Global trade under threat

WHAT has gone on for decades of US trade deficits and uncompetitiveness to be unravelled with the imposition of steep tariffs on steel and aluminium?

This is not an untried policy but one that has been tried and generally failed. Global trade is starting to look like a fight to protect each country’s turf with the US mounting more tariffs, first on washing machines and solar panels, and now on steel and aluminium that are used in heavy industries.

The latest threat is the US will impose reciprocal taxes on countries that charge higher taxes on US products than the US currently charges on their goods, according to Bloomberg.

Instead of structural reforms, uncompetitiveness is being tackled by short cuts like imposition of tariffs or artificial barriers.

Of some comfort is that there are exemptions and promises of flexibility in the latest round of steel and aluminium tariffs.

And while walls are threatening to come up elsewhere in the form of possible retaliation by the European Union and China, and counter-retaliation by the US, 11 Asia-Pacific countries inked a deal for lower tariffs.

In a sign that there is still some sanity left, they, including Malaysia, signed the TransPacific Partnership.

Is it so simple as saying that trade wars are not that bad ‘if we are behind almost every country?’

The US has been running trade deficits for decades, with the trend worsening over the last 30 years as companies shifted manufacturing to countries like China, according to a Reuters report.

The US trade deficit in January jumped 5% to US$56.6bil, the highest level since October 2008; deficits with its top trading partners, China and Canada, surged 16.7% to US$36bil, and 65% to US$3.6bil respectively.

China’s February exports unexpectedly rose 44.5% from a year earlier.

Tit-for-tat trade measures have been blamed for deepening the Great Depression, and at the beginning of the 2000s when the US imposed steel tariffs on Europe, thousands and thousands of jobs were lost, European Commission vice president Jyrki Katainen was quoted as saying by Reuters.

Tariffs imposed on tyres from China during the previous US administration had cost more 3,000 jobs, said Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias.

Reports say that during the Bush administration, firms cancelling orders for imported steel to buy domestic steel, ended up pushing local demand so high that 200,000 Americans lost their jobs to rising steel prices.

Retaliatory taxes also have adverse effects where “agricultural and manufacturing jobs can be lost,” according to Zahidi.

The economic costs of tariff protection usually outweigh the benefits.

“While producers benefit from increased sales and prices, consumers will have to pay more which will reduce consumer income.

“Tariffs to protect inefficient domestic industries lead to complacency. They become trapped in their inefficiency and uncompetitiveness,’’ said Lee Heng Guie, executive director, Socio Economic Research Center.

“It will likely worsen the US trade deficit (as the export competitiveness of companies using steel and aluminium is reduced) and result in net loss of jobs,’’ said Inter-Pacific Securities research head Pong Teng Siew.

Manufacturers using aluminium to make high value products like cars will experience rising costs, as the US does not have the capacity to produce what they need; producers cannot build new capacity as they do not have cheap power, Reuters reported.

“These risks (of retaliation) are real as other governments will be under pressure to safeguard their domestic industries and consumers,’’ said Lee.

Worse still, if China which has warned of stern reaction, were to devalue its currency; the impact will be felt across Asia which has been largely dependent on the China market.

“History shows that the devaluation of the reminbi was generally accompanied by depreciation of the currencies of emerging countries,’’ said Zahidi.

The effects of these tariffs may be uneven as cheaper imports may still be sourced from countries such as Canada, Mexico and Australia that have been initially exempted while other major trading partners and allies have lined up for exemption.

In a sense, these exemptions result in not just a more artificial trading system but also an uneven playing field for global trade, and may eventually defeat the original purpose of improving the trade deficit.

Markets remain wary and confused; this is especially so when the massive funding required for US$1.8 trillion in US tax cuts, military and infrastructure spending is not clear yet.

Then, markets have to struggle with the threat of rising US inflation and rate hikes, and suddenly, this tariff surprise and fears of a widespread trade war.

Speculation on the reasons for these moves include pressure from certain industry groups, the need to satisfy the voter base; preparation for US mid-term elections in November and major risk-taking in voting for somebody with “untried policies.”