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Laffer: Trump's trade war pushes China 'to behave like a proper country'

Krystal Hu
Reporter

President Trump’s proposed tariffs on $200 billion worth of imported goods from China, which could hit in early September, has unnerved many American businesses and customers who think that Trump is causing unnecessary economic damage.

But Art Laffer, renowned economist and former advisor to President Ronald Reagan, argues that it’s all for the better because Trump is using tariffs to pressure China to “behave” in regard to globally-connected trade.

“Trump is doing a great job with Mexico and, I believe, with Canada as well. But the real goal is to get China into the free trade world and to behave like a proper country should behave in a free trade world,” Laffer, who advises Trump on tax policy, told Yahoo Finance’s Midday Movers on Friday. “Don’t steal our [Intellectual Property]. Don’t have tariffs against our products. Don’t manipulate currency. Just trade, and trade fairly.”

Laffer added that “China is a huge plus to the U.S. because without China there is no Walmart [WMT], and without Walmart there is no middle class or lower class prosperity in America.”

U.S. President Donald Trump speaks during a roundtable discussion on the Foreign Investment Risk Review Modernization Act (FIRRMA) in the Roosevelt Room of the White House in Washington, D.C., U.S., on Thursday, Aug. 23, 2018. (Photo: Yuri Gripas/Bloomberg)

‘China is going to be left out in the cold’

President Trump made progress with a bilateral trade deal with Mexico early this week, while discussions with Canada are ongoing. Laffer, sometimes called the father of supply-side economics, sees Trump’s work with Mexico and Canada as a necessary step to eventually pull China back to the table.

“Once we get the deals with these other countries, China is going to be left out in the cold,” Laffer said. “And they really depend upon trade.”

China’s economic growth depends more on trade than the U.S. Exports of goods and services account for about 20% to the 2017 GDP of China, the world’s second-largest economy, compared to 12% of U.S. GDP in 2017.

(Photo: KEI)

Consequently, Laffer believes the economic miracle of 21st century China — driven by mass manufacturing meeting globalization — could be the weak spot when it comes to a trade war. In July, Laffer, whose thinking has been influential with President Trump, sent an analysis titled “The Great Fall of China” to the White House. He argued U.S. tariffs on Beijing were causing “substantial risk of derailing much of the past 50 years of growth in China,” the Wall Street Journal reported.

Laffer reiterated the point on Midday Movers, warning that China could “ill afford a setback” in a trade war scenario.

‘I believe deep down that he’s a free trader’

Laffer, a staunch free-trade advocate who called Trump an “amazing negotiator,” sees Trump borrowing a page from Reagan’s playbook by first imposing tariffs and then suggesting zero tariffs.

“Now what he’s told me and what I believe is happening is the threats of protection have brought these people to the table. And he said to me personally he has very little leverage except by threatening tariffs,” said Laffer. “And I have to trust him that he’s telling me the truth because I believe deep down that he’s a free trader. Any chief owner of an international business has to be a free trader if they know how to do business and he does.”

Art Laffer in Washington, DC on Sunday, March 8, 2015. (Photo: Sarah L. Voisin/The Washington Post)

Despite singing praises for President Trump’s negotiation tactics, there is one thing Laffer doesn’t stand with the president: that a trade war is easy to win.

“A trade war is the exact opposite of anything I want to see,” Laffer said, citing the lessons of Nixon’s presidency. “Trade wars are horrible and that is the one thing we may need to make sure we avoid, and free trade is the only real answer.”

Krystal Hu covers technology and economy for Yahoo Finance. Follow her on Twitter.

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