"The trade war will harm Israel"

Tyler Cowen  photo: Eyal Izhar
Tyler Cowen photo: Eyal Izhar

Leading economist Tyler Cowen says the US-China trade war was unavoidable, and Israel can only wait out the storm.

Prof. Tyler Cowen, one of the world's most prominent economists, told "Globes" that the trade war between the US and China and the growing rivalry between the two countries would harm Israel. He recommends that Israel's policymakers should lie low until the storm passes without taking sides.

The US economist, 57, an enthusiastic supporter of the free market, was selected by "The Economist" as one of the 50 most influential economists in the world, and as one of the 100 most original thinkers by "Foreign Policy". 

"Globes": Why is the trade war between the US and China escalating?

Cowen: "We started this trade war with China by shooting in all directions. It would have been much wiser to form our alliances first, and then consider doing something versus China. I believe that the current trade war with China is unavoidable. It would have taken place even without Trump as president. There are too many cases of unfair trading by China, of Chinese companies operating unfairly and even spying, of stealing of US ideas, and preventing US or Western businesses from operating in the country. This dam had to burst sooner or later.

"What is happening now is not good for any country: not for the US, not for China, and also not for Israel, which like many other small countries will be harmed by the trade war. We're in a situation in which everyone loses.

"The US is pressuring, and will pressure, Israel not to cooperate with China. It has already begun, and it will get worse. You can understand Washington - if you have the Sixth Fleet in Haifa and China controls part of the port, US concern is understandable. On the other hand, China depends on oil from the Middle East. It needs reliable partners in the region in order to ensure its regular supply, and Israel is the only country that meets this criterion. Imagine a future in which China exerts strong pressure on Israel to help it conduct its foreign policy. I think that it will be harder and harder for Israel to cope with Chinese pressure on the one hand and US pressure on the other."

What would you recommend that decision-makers do in such a situation?

"There is no choice. I would recommend a policy of waiting out the storm, trying to avoid choosing sides, and delaying the decision as long as possible. Actually, all of the options are bad."

"China will lose, the US will lose less"

Cowen visited Israel this week at the invitation of the Friedberg Economics Institute, whose stated goal is "to advance, in Israel, the understanding of and appreciation for the principles of economic freedom." Cowen, who holds libertarian views on economics, is frustrated at what the US is doing now. "I do not think that Trump is destroying the Republican Party's foundations, because it will return to its economic positions afterwards," he says. He manages the Mercatus Center, funded by the US billionaire Koch brothers. The center is a stronghold of pro-business views in favor of the free market.

Cowen is as much of an expert in literature and philosophy as economics. He writes "Marginal Revolution," a successful blog, has a regular column in Bloomberg, records podcasts and interviews with leading cultural and business figures, and so on. He writes books on the economic principles for choosing restaurants, on innovation, art, music, and on the economic value of reputation.

Do you support Trump's position that the US will get the better of the trade war because of its negative balance of payments?

"In the trade war just between China and the US, the US will lose less, because China is a poorer country with a positive balance of payments. In my opinion, the risk is that China will lose too much in the trade war and become more extreme and nationalistic. Then we will see a response to the trade war using other, non-economic, means. China already has a presence in the maritime areas that were in dispute in the past, and the concern is that it will continue moving in this direction."

Do you see the trade war opening up investment opportunities?

"If I had to point to an opportunity opened by the war, I would choose two main economies: Vietnam and Mexico. If anyone wants to maintain a presence in East Asia, the best place to go is Vietnam. That country will profit greatly from this. We are already seeing a trickle of businesses to it, and it never got along with China, so I don't see the two countries coordinating with each other. Mexico also, which lost a lot of the manufacturing that moved to China, is gaining now from the return of much of this manufacturing."

Broken US-Europe relations

Another theater of conflict is the transatlantic one. Relations between the US and Europe have not been this bad since the end of WWII. How do you explain this?

"Relations between the US and the EU have been broken for quite some time. Trump and his associates truly believe that Western Europe is no longer our ally. You can understand him: the EU buys gas from Russia and finances Putin, but does not spend money on defense, and expects the US to pay for this. Europe wants to play a double game between the US and China, to enjoy the best of both worlds, and Germany allows Chinese companies to control all of its infrastructure and communications. This is unreasonable; it is simply unacceptable."

Do your regard the European-US dispute on defense as an opportunity to invest in this area in Europe?

"I cannot visualize the EU succeeding or intending to build a strong defense force. European countries put such a strong emphasis on social conditions and welfare that they will not transfer budgets to defense spending. I think that they will continue to depend on the US, and will hope that it works for them."

The trade war, Brexit, and the state of the EU, especially Italy, are all visible risks. Is there any risk below the radar that we are unaware of?

"I think that one of the biggest risks, which is underappreciated, is what is happening in Taiwan, and the fact that China wants to take it over in some way is an important cause for concern. A direct invasion is an unlikely scenario, but another way that consists of intervention in Taiwanese politics and a takeover via business and immigration is a reasonable possibility, even a very likely one. This will put the US in a very difficult position, and the question of how to respond to such actions will be very important. Even if we say, 'Okay, we'll give up Taiwan, it's just a small country,' it will affect the behavior of other countries, such as Israel, India, and Japan itself, and their attitudes towards the US. They will lose the confidence that they have in US support in emergencies. This will even contribute to escalation in nuclear proliferation. I think that this is a more likely scenario than most people think. About your question, incidentally, I do not think that there is anything below the radar in our time. With all of the information circulating, everything is available. All you have to do is put a term on Twitter, and you will obtain a great deal of information about it."

"50% chance that Brexit won't happen"

Cowen is optimistic about the possibility that the UK will eventually abandon Brexit. "In the current stage, I think that that the chance of the UK withdrawing from the EU is 50%. Personally, I hope that the British will come to their senses and stay in the EU. But I of course understand why they want to withdraw. The UK is a very different place from the continent. I understand that they object to the European bureaucracy, but it is unrealistic to think that they will be able to sign a bilateral trade agreement with the Trump administration. Congress will not approve it, and it will certainly not be a good deal for them."

Cowen says that he visited Haifa, Jerusalem, and Tel Aviv, and was slightly surprised by views in Israel on US President Donald Trump.

"A large proportion of the Israeli public is in favor of Trump, and I think that this is because Trump talks about Israel not just as a normal country, but as a country that should receive the greatest respect. Furthermore, on a broad range of issues, some of them important but some merely symbolic, Trump is clearly pro-Israel, and in addition, his position is that it is completely acceptable to stop talking about the Palestinians as a problem for which Israel is responsible. Whether or not you accept his views, he talks this way, and the fact that his statements are accepted by the US public without protest has created a new status quo. I have been in nearly 100 countries. Israel is unusual in its sympathy for Trump."

Were Trump to sit down with you for a chat and ask you what to do, what would you recommend to him?

"I would tell him, 'Mr. President, be more predictable and work harder at creating alliances, and don't start conflicts,' but I don't think he listens to anybody."

Yasmin Yablonko assisted in the preparation of this article.

Published by Globes, Israel business news - en.globes.co.il - on June 10, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Tyler Cowen  photo: Eyal Izhar
Tyler Cowen photo: Eyal Izhar
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