Geo-Graphics

  

When he began slapping tariffs on Chinese exports last summer, President Trump said his actions would bring down America’s trade deficit. China, however, has retaliated by pressuring its firms to find alternative sellers for U.S. exports, from agricultural goods to oil, helping to increase the U.S. deficit with China to just over two percent of GDP—as the blue line on the above-left figure shows. Meanwhile, America’s global trade deficit has expanded by eight percent. Though Trump’s tariffs have not rebalanced U.S.-China (or U.S. global) trade, they have helped reverse the flow of China’s trade with other nations. As the red line on the above-left figure shows, the overall emerging-market (EM) trade balance with China has, since the U.S.-China trade war began, soared toward surplus. As China has cut its U.S. imports, it has bought commensurately more from the rest of the world. In particular, it has expanded trade with countries participating in its massive “Belt and Road” investment initiative (BRI). As the right-hand figure above shows, African and Latin American countries, many of which signed on to BRI last year, have been among the biggest winners of the U.S.-China decoupling. “The Sino-U.S. trade conflict, if it becomes long-term,” explained one China State Council official, “will definitely impact the import origins of some products.” BRI nations, in particular, were likely to “win orders from China for land-intensive agricultural products.” Trade wars are not, as Donald Trump famously tweeted in March 2018, “good, and easy to win”—at least not for those who fight them. Yet as BRI nations have shown, they can make winners of those who avoid them.

The “law of one price” holds that identical goods should trade for the same price in an efficient market. But how well does it actually hold internationally? The Economist magazine’s Big Mac Index uses the price of McDonald’s Big Macs around the world, expressed in a common currency (U.S. dollars), to measure the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose.