Trump’s trade war to nowhere

We are on the edge of a full-fledged trade war. The U.S. has raised tariffs, China is hitting back and businesses are watching worriedly as tensions rise and uncertainty grips the market. Amid this flexing of muscles comes a story from a place in the U.S. State of Missouri called Butler County, where Trump won almost 80 percent of the vote in the 2016 election.

This is the case of the Mid Continent Nail Corporation, which makes nails used for home construction and improvement. The company speaks of “hard work, respect, optimism, a can-do attitude, and an indomitable spirit,” calling up the values that have made it the largest makers of nails in the U.S.A. Now, as Donald Trump’s tariffs on steel begin to take effect, it is this company that is laying off workers and crying foul. Trump’s new tariffs mean input costs have gone up and the sale of ‘Made in USA’ nails has fallen by half. 

The example only serves to show that there will be no winners in a world where the strongest economy begins flexing its muscles, violating the bedrock principles of multilateralism, like negotiation, fairness, predictability, transparency and cooperation. Of course, the WTO itself has been criticised for paying lip service to these principles while forcing the agenda of the developed world on the developing world. But a wildcat disruption of the order brought by the actions of the Trump administration is a challenge of a very different order.

The U.S. imports more than it exports and runs an annual deficit of the order of USD 500 billion. In 2017, for example, the U.S. exported USD 2,331.6 billion of goods and services and imported USD 2,900 billion, resulting in a trade deficit for the U.S. of USD 568.4 billion. The U.S. had record imports from 47 countries in 2017, led by China (USD 505.6 billion), Mexico (USD 314.0 billion) and Italy (USD 50.0 billion).  The bulk of Trump’s ire is directed at China, which is hitting back with equivalent tariffs on U.S. exports. There are already reports that ports in China have stopped unloading U.S. goods pending directives from Beijing. With India, trade is comparatively much lesser but the U.S. still runs a deficit. In 2017, the U.S. said it exported USD 25.69 billion to India, imported USD 48.6 billion to India – a deficit of USD 22.91 billion.

Trading partners are interconnected not only by buying and selling of goods and services but also in forex investments. According to available data, China has forex reserves of around USD 3.1 trillion (as on March 2018). A substantial part of these reserves would be invested in U.S. treasury bills and treasury bonds. In other words, the huge fiscal deficit of U.S.A, at around 4 per cent of GDP in 2018, is being financed by the forex reserves of China and many Asian economies, including India. The fact remains that the dollar still remains the most attractive of currencies and a safe haven to place surpluses of the emerging economies. This is a strength for the U.S. that can turn into a weakness if the economies targeted by tariffs begin to react. One fallout could be the development (at last) of an Asian bond market to reduce the dependencies on the U.S. dollar.

Consumer sentiment is also turning against the U.S. Last month, Turkey announced tariffs on USD 267 million in U.S.-made products, citing the U.S. trade surplus with Turkey in steel commerce as justification. In Canada, consumers are starting a “Buy Canadian” effort focused around the boycott of all U.S. goods, according to a report of the Freedonia group on tariffs. Retaliation is all around, impacting U.S. exports of wine, whiskey, motorcycles, cheese and probably more products like soya.

The protectionist policy of Trump is based on the premise that a trade deficit is bad for the country and a trade surplus is good. This thinking harks backs to the days of mercantilism that dominated European policy from the 1500s to the 1800s, when the goal was to push exports, stop imports and collect gold and silver to build a strong nation state and conquer territories. The argument today that rising imports translate to reduced job opportunities for people in the importing country is in itself a mercantilist argument because it ignores the idea of a host of new opportunities that open up relative to the needs of the economy and the skills available in the country.

In the end, trade in a globalised world is not a zero-sum game, and imports can be as useful and valuable for the economy as exports.  Given the cost structures in the U.S., prices of goods and services will rise dramatically if the U.S. were not to allow imports from economies that can offer these at more efficient levels of production and delivery. Consider that manufacturing employees in the U.S. had an average annual compensation of USD 77,506 in 2013, according to the National Association of Manufacturers, the largest manufacturing association in the United States. High costs are not the only concern. As Tim Cook, the CEO of Apple has pointed out, the products Apple produces require advanced tooling. “And the precision that you have to have in tooling and working with the materials that we do are state-of-the-art. And the tooling skill is very deep in China…In the U.S. you could have a meeting of tooling engineers and I’m not sure we could fill the room. In China you could fill multiple football fields.”

In sum, different countries have their strengths and all countries cannot record a trade surplus at the same time.  There will be deficits in return for lower prices and more efficiencies in the globalised supply chain. This in turn brings economic benefits to both sides of the trade as the eco system thrives, enabling businesses to drive value.

The alternative is collapsing trade, strained relations and global turmoil. This the U.S. manufacturers can see themselves. The National Association of Manufacturers President and CEO Jay Timmons put well when he said, “The last thing America’s manufacturing workers need is an escalating trade war…more tariffs like these will punish America’s manufacturing workers.”

(Jagdish Rattanani is a journalist and R K Pattnaik is a former Central banker. Both are faculty members at SPJIMR.)