Trumping up a trade war

Print edition : April 27, 2018

Steve Mnuchin, U.S. Treasury Secretary, declared: “We believe in free trade, we are one of the largest markets in the world.” Photo: RODRIGO GARRIDO/ REUTERS

The trade sanctions on China and other protectionist measures announced by the Trump administration will not only not serve the cause of the U.S.’ trade deficit but could also spark off a trade war, resulting in an overall shrinkage of world trade.

After a year of huffing and puffing, United States President Donald Trump launched, in January this year, what some have termed a “trade war”, fought in scattered industrial and selected locations. It started with quotas and tariffs on imports of solar panels and washing machines, and then moved menacingly to steel and aluminium. Tariffs on these two products have been imposed under a World Trade Organisation (WTO) clause relating to imports that threaten national security, even as Trump’s rhetoric refers to competition from “cheap metal that is subsidised by foreign countries”, which amounts to a completely different “dumping” charge.

Trade sanctions on China

The imposts—25 per cent on steel and 10 per cent on aluminium—are not trivial, although exemptions are promised for Canada, Mexico, South Korea and other countries, subject to conditions. All this put together does not mean too much, though. Reuters quotes Morgan Stanley as placing steel, aluminium, washing machines and solar panels together at a little more than 4 per cent of U.S. imports. But then, Trump announced on March 22 trade sanctions on China on the grounds that China was using unfair tactics such as hacking commercial secrets and demanding disclosure of “trade secrets” by U.S. companies in return for access to the Chinese market. Those measures included investment restrictions and tariffs on Chinese exports valued at $60 billion.

With Trump having begun the process to please labour unions and middle America which are upset over unemployment and poor quality jobs, it is not clear where he is headed. The actions have triggered responses from Europe and China. The European Union, which exported $6.2 billion worth of steel and $1.1 billion of aluminium to the U.S. in 2017, was the first off the block. E.U. Trade Commissioner Cecilia Malmstrom promised to launch a complaint against the U.S.’ action through the WTO’s dispute processing channel, and simultaneously opt for safeguard tariffs for the E.U. which would now be threatened by third country exports diverted from the U.S. because of the new impositions. The E.U. claims that the steel and aluminium tariffs imposed by the U.S. are, in effect, safeguard measures that are not warranted since U.S. imports of these commodities have not been increasing in recent times.

China’s symbolic tit for tat

China, too, has responded, even if feebly. In a statement issued in the first week of April, the Chinese government announced tariffs on 128 goods imported from the U.S., valued at $3 billion, as against the $60 billion of its exports that the anti-China U.S. action has targeted. This included a 15 per cent tariff increase on American fruits and nuts, and an additional 25 per cent tariff on pork, recycled aluminium and other goods. Though this is a small quantum of Chinese imports in value terms, the response is seen as a symbolic gesture that the country is not going to just “accept” U.S. action.

The fear is that if this tit-for-tat process continues, what seems to be Trump’s show of bravado may turn into an actual trade war. A similar tit-for-tat process precipitated by the U.S.’ Smoot-Hawley Act of 1930, which hiked tariffs on a large set of commodities, had a damaging impact on the volume of world trade and is seen as having contributed to the intensity of the Great Depression.

Trump himself contributes to this growing fear of a trade war. For example, he famously tweeted: “When a country is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore—we win big. It’s easy!”

Such rhetoric has a history. From the inception of his campaign for the post of President, Donald Trump had one core item on his agenda: to restore, with measures such as protection, the jobs that had been stolen from Americans through migration and transfer abroad. The transfer to foreign locations had occurred, he argued, both because of the foolishness of previous governments that had given the jobs away and the manipulation of America’s trading partners who exploited America’s generosity without offering anything in return. So his campaign slogans promised to place “America First” to “Make America Great Again”.

