Trade Wars

International Conflict by Economic Means

We have become accustomed to hearing that the world is a better place due to “Free Trade”.  “Free Trade” being the idea that anyone, anywhere in the world, can sell their goods or services anywhere else without a government imposing import or export taxes on those goods or services.  The main word here is “idea” because, in fact, there are many important “exceptions” to Free Trade.

For example, the US started importing massive numbers of cars from Japan in the 1970’s, when the price of fuel went through the roof, and US manufacturers were way behind the Japanese in producing fuel efficient cars.  The Japanese sold their cars in the US after paying very low import taxes.  On the other hand, the Japanese still levied extremely high taxes on US agricultural products sold in Japan.  The Japanese import taxes were so high that they imported almost no US agricultural products.  They did this to protect the livelihood of Japanese farmers.

The point is that the United States has allowed itself to be victimized by one sided trade agreements for decades.  It is not all bad news though.  The winner is certainly the American consumer.  Goods in the US are cheaper as a result of low or non-existent import taxes.  My daughter, for example, regularly buys dresses direct from China, paying maybe $10 for a dress that would cost at least $100 in a store.  American “quality of life” has improved due to low cost goods from overseas.  Yet it is also true that American industries have suffered as the US is stymied in its attempts to similarly sell cheap products (mostly agricultural products) in overseas markets.

China has become America’s largest trading partner.  The trade is mostly one way, with China being the source of a vast quantity of manufactured goods for Americans.  The US does sell a significant amount of stuff in China, but it is not exactly a level playing field.  A good portion of what the Chinese sell in the US is “subsidized” by the Chinese government, the case in point being steel.  That means that they sell it here for LESS than it costs them to produce.

The Chinese are producing too much steel.  This is because their own demand for it has tanked as the Chinese construction boom has ended.  But they don’t want to lay off their steel workers.  So they “subsidize” it by giving grants and loans to producers that they will never repay.  This is the reason they are selling it for LESS than it costs to produce.

President Trump’s slapping tariffs and import taxes on steel and other Chinese goods is in response to so called “Free Trade” being a mostly one sided deal.  The problem is that it will hurt American consumers, and, in the short term, those who are exporting successfully to China.  That is because the Chinese will retaliate against Trump’s tariffs with those of their own, starting a Trade War.

A trade war caused by American tariffs (the Smoot-Hawley Act) in the early stages of the Great Depression caused serious harm to the world’s economy.  It was a major factor in the depth and length of that economic catastrophe.  Trade wars harm everyone involved, as it just makes a bad situation (the lack of true “Free Trade”), worse.

What to Do

The best way to handle one sided “Free Trade” is to deal with poorly negotiated trade treaties.  If you can’t sell your stuff in another country at the same rates they can sell their stuff in your country, it’s a bad deal.  And you shouldn’t make bad deals.  We enter into these things because those that will profit from the bad deals are the ones supporting politicians who sign them.

The bad deals need to be renegotiated.  That takes time.  Hitting out with tariffs and import taxes only has the result of hurting the consumer and hurting export industries.  And it does this VERY quickly.  American consumers and exporters will suffer almost immediately.

The Trump tariffs will also give the Chinese significant propaganda ammunition.  The Chinese leaders can say that China’s economic troubles are caused by America not living up to its signed agreements.  And when things get really rough economically, they will say that America, not the poor planning and policies of the Chinese Communist party, is the cause.  And this will be one of the triggers for outright conflict between China and the USA.