A global trade war
According to Donald Trump trade wars are good and it is a war that the United States can easily win. This tweet came after his announcement that the United States was imposing a 25 percent tariff on steel imports; and, 10 percent on aluminium imports. These were in addition to tariffs already imposed on washing machines and solar panels.
As expected, other countries have strongly objected saying that this move would trigger a global trade war that would be bad for the US economy and the world economy. Several countries are already preparing retaliatory measures. The European Union has said it will impose higher tariffs on several American products including Levi’s jeans, Harley Davidson motorcycles and Jim Beam bourbon. There are speculations that China will impose higher tariffs on American soybeans and tech products like Apple. Brazil is actually the largest exporter of steel to the United States. It is considering retaliatory tariffs against US coal imports.
Trump’s planned tariffs are supposed to be targeted at China; but China is not even one of the top ten exporters of steel to the US. But China will still be affected because the foreign suppliers kept out of the American steel market will head elsewhere and eat into the market share of Chinese steel in particular and could result in some consuming countries instituting their own safeguards against a glut of steel and aluminum being diverted from the Chinese markets.
One Stratfor analyst said: “For China the steel is just the tip of the iceberg. It is an indicator that Washington is becoming more serious about forcing it to reshape its trade practices from market restrictions and industrial subsidies to technology transfers and protection for state owned enterprises. And the disputes are part of a bigger picture. China is transitioning from being inward looking to an outward acting nation. As a consequence its influence is expanding elsewhere, and it is challenging the global status quo. Its size and influence, accompanied by more aggressive actions, make it an easy target and put it in an inevitable course that directly challenges US strategic interest.”
Trade wars happen when two or more countries raise or create tariffs or other barriers on each other in retaliation to other trade barriers. Increased protection causes both nations to move toward more confrontational positions. Another form of trade barrier is actually increasing subsidies to domestic industries. China and Germany subsidize exports.
Poor countries do not have the ability to engage actively in trade wars. They do not have the financial capacity to match the subsidies of rich countries. In addition, poor countries are more vulnerable than rich countries in trade wars, in raising protections against dumping of cheap products, because a government then risks making the products too expensive for its people to afford.
A tariff is a tax placed on some particular or specific imported goods. For example, a company bringing in a $100,000 of steel made in Brazil, Germany or China would have to pay $25,000 to the American government. This would mean that the price of imported steel will increase by 25 percent. Tariffs are supposed to protect domestic prices and raise government revenues.
In the United States, the steel and aluminum industries will benefit. However, the industries that rely on steel and aluminum inputs will have to pay higher prices. These industries include automotive, aerospace, machinery and construction. Consumer goods containing these metals will become more expensive.
The worst part is that there will be a ripple effect around the world. Affected countries are already planning retaliatory measures. They would carefully target goods that would cause economic or even political pain.
The New York Times recently wrote in an editorial: “President Trump has been spoiling for a trade war since before his election... The steel and aluminum tariffs are ostensibly aimed at punishing China which has been driving down prices for these commodities by producing far more metal than the world can use. ...If Mr. Trump were truly interested in getting China to reduce its excess production, he would have worked with the European Union, Canada, Japan, South Korea and other countries to pressure Beijing. These nations tend to be closely aligned with the United States and have also been hurt by China’s mercantilist policies.
The steel and aluminum tariffs might on their own have only a small impact on the economy. But the greater fear many experts have is that Trump is just getting started and will impose new tariffs on a host of other imports sending the United States into a much broader trade war, the likes of which the world has not seen since the Great Depression. That would have a large and devastating impact in the United States and around the globe.”
In 1930, in an effort to save American jobs and farms from foreign competition the United States raised tariffs to its highest levels in 100 years. The result was a disaster as American trade dropped by almost two thirds.
At the same time, Great Britain sought to protect home grown industries. France doubled its tariffs. Nazi Germany established a policy of self sufficiency by replacing imports with domestic production. The collapse in trade among nations in the 1930s accompanied a rise in aggressive militarism which led to the Second World War.
The world must look for a middle ground between excessive protection will lead to a global trade war and a global trade policy that will prevent countries like China from dumping cheap products to solve excessive domestic production.
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