TRUMP’S TRADE WARS – the Law of Unintended Consequences

The notion of using tariffs as a means of biasing trade to benefit the tariff controlling nation is not a new concept. The British Empire, and more recently the US have (among others) had the means to take raw materials almost at will from poorer nations. Unfortunately while imposing tariffs has traditionally enabled some nations to grow, the tariff produced growth is always somewhat erratic and destabilizes the targeted trading partners.

Remember it is not just an imbalance of trade that is used to excuse the imposition of tariffs, it is also the wide difference in the partner nations’ overall wealth.

A trade war brings in new dimensions. Sometimes the targeted trading nation has its own significant economic strength, which gives it a genuine choice for seeking other trading partners. As it happens New Zealand has now drifted to China as a preferred trading partner ahead of the United States and it may be of passing interest to some in the US to know that a number of their trading partners are talking of doing the same.

One factor in a tariff dispute with more equal partners is that for the one sided imposed tariffs (or quotas on imports), an unexpected tariff almost guarantees retaliation. Autocracies like China are particularly well placed to control reprisals and one study from the Brookings Institution (by Joseph Parilla and Max Bouchet) has pointed out that 61% of US jobs affected by the Chinese response to round one coincided with electoral counties in the US which just happened to be in areas where Trump had a majority last election.

This was not a surprise to the commentators. The Trump imposition of trade tariffs on China last year brought its expected result in that many economists had predicted China would then hit back at the Mid West farmers in the US because they had the option of other suppliers eg in Brazil. In this case the Soy Bean market was shut off to the US and the Trump administration were left with a costly bail-out for the mid West farmers.  The other elementary error repeated many times by the Trump administration over the last two years is to equate Trade with the transfer of goods instead of including services PLUS goods.   For example Mr Trump imposed tariffs on Canada complaining they were being unfair whereas when the total value of goods and services were compared it was the US which was ahead.    Since services has the greater effect on employment, this actually matters!!

The other issue which seems to largely escape the wealthy leaders and investors of a large rich nation is a inconvenient truth that a large sector of the population live from pay-check to pay-check  and something like half the population have no access to cash reserves to deal with unexpected emergencies.   If is happens that China’s retaliation hits areas that include the vulnerable cash strapped sectors of the population the disruption is likely to spread.

Although there may well be short term advantage in imposing tariffs e.g. producing more local employment, the most common long term outcome appears to be reduced international trade, and problems in traditional supply chains. When trading partners find they cannot plan on the basis of previous long term fixed negotiated prices they often have to cut back on their products or seek safer markets. The most celebrated case of this happening was the now infamous 1930 Smoot Hawley Tariff imposition of tariffs whereby some 900 articles were chosen on the basis of competition with local US products and the imposed tariffs were typically between 40 and 50%..

Although in 1930 it seemed at the time desirable as a means particularly to assist struggling farmers attempting to cope with the after effects of the great dust bowl disaster, despite an initial boost to the local economy, the abrupt change in treatment damaged other struggling nations attempting to trade with the US and the result was a large scale depression. Goods arriving in the US with the added tariffs drove the price of imports up and the resulting pressure on the cost of living led to the collapse of much internal business as well as destruction of export destinations.

In more recent years the geographical isolation of nations has far less meaning than it did a century ago and it is typical to have supply chains crossing several national boundaries.

For example the current case of China and the United States the supply chains are sufficiently complicated to involve multiple partners and often involve crisscrossing the Atlantic several times with raw materials and componentry sourced and part assembled at different locations. Although the assembly of complicated products e.g. cars and planes may well employ more nationals for a nationally based company the hard truth is that at least part of the finished product is often much cheaper to assemble elsewhere which produces a more affordable product with a much more receptive international market. Hitting Huawei with legislation and tariffs is far from a one sided blow when Huawei employs many Americans in their many US stores.    More significantly China has already started to impose their own tariffs on the rare earths mined in China and processed in China for the supply of manufacturing materials for all those mobile phones and other electronic devices eg Apple – with the further option of closing down a good part of the supply chain to the US altogether.

I have not checked out the costs of setting up local steel production in the US but I know that the price of rolled steel for American factories to use has leapt more than 40% since the 2018 import tariffs for steel were imposed. Mr Trump’s often quoted criticism of dependence on Chinese steel is of course just plain wrong.   China only supplies something like one twentieth of the steel entering the US.     Once the steel tariffs were in place one calculation claimed the price per new American steel worker position (largely covered with borrowed money) was of the order of $900,000 per worker! When such costs are eventually passed on to the consumer it is hard to see a happy ending.

On March 8, 2018, Trump administration had imposed 10% tariff on imported aluminium 25% tariff on imported steel claiming dependence on imported metals threatens America’s lucrative markets for weapon manufacturers. The Aerospace Industry council pointed out that the tariff rise would raise the military’s costs instead. The huge Automotive assembly business was also clearly affected in that costs from tariffs lowered second quarter profits for the three biggest Auto manufacturers. The Auto manufacturers have been saying that costs from tariffs have already surpassed any benefits from having the metal tariffs.

