Easy to Win Trade Wars

The Trade War Declaration

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.”

So said Donald Trump in a tweet on March 2, 2018. Previously in January he had placed a 30% tariff on foreign made solar panels. In March he had the U.S. Trade Representative assess tariffs on about $50 million of Chinese imports. In April the Chinese retaliated and levied tariffs on 128 products imported from the United States. Tit for tat tariffs were the norm.  The trade war had begun.

The Chinese

The President’s belief that trade wars are easy to win is woefully misguided. But his frustration with Chinese unfair trade practices is not. The Chinese have taken advantage of the United States for years. They have restricted access to the Chinese market, forced technology transfers and joint ventures with Chinese partners, failed to protect U.S. intellectual property, manipulated their currency to achieve price advantages and provided export subsidies that enhanced that advantage.

Regrettably, Trump did not limit his actions to the Chinese. He also chose to assess tariffs on other countries he considers taking advantage of the U.S. That includes the European Union, Canada and Mexico. So, instead of a coordinated strategy with countries injured by Chinese practices, he initiated a trade war with all.

Republican Paul Ryan, Speaker of the House of Representatives, spoke out against Trump’s action on tariffs.

“I disagree with this action and fear its unintended consequences. . . . There are unquestionably bad trade practices by nations like China, but the better approach is targeted enforcement of those bad practices. Our economy and our national security are strengthened by fostering free trade with our allies.”

Trump’s Understanding of Trade and Tariffs

Trump believes trade is a zero-sum game: one party wins, the other loses. He emphasizes that belief when he states, “. . . . we lose Jobs and over 800 Billion Dollars a year on really dumb Trade Deals.”

But that $800 billion is not a loss. It is the 2017 U.S. trade deficit in goods (excluding the $255 billion surplus in services). That represents the amount spent on products received in excess of the amount of products exported. It reflects the imported products consumers wanted such as  iPhones, Lexus and Mercedes Benz cars, and French wine and cheese.

On September 17th, Trump tweeted:

“Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country . . . .”

Aside from his usual braggadocio and misstatements, the idea that billions of dollars are flowing into the United States from these tariffs indicates how little he understands. The fact is neither China nor other exporting countries pay the tariffs. Importers pay the duties and either bear the cost or pass all or some of it on to consumers.

Historical Experience of Trade Wars

Perhaps one of the most damaging trade wars occurred after the Smoot-Hawley Act of 1930 involving the United States, Canada, Europe and other nations.

During the initial years of the Great Depression, President Herbert Hoover proposed tariffs on agricultural imports to mitigate a farm crisis. But Senators Reed Smoot and Willis C. Hawley introduced legislation adding a multitude of industrial tariffs. Hoover signed the bill. Other countries retaliated imposing their own tariffs. The result: a drop of 66% in imports and 61% in exports, exacerbating economic recovery during the Depression.

As a footnote, Hoover, Smoot and Hawley were all voted out of office in the next election. Take note, Mr. Trump.

In 1987 President Ronald Reagan placed tariffs on $300 million worth of Japanese computers, power tools and TVs. This was an addition to already high tariffs on Japanese autos in the 1980’s. The action was taken in response to Japan’s failure to fulfill an agreement to allow more U.S. imports into its market and stop under-pricing American semiconductor computer chips.

The Japanese chose not to take retaliatory action. Nonetheless, economists of Bank of America Merrill Lynch said the U.S. trade deficit continued to grow. Additionally, U.S. consumers paid an estimated $53 billion more because of import tariffs.

Steel Tariffs 2002

President George Bush imposed tariffs on certain steel products in 2002. A research report issued subsequently described the consequences of that action. It found that 200,000 Americans lost their jobs to higher steel prices in 2002, approximating $4 billion in lost wages. And the number of jobs lost were greater than the total number employed by the U.S. steel industry itself.

Consequences of Trump’s Easy to Win Trade War

Though most economists do not expect these trade wars to benefit the U.S. or world economy, it is too early to make that firm conclusion. Nonetheless the initial effects of these tariffs on the U.S. economy are readily apparent.

Steel and Aluminum

Tariffs will raise the cost of imported steel and aluminum giving a competitive advantage to U.S. companies. This will provide a profit boost to the respective U.S. companies and an opportunity to add workers to satisfy increased demand.

But the corresponding effect on those industries that use steel and aluminum will be much more negative. The fact is there are far more people in industries that utilize these metals than in their primary manufacturing. Think steel and aluminum in autos and appliances. A Goldman Sachs team of analysts estimated that higher steel costs could hit GM and Ford’s profits by $1 billion each.

Retaliatory action to these tariffs has also begun to take its toll. For example, the European Union increased its tariff on motorcycles to 31%. As a result, Harley Davidson decided to begin moving some production to countries not subject to this tariff. This unintended but expected consequence of tit for tat tariffs suggests further job losses in the U.S.

Farmers

But users of steel and aluminum are not the only losers in Trump’s trade wars. Farmers are already suffering as China imposed retaliatory tariffs on several products including soybeans, corn and pork. Iowa Agriculture Secretary, Republican Mike Naig confirmed the negative impact.

“It is impacting our markets and that’s impacting our farmers. Our farmers understand that there are issues that need to be resolved, particularly with China. But there is no doubt that the retaliatory tariffs are impacting our marketplace and that’s impacting our producers negatively.”

Bad Public Policy

Trade wars are bad public policy as more than inferred by Republican Senator Chuck Grassley. Tariffs do not put America first — low barriers and expanded access do. But the American President believes otherwise. Sadly, America will suffer from his ignorance as will the global economy.

 

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