Trade wars prove a dangerous game of interference
Choose your weapons! There’s a trade war coming. Like most wars, it’ll prove to have been senseless once the calm of natural force regains equilibrium, and we reflect on the waste and the damage. Is it not a zero-sum game? US President Donald Trump is leading the charge.
To be fair, he won the election on the unquestionably protectionist economic policy of “putting America first”.
Is he going to end up “putting America alone”, the way he’s going about losing friends and annoying people?
The World Series aside, is the US still relatively strong enough to be alone?
Not only has the balance of economic power and influence shifted over the past couple of decades, but the weapons of trade wars have also changed.
Trade war is no longer simply arithmetic.
It’s not just tariffs and counter-tariffs, tenuous trade agreements, and sanctions and signatures.
We’ve moved on to a far grander scale.
North Korea’s GDP couldn’t be noticeably mapped on the same graph as that of California, let alone that of the US, China, Japan, Germany or the UK.
The North Koreans are in no position to wage economic war, but they have some other cards.
Why not bring a gun to a knife fight?
Anyone, particularly given the advances in missile technology, can become a player by pretending to be a nuclear threat at the sanctions debate table.
North Korean leader Kim Jong-un did, and he seems to have won – as evidenced by the much lampooned coziness between the two leaders in the afterglow of the “successful” Singapore summit.
If not the threat of force, then how about a charm offensive?
Russian President Vladimir Putin can hardly be accused of being charming.
Tough, bare-backed and riding bareback, yes, but charming? No.
Along comes this once-in-four-years opportunity.
The doors are open and the barricades are down as Russia shows just how hospitable it can be for the most watched event on the planet, the Fifa World Cup.
Just another trade game negotiation chip, surely?
There are more subtle ways of dealing with the lack of natural competitive advantage, depending on which trade lane you find yourself in, or prefer to be in. Subsidise local production. These “support your own” rather than “fight the others” strategies get more political mileage and sometimes even prevail, if a residual asset or competence is created and a previous dependency can be replaced.
The corollary is that you can end up spending more on the subsidy than it would cost you to pay the unprotected price difference anyway.
Interfering with equilibrium is a dangerous game, albeit sometimes necessary and even apparently virtuous.
But is there ultimately a purpose?
Can you fight natural, different advantages? Yes, you can.
But you’d be better off using the tide than swimming against it.
The era of monetary stimulus is coming to an end.
Its protagonists will claim it has worked in getting the economies of the world going again, insomuch as they have, say, in Europe.
Was it the central banks’ intervention, really, or just the inevitability of economic cycles?
As any one country sought relative advantage through monetary policy intervention, so its counterparty would simply follow suit, returning both to the relative status quo ante.
There may well have been some effective decisions and some change, but, in the main, the pursuit of weaker currencies to promote exports simply resulted in a race for the drain for all currencies.
Imposing trade barriers and tariffs – or their counterparts, subsidies and incentives – is no different. The authority of sovereign states (and their leaders) allows imposition and interference, regardless of relative strength, or such fundamentals as natural supply and demand.
But over time you’ll either revert to the supply-demand clearing price, keep paying the difference or simply do without.
While politicians exchange trade tariffs (and insults) abroad in search of popularity at home, and the coffers of the treasuries of both sides swell, a lot of damage can be done on the ground, to local industry dynamics, and abroad, to trust and foreign direct investment.
It’s better to build on your strengths and export those products at fair market value, in exchange for importing those products where other countries are the natural lowest-cost producers.
Is that going to happen? I doubt it. There’s just too much money to be made in the business of interference.