. Of course, if each nation within Europe genuflects at the foot of the emperor, hoping to carve out a better deal than the others, Trump will have the advantage — and he is counting on that.
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White House press secretary holding a photo of Jeff Bezos at a press briefing.
The White House publicly rebuked Jeff Bezos last week to deter Amazon from displaying “tariff surcharges” next to products
WILL OLIVER/EPA
Rejecting Trump’s trade vision is not just a matter of how well businesses or the stock market do in one country or the other, today or tomorrow. It is essential to uphold some semblance of the international rule of law — a rules-based international order — that Trump is seeking to dismantle.
Throughout the centuries, we’ve learnt that the rule of law is necessary for individual freedom and collective prosperity. It is especially important as a way to curb demagogues, whose confidence in their own judgment leads them to crush the rights of others and ignore collective wisdom.
These are the laws and ideals that have helped sustain America’s prosperity for many decades. Squandering them would, ironically, further damage the US’s position in its economic competition with China.
Joseph Stiglitz is an economics professor at Columbia University and a recipient of the Nobel Memorial prize in economic sciences. His latest book, The Road to Freedom: Economics and the Good Society, is out now in paperback (Penguin, £10)
Business & Money
Economics
Asia
China
Donald Trump
Economics
World politics
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Mary Duffy
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Derek Lewis
1 day ago
Good article. Trump and his administration massively overestimated the power of the US. It is powerful and influential, but not THAT powerful - it cannot bully the rest of the world into bending to its will.
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Jerry Carroll
1 day ago
Wouldn't be too sure about that.
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4 replies
Andrew Soltau
1 day ago
Aim. Fire. Oops, foot!
"Moving production to the US will require massive upfront investment yet, because of all this disruption, no firm can be sure about the economic environment three months from now, let alone four years from now."
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J Carter
1 day ago
China's wage bill rises and it's population birthrates decline. Then there is the property debt bubble. Give it time and Trumps war on China's economic growth will pay dividends. Politicians come and go but I'd still prefer free America to being in hock to Communist China.
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13 replies
Jim Holloway
1 day ago
That's certainly how it looks. The US is simply cutting itself out of the global economy; while that's bad for the world as a whole, the world will move on, and the US will be left further and further behind.
This doesn't bode well for the future...
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M Nagl
4 hours ago
The world hasn't yet worked out what an international order might look like without the US playing an active role in it. The existing economic and security arrangements simply don't hold up without reliance on Uncle Sam.
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N Isaacs
1 day ago
Great article. I firmly believe that Trump is bringing about the collapse of the American empire as we know it due to his mercantilist view of the world and his disdain for science and learning. Future history books will highlight how staggering it was that one, very uneducated, man was allowed to ...
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A Brennan
18 hours ago
Whilst 200 years of political and legal infrastructure just watched on and let him do it.
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Stephen Roberts
1 day ago
Harking back to some bygone era (in this case, the days of mass manufacturing in the US) appears to be a trademark of the so-called “populist right”. A far better strategy must surely be to focus on future leading edge technologies (which the US has hitherto done brilliantly) while taking concerte...
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Jillie Gardiner
1 day ago
The problem is that not all of the population would be able to work on leading edge technologies.
There has to be employment for the sector of the community that used to be employed on assembly lines.
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James Ratcliffe
1 day ago
Serious consideration needs to be given to how the American constitution works. Where is the much vaunted ‘checks and balances’? It seems the US has swapped King George III for King Donald 1.
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Michael Lydon
1 day ago
It seems that the hallowed Constitution was just an illusion all along……..sad times…
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2 replies
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KN Rushworth
1 day ago
America has hardly ever won its military wars. It was humiliated in Vietnam, Iraq and Afghanistan. In each case it faced an adversary with infinitely more guile, courage and resilience. It will be the same in an economic war waged against China.
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T Beaumont
18 hours ago
The three you mention were limited wars of choice. They are a poor measure of what the US could do in a total war scenario.
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Bill Morrison
1 day ago
George W Bush massively overestimated the power of the US military and launched two failed wars.
I strongly suspect that the Trump admistration will find the same in terms of American economic power.
As the US retreats towards its domestic borders and collapses its empire, the world will realign to f...
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Paul Osbourn
22 hours ago
The UK lost Hong Kong by being weak.
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4 replies
Tudor Arter
1 day ago
The article (first paragraph) refers to a ‘hefty 45% tariff’ on Chinese goods.
Shouldn’t this read ‘145% tariff’?
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Phil Nuttall
1 day ago
So the question is why?
Are they really that unaware?
Or is comrade Trump working for a different employer?
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