Maybe worth laying out incoherence of Trump's trade war a bit more, um, coherently. There are three issues that seem to be flashpoints:— Paul Krugman (@paulkrugman) July 6, 2018
1. Chinese bad behavior on intellectual property
2. China's overall trade surplus
3. China's bilateral surplus with the US 1/
Meanwhile, (2) is far less important in, say, 2010: Chinese surplus smaller relative to GDP, and the U.S. is no longer at the zero lower bound with high unemployment, so demand drag from foreign surpluses less of an issue. Still, some case for shift in Chinese macro policy 3/— Paul Krugman (@paulkrugman) July 6, 2018
But (3) is just stupid: China would have large bilateral surplus even with balanced trade, because it's the Great Assembler of goods whose value added comes largely from other countries. Yet (3) seems to be what Trump mainly focuses on 4/— Paul Krugman (@paulkrugman) July 6, 2018
So what are the Chinese supposed to deliver? They don't even know what concessions might satisfy Trump, and have good reason to believe that nothing would do the trick -- after all, Canada is also in the crosshairs, and does nothing important wrong 5/— Paul Krugman (@paulkrugman) July 6, 2018
So the only policy that makes sense for China is retaliation -- make this as painful as possible for Trump, and hope that this pushes him into either backing down or at least making comprehensible demands. Not saying they're good guys; but Trump not offering any useful options 6/— Paul Krugman (@paulkrugman) July 6, 2018