It is of course true that in general terms the US has had a large annual trade deficit of goods which is running somewhere about $620 billion dollars. This however is partly misleading because there is an insatiable hunger for consumer goods in America and US manufactured goods produced for trade in the US are almost invariably higher priced if only because manufactured goods are typically more expensive to produce in America.

The US is not alone in this. Here in my home town I can for example buy a perfectly serviceable automatic opening umbrella from the local $2 shop and can’t find any local (New Zealand) product that approaches this bargain price. I am guessing if a New Zealand exporter was to send, say, locally manufactured reading glasses to China the local New Zealand manufacturer would need at least $10 per pair to even break even. If I prefer buy the equivalent Chinese produced product for $4.00 in a local store is this really a contribution to the bad effects of New Zealand’s trade deficit if it frees me to make other local purchases and support other local industries??

Placing tariffs on the Chinese products would indeed solve some of the competition problems for America and my country but because I too like to buy cheap imported goods, it would leave me with less money in my pocket to buy the American made cars imported here for sale in my country. Go figure!

Thus far the US administration has apparently assumed that the Trade disputes are independent from internal taxation and are focussing on short term gain rather than the overall debt increase exacerbated by the failure of the tariffs to compensate for the reduction of tax for the wealthy.

Since the Mid West agricultural support for the Trump presidency is partly credited with his election it may be of some concern for his party to note the farmers suffering from retaliatory tariffs imposed by China and Europe on their exports. For example in Wisconsin, Illinois and Indiana, bankruptcies have reached a record rate for the last ten years. Over the whole of America, in the first three months of this year, farmers’ income dropped $11.8 billion. Although Mr Trump says he will bail out the farmers, there is the inconvenient thought that since the budget has not balanced for the last two budget cycles, presumably the bailout will come from an extension of the sky-high US debt of $22.33 Trillion Dollars.

There might be fewer tariffs in the world if those who apply tariffs might contemplate how they might react when it is done to them. Keeping countries like North Korea or Iran in a state of grinding poverty by high tariffs and implying that military intervention might be a next step is unlikely to make their populations receptive to the need to surrender their rights to make nasty weapons. If US ever loses its current top spot in its share of the world’s GNP I find it hard to envisage a situation whereby its Administration would accept a sudden and one sided imposition of crippling tariffs from a more powerful trading partner. Why they assume that their own attitude to their own well being would not be expected in other nations is difficult to follow.

I have the passing thought that should the US elbow China’s greatly improving economic position to one side and greatly weaken China in the process (as Mr Trump claims will happen) it is not easy to see how the US will generate the equivalent markets elsewhere since China is currently such a strong contributor to the US economy.

I assume at least some of those living in the US support Mr Trump’s actions against America’s trading partners. I only hope Trump supporters are aware that according to overseas polls many outside the US are losing faith in the changing US trade policies. Having heard (and largely rejected) Mr Trump’s cutting criticism of some of its trading partners, I presume most who follow the international press are not surprised to learn disenchanted governments are negotiating new trade treaties excluding the US. For example the EU has strengthened its trade ties with Mexico and Japan – the latter being one of the largest bilateral trade treaties in the world covering some $152 Billion in goods. Now that the Trump administration has decided to punish Mexico for the illegal immigration into the US with graduated tariffs since Mexico is bound to respond in kind this will seriously damage the lucrative cross border trade.  More to the point it means the recently negotiated three way treaty between the US, Canada and Mexico is already endangered.

Ultimately whether or not the US is seen as behaving appropriately depends on whether or not its own people and trading partners accept the administration’s reasoning.    Of course tariffs are a legitimate part of a nations economy.    For example a fledgling industry may need protection.   In this instances some industries in the US are being disadvantaged by China’s trade practices – but remember it is not a case of a rich country holding a poor country to ransom.    As long as there is a vast gulf between the rich and the poor in the US, looking outside the nation for prime causes seems disingenuous.  That the rich in the US should be further assisted by reducing their taxes while the US is attempting to change the trade arrangements of a nation like China ( which is currently using trade to help lift the standard of living of a previously disadvantaged work-force), seems to miss the main point.

It is certainly true that China makes every effort to pressurize those who want to take advantage of their cheap work force and huge market by insisting on the sharing of intellectual property as part of the payment for using Chinese resources, but when you remember that US industry regularly does its own stealing of ideas, often by buying successful competitors out, pretending the moral high-ground is harder to justify.  Reflect back to the number of times Microsoft and Apple have been at loggerheads over the stealing of ideas.   The end result of similarity of automobiles produced by different companies and a raft of electronic devices from different electronic companies in the US should not escape our notice.

While I can understand the US wanting the best possible deal for their trade and where possible assisted by tariffs, given that current US President’s propensity to impose crushing tariffs at will (eg on Iran and other rival energy producers not to mention all those central and South American countries who refused to bow to US demands), it is hard to believe the controllers of the richest nation in the world when they tell us that poorer nations are unfair in their adopted trade practices.     Wouldn’t the fairest deal result in a true sharing of the rewards?

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