International economic theory and empirical evidence have demonstrated that free international trade is generally expected to benefit both exporters and importers. The theory also shows that trade wars, in general, will cause damage to both sides.
President Trump's trade war logic is based on a series of decisions that are not at all theoretical. Trump insisted that the trade deficit is the transfer of wealth to foreigners (the trade deficit is a measure of the amount of money foreigners are robbing us from). Mr. Trump emphasized that the trade deficit caused job losses, ignoring the fact that once having encountered a larger trade deficit in history, the employment rate in the United States was also higher.
He also argued that China was manipulating the exchange rate when China's CNY depreciated, ignoring the possibility that the market itself - not the Chinese government - was the factor behind the exchange rate fluctuations.
Of course, a government can intentionally devalue its currency to gain a competitive advantage in exports, by allowing its central bank to net purchase foreign exchange. But this increases the domestic money supply and often leads to domestic inflation, suppressing the competitive advantage of depreciation.
Monetary manipulation requires the central bank to conduct interventions so that the central bank matches the buying of foreign exchange and selling domestic assets to the banking system to avoid the inflationary effects of devaluation. China practiced such interventions for most of the 2000s but soon stopped.
China used this tactic in the 2000s to turn hundreds of millions of unemployed rural workers into export-oriented manufacturing, following the economic failure of Mao Zedong.
Can similar reasons cause Mr. Trump to trigger another trade war with Vietnam, when Vietnam recently jumped to become the seventh largest exporter to the United States?
The answer is no, the United States should not start a trade war with Vietnam.
The United States has a number of legal claims against Chinese trade practices, primarily related to intellectual property theft and injustice with U.S. businesses in China.
But the United States should also attack those policies instead of restricting bilateral trade; A good policy is one that is at the heart of the matter, thereby minimizing unintended negative consequences.
Unlike China, Vietnam does not pose a threat of intellectual property or be unfair to US businesses. In fact, Vietnam is very open and facilitates foreign businesses. The United States should protect and promote trade with Vietnam as a counterbalance because Vietnam is the gateway for the United States to move closer to ASEAN cooperation.
Although the fact that Vietnam's trade surplus has increased significantly in 2019, most of it is the result of a trade war between the U.S. and China, prompting importers to source from Vietnam instead of China. If Mr. Trump seeks to punish Vietnam for the trade surplus generated by the U.S. and China trade war, where will the tariff cycle end?
Mr. Trump wants to see factories repatriating back to the US, but only 6% of US companies moving production out of China are considering moving their production facilities "back home."
One of the main reasons is that the current facilities in China are exported throughout Asia. Reproduction to the United States will incur shipping costs and time. Furthermore, the cost of moving production to the United States is also too expensive.
Assuming the United States succeeds in reducing Vietnam's trade surplus by imposing tariffs as it did with China or the EU, then US companies will just move to Thailand, Myanmar, Bangladesh or Cambodia instead.
