As I continue my quest to step back from the lunacy of daily life in the Age of Trump, let's get through some of what is happening with the whiplash-inducing trade war.
As I explained last week, I was rather skeptical that there will be a resolution any time soon to the trade war. I wrote that I find it highly likely that continued escalation will lead to recession, eventually, and that broad consequences of Trump's behavior here are what might put him in competition with James Buchanan.
And in the Age of Trump, do you wear a neck brace on a daily basis? China now says they won't escalate, because they want a "calm" resolution.
So one of two things happens: either Trump sees that he needs a resolution before the election, and "calmly" reaches one, or takes that as a sign of his favorite insult-- weakness-- on China's part, and presses what he thinks is his advantage.
What are the chances of a "calm" resolution? That depends. Specifically, it depends on what we describe in my corner of academia-- rational choice theory.
You know, exactly what very stable geniuses use when making decisions.
Here's how rational choice theory works. Everyone has a "utility function," which translates any potential outcome into comparable units of happiness-- utility. Then, they choose the strategy for which the end result gives them the highest expected utility. The complications come in the form of things like imperfect information.
But let's step back and ask a more simple question. What goes into your utility function? In principle, anything can. Apparently, I get utility out of typing this meandering silliness. How do you know? A little thing from economics called, "the axiom of revealed preferences." I do it, therefore I get utility from it. This blog isn't monetized, so I just get utility, somehow, from blathering.
In the most strict forms of rational choice theory, though, such things aren't put into anyone's utility functions as "parameters." Soft 'n' squishy stuff like that has no place in rigorous economic analysis.
What does? Consider international trade. Tariffs. Tariffs impose costs on the country enacting them (assuming one... understands this), and on the country whose goods face tariffs. So, the two negotiating countries have preferences over tariff regimes. Intellectual property treatment? Yeah! Bluntly, actors in China steal a lot of US intellectual property. Currency valuation? Yup. I could go on, but you get the point. There are a lot of concrete matters over which nations can have preferences.
These matters are, in principle, open to negotiation for trade agreements and settlement because rational actors have preferences over them.
But what goes into Trump's utility function? Here's the basic problem. One of the consistent pieces of reporting out of the negotiations-- also consistent with his own... sure, let's call it "speaking," is that it isn't clear what his specific policy demands are from China.
He is, as I regularly observe, a mercantilist. That means he sees trade as zero-sum, and a trade deficit as a loss. Economics aside, the Chinese government isn't the actor that sells us goods. So...
The basic problem, then, is that Trump's primary quasi-policy goal is not actually something that is a policy action that the Chinese government can take.
Beyond that, though, what goes into Trump's utility function? No utility function, no bargaining model. And we can't just say, reduced, or flipped trade deficit because that isn't something that can come out of a negotiation directly. Well, we can say it, but if it's true, that's kind of the problem. (And today's point.)
One of Trump's frequent goals is to humiliate whomever he sees as an enemy. I can stick that into a utility function, but it negates the possibility of a negotiated settlement because whatever Trump defines as acceptable will necessarily involve the subjugation of the other party, and hence that party finding it unacceptable. Otherwise, Trump wouldn't find it acceptable. Definitionally so.
He likes negating anything Obama did, 'cuz, but there was no special trade agreement with China to reverse or rename, so that's out.
There just isn't all that much to which a mercantilist without a clear understanding of policy can anchor his preferences. Hence, the unmeetable demand, without specific policy proposals.
This week, we saw vague signals of non-escalation, but from a mechanics of bargaining perspective, let's be real. I mean, rational.
Beyond that, though, what goes into Trump's utility function? No utility function, no bargaining model. And we can't just say, reduced, or flipped trade deficit because that isn't something that can come out of a negotiation directly. Well, we can say it, but if it's true, that's kind of the problem. (And today's point.)
One of Trump's frequent goals is to humiliate whomever he sees as an enemy. I can stick that into a utility function, but it negates the possibility of a negotiated settlement because whatever Trump defines as acceptable will necessarily involve the subjugation of the other party, and hence that party finding it unacceptable. Otherwise, Trump wouldn't find it acceptable. Definitionally so.
He likes negating anything Obama did, 'cuz, but there was no special trade agreement with China to reverse or rename, so that's out.
There just isn't all that much to which a mercantilist without a clear understanding of policy can anchor his preferences. Hence, the unmeetable demand, without specific policy proposals.
This week, we saw vague signals of non-escalation, but from a mechanics of bargaining perspective, let's be real. I mean, rational.