Justin Yifu Lin, former Chinese government advisor: ‘Trump’s tariff policy is irrational. It will hurt his people’

Justin Yifu Lin, 72, is one of China’s most renowned economists, and probably one of those with the most incredible biography. Born in Taiwan, the self-ruled island that China considers an inalienable part of its territory, in 1979, while stationed as a Taiwanese soldier on Kinmen Island, a few miles from mainland China, he swam across the strait, convinced that the future lay on the other shore. He studied Political Economy at Peking University; he traveled to the United States, where he became one of the first Chinese citizens to earn a doctorate after the country’s reopening. He would go on to become the first Chinese person appointed chief economist of the World Bank (2008-2012). Close to the Beijing government, to which he has served as an advisor, he is currently dean of the Institute of New Structural Economics at Peking University.

He received EL PAÍS in his office on the last Sunday in April; the room is decorated with photographs of Lin shaking the hands of world leaders; five of them are with Chinese President Xi Jinping. “I have more,” he adds. The interview revolves inexorably around the trade war with the U.S. and has been updated by email following the 90-day partial truce sealed between the administration of Donald Trump and the Beijing authorities, which came into effect Wednesday.

Question. Does the recent agreement on mutual tariff reduction mark a new beginning for trade relations between China and the U.S.?

Answer. I hope so, but I’m not sure. Based on Trump’s past behavior, it’s very likely he’ll ask for something else in the coming days.

Q. China has taken a hard line, stating that it would not negotiate with the Trump administration if high tariffs remain in place. What changed that led the two sides to come to the table to negotiate?

A. The meeting was repeatedly requested by the U.S. side. The U.S. has also softened its tone toward China. Given that they are the world’s largest economies, the conversation will benefit both countries and the world.

Q. What is the root cause of this trade war?

A. Trump’s idea is to make America great again. But the path he’s taken will weaken his position in the world. A global leader needs to be trusted and respected. Trump’s policies are irrational by any fair analysis. They will harm his people and their competitiveness. If they want to become great again, they must support industrial modernization and use public funds to support innovation. But he’s been elected, and his policies are irrational. Secondly, a global leader must be trustworthy. But Trump can change negotiations and agreements at will. How can we trust him? It’s a shame the U.S. has this president. And it’s a shame for the world, because we want credible, rules-based governance.

Q. After the new agreement, what could emerge from future negotiations?

A. The U.S. will know how China will respond if it adopts a similar policy.

Q. What conclusions do you draw from the U.S. tariff escalation?

A. With trade, everyone wins. It’s good for everyone. The basic principle is comparative advantage: if there’s a product we can produce in China more cheaply than in the U.S., it will be beneficial for them to import it. And vice versa. That’s why almost all economists oppose Trump’s policy. He doesn’t fully understand how the economy works. He believes that every time there’s a trade deficit, it’s because the U.S. has been exploited by another country, which is completely wrong. Trump uses this kind of irrational trade policy as a form of negotiation. It’s a way to achieve another purpose.

Q. What purpose?

A. The U.S. wants to “Make America Great Again,” to rebuild the manufacturing industry. In the past, middle-income earners lived off a manufacturing job, but now manufacturing, as a percentage of GDP and employment, has declined. Trump is using tariffs to force the relocation of investment to U.S. manufacturing and create jobs. That’s his intention. However, I don’t think his policy will succeed.

Q. Why?

A. The U.S. imports goods from other countries because it’s less expensive to import them than to manufacture them there, having lost its comparative advantage in those types of goods. If you use this policy to force the relocation of production, your production costs will be more expensive. You would have to protect them continuously, forever. On average, it will reduce productivity. Even if it’s successful, it will reduce the level of income in real terms. And nobody wants a reduction in their income. People are not going to support this policy.

Q. The IMF predicts a considerable blow to the global economy.

A. It will definitely affect the global economy. If a wall with tariffs is built and trade is reduced, it will hurt everyone. It will be very difficult for smaller economies to negotiate with the U.S., because trade is a win-win situation for both sides, but small economies win more than large ones. Except for China and the European Union, the rest are small. If they don’t trade with the U.S., they lose more; that’s why Trump dares to use tariffs as a bargaining tool.

Q. How will it affect China?

A. If the tariff war leads to a global recession, it will have a major impact on all countries, including China. If there is no global recession, China has a very good opportunity to adapt. If we reduce exports to the U.S., we will have excess capacity and employment will be reduced. If jobs are lost, there will be no incentive to consume. Consumer demand will be reduced. And if there is excess capacity in export sectors, there will be less incentive to invest… if the government does nothing. However, we have ample room for fiscal stimulus and monetary policy support.

Q. For example?

A. We can subsidize consumption with coupons or other means to increase demand. The government can also lower interest rates to encourage investment and consumption. We have plenty of room to do so because rates, compared to other countries, are quite high. Our reserve ratio remains high. And we can resort to fiscal policy because our public debt is around 60% of GDP, one of the lowest in the world.

Q. What do you expect to happen in the United States?

A. Consumers will have to pay much higher prices for imported goods. Furthermore, if tariffs are high and they aren’t imported, they will experience domestic shortages, which will raise prices. Trump’s idea is to rebuild the manufacturing base, but that will take years. They will have high inflation. Consumption will fall, and investment demand may not be enough to offset the drop in consumer demand. The U.S. entering a recession is a very likely scenario.

Q. In a recent lecture, you compared the current scenario with that of 1929.

A. After the New York Stock Exchange crashed in 1929, the entire world suffered a loss of wealth. They reduced their consumption and demand. There was huge excess capacity and unemployment. The United States wanted to reduce imports in order to increase employment, so they imposed a high tariff rate. Other countries used similar policies. As a result, the world trading system collapsed, and countries returned to a closed economy. We entered that kind of Great Depression. If all countries adopt high tariff policies this time to protect jobs, we will return to a closed economy, and it will be a huge shock. So let’s continue with globalization.

Q. What is the main concern for the Chinese leadership?

A. We’re prepared. And we don’t expect the shock to last too long. I don’t think the U.S. can maintain its position for more than one or two years. They have midterm elections; elections are held every four years. And if Trump’s policies continue, the U.S. will be the first country to suffer a major recession. I hope it doesn’t turn into something like 2008. The U.S. is going to suffer greatly, and I don’t think it can maintain that kind of policy. It’s going to change, and we can endure the process. We hope it changes as soon as possible. But if they want to be irrational, we will be rational. We will do what we declared. If they want to start a trade war, we will not accept it. We have to retaliate, just like the EU. You can’t swallow that, because it’s not good for your country. We have to stand up.

Q. In 2018, China responded to the trade war with what seemed like a bit more of a commitment to negotiations. Now, it’s responded with similar retaliation and has declined to negotiate for the time being. Why?

A. China always follows a similar path. In Trump’s first term, when they imposed higher tariffs on us, we also raised them on the United States. But back then, because Trump wasn’t so extreme, and the trade war was smaller, we were happy to negotiate. If there are problems, the best way isn’t to use this kind of threat. Trump’s strategy is to impose very high tariffs as a bargaining tool, which we don’t accept. If we have a problem, let’s face it directly. We open the door. But if you want to negotiate, forget about a trade war first. Otherwise, we won’t be able to negotiate on an equal footing.

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