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Trade Wars and Rumours of Trade Wars

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“Every man lives by exchanging” – Adam Smith

The official announcement of the onset of a Trade War between the United States and China has caused the entire world to sit up and take notice. Everyone seems to be waiting with bated breath to see how the situation unfolds. The general consensus, though, is that it can have potentially drastic implications for the global economy.

The crux of the issue is the growing trade deficit with China, made worse by the fact that China’s trade surplus with the US is greater than with any other nation worldwide. China is therefore not without blame.

China has long been accused of remaining in violation of international trade laws through both exchange rate manipulation and ignoring policy on Intellectual Property Rights as outlined by the World Trade Organisation.

Yet, while several economists agree with America’s stance on the matter, its methods have become the subject of widespread controversy.

While this violation may be salient for China, it does not hold true for the rest of the world upon which the same tariffs on steel and aluminium have been applied.

The tariffs were placed on raw materials instead of finished goods. Therefore, the impact may not only be felt by the aluminium and steel producers who will benefit, but negative consequences can also affect the production costs for downstream producers.

This particular Trade War also threatens the United State’s attempts to become one of the leading exporters of Liquid Natural Gas (LNG) given that China recently surpassed Japan as the world’s leading importer of this particular commodity. The US has been attempting to expand its market share and is currently competing with the leaders of Qatar and Australia, however, the impact of the Trade War can prove a real threat to the achievement of this goal.

The US stock market responded almost immediately; within one week, the Boeing fell by 3%, Caterpillar fell by 2.7% and tech companies were also affected as Apple fell by 1.5%. The Dow Jones Average fell by 40 points cancelling out all gains made during the year. Chinese stocks also felt the impact as the benchmark Shanghai Composite Index fell by 3.8%.

Another disturbing issue lies in the fact that these tariffs are in opposition to several longstanding international agreements such as the General Agreement on Tariffs and Trade (GATT) of 1947 and the North American Trade Agreement (NATO) of 1949 which are both against the propagation of hegemony and protectionism.

Finally, the impact can also actually be worse for the US than for China given that China is less dependent on external demand and its reliance on net exports is currently shrinking. According to the International Monetary Fund, China’s “current account surplus will continue to shrink to 0.6% of GDP in 2023”.

OPINION:

As it stands, the expected fallout from the current level of tariffs will probably be manageable at best and so far, other nations have only been responding in kind rather than outright retaliation.

No one can really know how this will turn out or what will happen next, but I tend to lean toward the idea that other countries will continue to remain conservative for as long a possible in the interest of self-preservation.

It is worth noting, though, that several countries have a history of responding to war and rumours of war with immediate force, especially in light of the fact that Trump’s heavy-handed methods are widely regarded as bullying.

His demands leave no room for negotiation or consideration for a different viewpoint, and he also doesn’t appear to want to accept yes as an answer. It seems like the objective it is a trade war and nothing else.

The second cause for concern is his seeming lack of knowledge on the subject matter. Trump’s statement that “Trade Wars is good and easy to win” seems to be causing its own round of concern as it appears to be a gross underestimation of the widely held sentiment that they may be a lot more complicated than he seems to believe them to be.

The statement itself is also erroneous since the supposed winner of a Trade War is actually the country that loses the least. This alone invalidates both parts of this argument.

The idea that because America is currently experiencing a trade deficit with all other countries, and the imposition of tariffs will therefore automatically be beneficial, is dangerously overly-simplistic.

Additionally, if the reason for the Trade War lies in the need to take China to task for its abuse of international trade policy, then as most economists agree that the better approach might have been to approach the issue with a united front as America is not the only country to express this sentiment.

Yet his approach of ‘Us against the world’ is counterproductive, especially given that it doesn’t account for the substitution effect which will allow countries to seek out alternate sources. This can then spark a price war among the top producing countries which will definitely benefit other nations but can be detrimental to the US and China themselves.

This is the greatest fear, that the situation will escalate and spiral out of control. Shawn Donan of the Financial Times “reckons that the figure could soon reach more than $1Tn or 6% of global trade”.

America is also unwilling to compromise in its demands for the following:

1- To end subsidies to United States companies

2- Stop stealing United States Intellectual Property

3- Open China to United States Investment

4- Reduce the trade deficit by $200 Bn by 2020.

All of these demands are in direct violation of China’s goals and would quite possibly hamper its economic progress and its objective to rise to trade dominance and its emergence as a world economic power.

While some sectors are set to benefit and it is predicted that the war will create employment, some fallout is expected for worldwide exporters to the US, stock markets and Industrial, Auto and Technology Industries.

Targeting intermediate goods like aluminium and steel, even though other nations are retaliating only with finished goods, seems counterintuitive. Not only could it result in a disproportionately favourable way for steel giants while squeezing out smaller producers, anything that increases the cost of production and impacts profitability will result in either of two scenarios:

Either the cost will be passed on to consumers, thereby creating inflation, or firms that are more vulnerable to competition will need to cut costs to compensate and the easiest and first cost to cut is usually that of labour thereby cancelling out or maybe even surpassing any benefits predicted from growth in the targeted industries.

Nevertheless, although the entire world has taken notice and is anxiously awaiting the outcome of this disagreement, there is also a wide section of the population who believe that we might be over-reacting.

Considering the number of times we have feared wars since the last election, and how many times America has managed to escape this fate, it is very likely that this might not end up being the catastrophe we are afraid of. Maybe this too will turn out the way several others have done in the past. Perhaps Trump will, as one speculator puts it, “bluster and tweet for a while, then accept some cosmetic policy changes, and call it a win”.

I guess only time will tell…

 

 

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  • Rob Siltaren

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