The “America First” slogan is taken to mean American markets for American products so as to create jobs in the country. But the first year of Trump’s presidency delivered more rhetoric on this front rather than real action. Through his choice of advisers and refusal to support the G20’s routine calls to “resist all forms of protectionism”, Trump fuelled fears of protectionism, but did not resort to it. He threatened to undo the North American Free Trade Agreement (involving Mexico and Canada, besides the U.S.) and impose penal taxes on imports from countries that run large trade surpluses with the U.S., but did not. In fact, Steven Mnuchin, U.S. Treasury Secretary, declared: “We believe in free trade, we are one of the largest markets in the world, we are one of the largest trading partners in the world, trade has been good for us, it has been good for other people.”

If Trump turns his back on such conciliatory statements and persists with his new protectionism, he would be clearly adopting a strategy that is a major departure from the positions the U.S. has taken since the Great Depression. That strategy amounts to giving up global leadership of a kind that promotes multilateralism as a means to ensuring a semblance of orderliness in world trading rules. In terms of policyspeak, Trump is clearly against multilateralism, which he is convinced has not served the U.S. well. After assuming office, he walked out of negotiations on a Trans-Pacific Partnership Agreement that the U.S. had backed for long. He promised to rewrite the rules embedded in the NAFTA. Trump and his advisers have been making it clear that they think the WTO is biased against the U.S. If American interests have to be served, unilateral action against individual countries such as China, South Korea and Germany, which run trade surpluses with the U.S., is what is needed.

U.S.’ trade deficit

The U.S.’ problem is real. Its aggregate trade deficit increased by close to 13 per cent to $568.4 billion in 2017. Of that, around $375 billion was on account of the deficit between China and the U.S. Strangely, despite his aggression, Trump again tweeted calling on China for “a plan for the year of a One Billion Dollar reduction in their massive Trade Deficit with the United States.” But China is a major source of the U.S.’ “problem”. And targeting steel and aluminium alone will not help much. China supplies just 2.4 per cent of U.S. steel imports, which is way below the share of Canada (16.7 per cent), Brazil (13.2 per cent), and South Korea (9.7 per cent). That explains the decision to impose separate sanctions on China. U.S. Trade Representative Robert Lighthizer made it clear that addressing the U.S.’ “China problem” will require going outside the multilateral route. “I don’t believe that the WTO was set up to deal effectively for a country like China and their industrial policy. We have to use the tools we have and then I think we have to … find a responsible way to deal with the problem by creating some new tools,” he reportedly said at his Senate confirmation hearing.

Such sanctions may neither hurt China excessively nor help reduce the U.S.’ aggregate deficit. China could divert its exports to other markets, displacing rivals there. And China’s place in U.S. markets could be taken up by its rivals rather than by producers located within the U.S. tariff area. If the U.S. seeks to prevent that, being the world’s major importer, it could end up hurting many more countries other than China or those that run a trade surplus with it. In fact, as the data on steel and aluminium imports suggest, among those hurt would be allies of the U.S. such as Germany and South Korea. If the U.S. chooses to protect domestic markets, having lost economic leadership, it would be giving up political leadership of the so-called “free world”. Meanwhile, the Trump administration is planning to frame its own mercantile export policy, which will drive up exports and hold down imports so as to reduce its large trade deficit. But here it could learn from the U.S.’ experience with the Plaza Accord in 1985. Through that Accord, the U.S. forced Japan, then a major source of its imports and the cause of its trade deficit, to appreciate its currency in order to strengthen the relative competitiveness of U.S. versus Japanese producers. But a year after the Plaza Accord, yen appreciation, which had adversely affected Japanese competitiveness, did not help the U.S. reduce its deficit because exporters from countries other than Japan found their foothold in the U.S. market.

In sum, Trump’s protectionist actions, while not helping the U.S. strengthen domestic producers and reduce its trade deficit, could set off a trade war that results, as in the 1930s, in a shrinkage of world trade. The Trump administration sees in protectionist actions a way of forcing a robust recovery from long years of stagnation. What it may actually get is an accentuation of the recession.

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