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Why Americans Are Confused About "Trade Wars"

April 13, 2018

In a jokey New York Times article, John Schwartz writes about starting a “trade war” against Whole Foods. He consults with two economists: 


“Trade deals are about setting the ground rules so other people can get what they want,” Mr. Goolsbee said. When you stop them all from getting what they want, he said, you’ve “got the game wrong.”


I had to admit that the two economists had a point. I may feel that Whole Foods has, in fact, gotten “cute” by charging so much for wild-caught gulf shrimp and those really amazing rotisserie chickens. But if I don’t trade with Whole Foods any more, will that really let me “win big”?


I really like those shrimp on the grill; they’re my big weekend splurge. And if I stop spending money in grocery stores altogether, well, what will I eat?


Mr. Goolsbee said I was getting the idea: “Building walls to trade, that doesn’t make you rich. That makes you poor.” And, apparently, shrimpless.


Zero sum — the idea that there have to be winners and losers — “is fundamentally the wrong way to think about trade, and doesn’t make any sense,” he said. Mr. Goolsbee added that, “sadly, it seems that the White House is espousing exactly that view.”


Let’s break out the concepts talked about here: 


1.    “Trade deals are about setting the ground rules.”
2.    Schwartz doesn’t like the ground rules set for his “trade” with Whole Foods (i.e., the price of shrimp). 
3.    Schwartz realizes walking away from the trade with Whole Foods leaves him with no shrimp.
4.    Goolsbee says the idea that there’s a Zero-Sum element to trade is “fundamentally the wrong way to think about trade.”

 

Here’s the big question ignored here: Who sets the ground rules of trade?


In the case of Whole Foods prices, it’s Whole Foods. They set the price, and people can either engage in the trade or walk away. There’s no “trade war,” because Whole Foods won’t change its prices if Schwartz walks away.

 

What Schwartz describes is the typical American experience. You, as an individual consumer, don't have much power in trading your money for a product with a large company. Your choice is either pay the set price or walk away.

 

Which leads to a hypothesis for why most Americans are confused by "trade wars": Negotiations are largely gone from American life. 


For most American consumers, there are few negotiations in daily life. Prices are set, and they’re non-negotiable. Contract disputes are rare. You can go your whole life in America without going to even a small claims court. You might negotiate your salary, but even salaries are largely set by someone else. Your choice is always the same: Accept what's offered or walk away. Accept the price of shrimp at Whole Foods or walk away.


But if you’re Chinese or Russian or Arab, you negotiate all the time. In China, there’s a lot of negotiating over terms of sale. In Russia, the system of courts is more uncertain. In the Arab world, everyone negotiates everything. If you're in those cultures, you know there's a Zero-Sum Game embedded in the Positive-Sum Game of trade.


If you’re a building developer in New York City, you also negotiate everything. There are few set prices. You’re in court all the time. Everything is up for negotiation. You might even write a book about it (Note: I'm describing what's happening, not picking a side).

 

Even though high-stakes negotiations like this are strange to most American consumers, they happen all the time in the rest of the world. Call them "trade wars" or not, they're fundamentally a Zero-Sum Game embedded in a Positive-Sum Game. One side can win at the expense of the other over prices and ground rules as long as both win from the Positive-Sum Game of trade.


If you don’t negotiate, you're left with two choices: Accept the terms the other side offers or walk away. In trade deals, by not negotiating you act like the other country is Whole Foods. You act like you always accept the existing ground rules. Which is what Goolsbee seems to suggest the U.S. do with China.

 

Or maybe it's just the economists and New York Times writers confused by "trade wars." Maybe normal Americans understand exactly what's happening. 


If you understand what's happening, why not try to re-negotiate the ground rules? Why not try to make your side better?


If Schwartz could re-negotiate the price of shrimp with a chance of changing it, wouldn’t he?

 

If the situation were reversed and Schwartz could set the price of shrimp, wouldn't he?


As negotiators have pointed out for years, having the power to walk away gives you more power at the negotiating table. If the other side loses more by walking away, they will make concessions to have you stay.


When you’re a guy buying a shrimp, you don’t have much power to change prices by walking away.


When you’re a nation with the largest economy in the world, you have a lot of power to change ground rules by threatening to walk away.


There’s a Zero-Sum Game embedded in the Positive-Sum Game, whether we're familiar with it or not. 

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For more on the strategy of trade wars, see this post.
 

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