Donald Trump’s trade war has erupted! He thinks “trade wars are good and easy to win.” But the expected negative outcomes might surprise him. The United States (US) fired the first salvo with tariffs on steel imports. China countered with duties on several items, and the European Union (EU) warned it would retaliate if not exempted. Unless common sense prevails quickly, more countries will join the fray, and US citizens will be major losers. Meanwhile, uncertainty continues to cause massive swings in stock markets.
Trumps’ Basic Premise is Wrong
Trump’s basic “made in America” crusade will produce unintended results. To be sure, US firms could make in the US almost everything they need in the US. But some countries can make products as well as the US and at a lower cost. Thus, it is wise to let these countries produce those goods to lower consumers’ costs. That’s why Walmart off-shores, imports, then sells several products at prices people can afford. These imports are in the trade imbalance. To present a realistic trade picture, trade figures should reference the value of imports by US firms from off-shoring and later selling those items in the US. Apple, Walmart, Dell, and others off-shore some production and invest the resulting enhanced profits from selling these products in the US, which augments the GDP.
Sadly, the public is ignorant about manufacturing activities in the US. People believe off-shoring is the main cause of job-loss in the manufacturing sector. Although those jobs have been declining, output has been rising. To be sure, these jobs will reduce while output increases because of greater productivity. We should celebrate this result! With less government red tape, lower corporate taxes (ideally zero), and no corporate welfare, other sectors in the economy will grow and more than offset the fall in manufacturing jobs.
America has an advantage to produce many products locally. Governments must encourage US production by creating conditions for firms to keep production in the US. That’s what the recent tax reform should do, but tariffs might cancel the positive effects. Forcing companies to produce in the US where pockets of high union-driven labor costs exist, won’t work. Firms should go where they have a comparative advantage to produce goods and services most cost-effectively.
Facts-Driven Decisions Should Prevent Trump’s Trade War
If the trade war escalates it will cost many jobs, cause inflation, and likely lead to a recession. In the end, US consumers will lose. Let’s consider these facts:
- The US is the largest importer in the world although its imports are only 14.7% of GDP.
- Since 1975, the US has the world’s largest trade deficit. In 2017, the deficit in goods and services was $566 billion.
- China, Canada, Mexico, Japan, and Germany are the top five US trading partners (exports plus imports). In 2017, China’s trade surplus was $375 billion.
- China manipulates its currency, steals intellectual properties, and has other covert trade barriers.
- Before the recent tax reform, the US corporate tax rate was among the highest in the world, so companies off-shored to provide affordable products for Americans. As well, many states do not have right-to-work legislation which contributes to high labor costs and low productivity.
- Six of the top ten imports in the US are also in the top ten exports: motor vehicles, cell phones, computers, motor vehicle parts, gasoline and computer chips.
- Trade wars are harmful to the economy. They will result in direct and collateral damage to the most vulnerable in society.
- US imports include products US firms off-shore to lower wage countries and later sell in the US at lower prices than if those products were made in the US.
- Donald Trump is right to look for a solution to stop China’s cheating. However, his ideas and approach are myopic and will cause major harm to the US economy.
- Imposing a tariff on steel won’t hurt China whose steel imports are small (2% of total imports).
Trump’s Trade War Directed at NAFTA Negotiations
Attaching an import duty on steel from China is sophistry. It is evident Donald Trump focused his steel tariff on Canada (17% of US steel imports) and Mexico (8% of US steel imports). Trump is dangling Canada and Mexico’s exemption as his “carrot” for the NAFTA negotiations. He waived import duties on these countries but threatened to impose them unless he is happy with the outcome of negotiations. That’s Trump’s old-school carrot and stick approach to negotiations. If Canada and Mexico do not respond as he expects, he will impose the tariff (use the “stick).
Trump hasn’t done his homework. He admitted he was ignorant of US -Canada trade. He did not know the US has a trade surplus ($8 billion) with Canada—a deficit in goods of $18 billion (60% increase from 2016), but a services’ surplus of $26 billion (up 8% from 2016). Though seventy-five percent of Canada’s exports go to the US, Canada-US trade represents 15% of US global trade.
International Trade is not a Political Issue
International trade, like immigration, is not a political issue; the stakes are too high to ignore the facts. The US (Trump) ought to do the following to get back on track:
- Learn the facts. Understand the facts, then decide based on facts, not innuendos.
- Reflect on the likely effects of a trade war. The US population and US companies will lose.
- Twenty-eight states have right-to-work legislation. Earlier this year, the US supreme court heard arguments on whether government employees can be fired for refusing to pay union dues. The court’s decision might lead to right-to-work legislation in all states. Meanwhile, the electorate should encourage the remaining states to pass right-to-work laws and eliminate other restrictive union practices that drive wages up. This move would create a more competitive labor market, and with tax reform, will encourage companies to return production to the US and keep cash in the US for local expansion.
- Eliminate import duties.
- With the EU and other allies, in the World Trade Organization (WTO) or outside, ensure China stops its restrictive trade practices, including manipulating its currency. Meanwhile, the US and its allies must apply meaningful sanctions on China.
- Don’t force firms to manufacture in the US (or other country) as this will merely expand the work for creative accountants and lawyers to beat the system.
By creating a level playing field, companies will decide where they will locate production. Still, the overarching challenge to which we must devote attention is finding a sensible, practical, long term solution to stop China from cheating.
© 2018 Michel A. Bell