Did Trump start a trade war?
European Union (EU) President Jean-Clause Juncker warned the United States (US) on March 2 that EU will retaliate in kind if President Trump follows through with his plans to impose tariffs on steel and aluminium imports from Europe. "We must show that we can also take measures. This cannot be a unilateral transatlantic action by the Americans," he emphasised. Other countries in Asia have echoed similar sentiments. There is an increasing sentiment everywhere that US is going it alone and fomenting a trade war.
Unrestricted free trade is the cornerstone of economic growth and global prosperity. However, recent measures adopted by the Trump Administration has raised concerns among America's trading partners. US protectionist actions have also created an intense debate in academic circles. Many of my fellow economists have started to question the gains from international trade, a dictum we held close to our hearts since graduate school. Another fallout from US policies and actions, including its adversarial performance at the recently concluded WTO meetings in Buenos Aires, is the fear that all this could derail global economic recovery. The Wall Street Journal on January 24 declared in a headline, "Global Trade Tensions Rise" and warned the Trump administration of possible retaliations following the recent round of tariffs and threats to impose tariffs. "Despite a positive world economic outlook at the outset of 2018, rising trade friction between the US and some of its key trading partners, notably China, is one of the key risks to the global economic outlook," said Rajiv Biswas, Singapore-based chief Asia-Pacific economist at IHS Markit. Condemnation has come from other sources too. On the other side of the globe, The Irish Times ran a headline "Trump angers trade partners with protectionist tariffs." So the question is: what is the driving principle behind current US trade policy?
International trade theory is not a very difficult subject to master. By and large, free trade is good for all, but how do we get there? Unfortunately, there is hardly a single country in 2018 that allows free import and export of goods without any tariff or quota restrictions; we currently have a "managed trade" regime. Some countries allow trade more freely than others, but since tariff and quota are dirty words, all governments restrict imports by various means, including licenses, permits, trade enforcement actions, or other subterfuges. For example, China restricts imports of big cars from the USA by imposing a hefty 30 percent tax and calls it consumption tax or sales tax. Likewise, the US subsidises its agricultural sector and that puts agricultural exports from developing countries at a disadvantage. Most of the USD 25 billion agricultural subsidies go to big conglomerates which grow a handful of crops, including wheat, corn, soybeans, rice and cotton. However, the farm lobby is a strong presence in many states, and in collusion with lawmakers in Washington, it managed to torpedo the Doha Round, even though the World Trade Organisation (WTO) had judged that America's cotton subsidies were illegal.
There are many reasons why countries interfere with free trade, but only a few of them, including the "infant industry" argument discussed below, can claim legitimacy. If a country's trade balance is negative and out of control, it can curtail imports, but that by itself is not a very good reason to impose tariffs, as USA is doing now. Admittedly, US trade deficit on goods and services with the rest of the world jumped to USD 566 billion in 2017, a 12.1 percent increase over the previous year and the highest in nine years. For President Trump, who had promised to cut the size of US deficits to win elections, the surging trade deficit presented a dilemma. On the one hand, his advisers note that US economy is very strong, more so after he came to power, and the stronger US economic growth in 2017 enabled US consumers to buy more imported automobiles, household appliances such as dishwashers and televisions, and electronic equipment. On the other hand, "As a candidate, the president promised to reduce the trade deficit, end China's cheating, stop unfair trade in steel and aluminium, and reverse the tide of lost jobs due to trade," said Leo Gerard, president of United Steelworkers, a strong supporter of Trump's policy.
Thus, President Trump's anti-trade agenda is by and large a political act and not really meant to save jobs as he claims. Since taking office he has targeted trade pacts (TPP, NAFTA), and now he has turned his attention to rectifying trade imbalances with specific countries, particularly China, Mexico, Canada, Japan and Germany. However, the course he is following is erratic. For example, Trump was warned by his advisors that pulling out of TPP would damage American relationships in Asia and give China a diplomatic coup. Trade relations are an important tool in global diplomatic games and US will not win any new friends if it continues on the current course geared towards trade-busting.
What about the recent round of tariffs and quotas against solar panels and dishwashers? On January 22, 2018, USA imposed a 30 percent tariff on solar panels and this has been mocked as the first instalment of an "America First" tariff. The US president approved four years of tariffs that start at 30 percent in the first year which falls to 25 percent after a year and then 20 percent and 15 percent each year after that, before phasing out entirely. However, not everyone in the US is happy; tariffs, whether on solar panels, washing machines, steel or aluminium are not a free lunch. US consumers and industries that use imported raw materials will see their prices go up. "Tariffs have costs, benefits for makers of steel, aluminium", as The Wall Street Journal reported. The Solar Energy Industries Association has projected tens of thousands of job losses, 23,000 according to one estimate, in a sector that employed 260,000. From a more benevolent perspective, the tariffs are designed only to warn foreign governments and exporters to play it fair and may be part of a broader strategy to get US and foreign companies to shift production to the US and thus boost US employment in manufacturing. However, we know that solar plants are not "infant industries" and went out of business because of their higher cost of production. GATT and WTO rules allow protection of domestic industry in the face of "unforeseen competition if temporary protection will enable the domestic industry to make adjustments to meet the competition." There is hardly a single soul in the US who believes that US appliance manufacturers such as Maytag or Whirlpool companies will become competitive against sources in Malaysia and Vietnam.
More than three decades ago, President Reagan, an ultra-conservative like Donald Trump, railed against protectionism, which Trump has now resurrected. Reagan was facing pressures from many sides to raise tariffs to save jobs. But he came out swinging and appealed to the American people, "I may need your help in resisting protectionist barriers that would hinder economic growth and cost America jobs. Protectionism becomes destructionism; it costs jobs." Reagan knew a thing or two about good economics!
Dr Abdullah Shibli is an economist and Senior Research Fellow at International Sustainable Development Institute (ISDI), a think-tank based in Boston, USA.
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