The Financial Express

Behind the unfolding trade war: The instruments

| Updated: July 30, 2018 22:30:48

Behind the unfolding trade war: The instruments

Though US President Donald J. Trump fired the first shot in the unfolding global trade war, one must still credit him for fairly and squarely living up to his campaign pledges, almost to the letter. Canada, China, the European Union (EU), and Mexico were the top targets then, and they lead the tariff target list: Canada and Mexico for a trade agreement that brings only US trade deficits; China for a string of unfair trade practices; and the EU largely for similarly free-riding the US market, much as it does security.

The new tariff hit only a few products, but unusually hit all targeted countries, suggesting a politically accented industrial bias. More pointedly, tit-for-tat action not only perpetuates itself, but its vicious outwardly-spiraling cycle actually attracts more products and countries.

 Aluminum and steel led the US taxed items, with 10 per cent and 25 per cent, respectively. First announced in March 2018, with exemptions expiring just as the G7 Summit at La Malbaie (Quebec), Canada, would meet in June. Retaliation quickly followed, seeking a net $20 billion from US exports: Canada's $12.8 billion to protect 10,500 aluminum and 23,000 steel workers, and the Europeans $3.3 billion.

China retaliated in April by imposing $3 billion of taxes on hogs, Harley-Davidson bikes, and soybeans, products strategically hitting the 'base' Trump supporters, farmers. Since one-fifth of US farm income stems from exports, with China being a prize market, Trump's tariffs began to backfire: he quickly adopted a $12 billion emergency farm relief measure when farmers still prefer to earn through exports than receive relief. Kentucky's Republican Senator Rand Paul spoke for them. Since they "punish farmers," he argued, "the answer is not welfare  . . . [but to] remove tariffs." The weight behind his comments contributed to the July 25 defensive zero-tariff deal with the European Commission President Jean-Claude Juncker. Indeed, agriculture dominates the European Union's next US tariff list, with orange juice, cranberries, tobacco, corn listed, in addition to jeans and tee-shirts. Canada's similar list also targets largely agriculture: yoghurt, soya sauce, jams, pizza/quiche, orange juice, whiskies, coffees, soups, and water; as too Mexico's: cold cuts, pork chops, sausages, berries, grapes, and cheeses.

With China Trump imposed 25 per cent tariffs upon $50 billion of Chinese exports in May 2018, then threatened to ramp them up sharply to $200 billion. China's tit-for-tat retaliation dittoed what it had previously done with investment: spiking European investments over the past two years from about $2.0 billion to $12 billion, while dramatically slashing US investments from $24 billion to around $2.0 billion. West Europe did just as well with Chinese mergers and acquisitions, amassing $22 billion of Chinese money, against $2.5 billion for the United States.

Government intervention in Canadian and US dairy highlights the farming ghost. From 1970 Canada started an objectionable supply management system, entailing up to 300 per cent import taxes to prevent market-flooding and price-controls (for cheese, milk, and butter; with turkey, chicken, and eggs added). Several NAFTA (North American Free Trade Agreement) and WTO (World Trade Organisation) trade disputes have been filed by the United States against Canada's supply management of softwood lumber. This is the legitimate route Trump should have taken instead of unilaterally imposing tariffs.

Transplanting the softwood lumber bickering on to Canada's dairy industry becomes ludicrous: 10,000 dairy farmers, who represent only 5.0 per cent of Canadian farmers, earn a disproportionate 10 per cent of farm income, and have gotten so spoiled on welfare, they actually utilise their supply management quotas as collateral to borrow, piling a $70+ billion public debt.

Trump's dairy tariffs also carry a political touch, driven by ballot-box considerations. The key US dairy state, Wisconsin, played a pivotal role in Trump's 2016 election victory. Any pro-dairy move by Trump now could conceivably translate into handsome Republican returns in the November 2018 mid-term election. What a far cry that would be from the strapped condition the party was in earlier this year.

With the November 2018 mid-term congressional election less than a hundred days away, Wisconsin dairy producers and steel producers in the 'rust' states of Ohio and Pennsylvania may conceivably ripen the November Republican fate. Nonetheless, after-effects could spiral costs, for example, steel tariffs spiking automobile prices, thus necessitating new auto tariffs.

External reactions could puncture domestic-only explanations. Canadian, Chinese, European, and Mexican retaliation may shake the fulcrum of the global trading system, jeopardising its tortuously constructed rules-based sanity, stability, and dignity over 75-odd years. Though the next Scopus article discusses this further, why the US tariffs are not wholly unreasonable must also be fully understood before drawing conclusions.

The US argument about trade imbalances carries weight. It has not only deficits with each of these countries, but also of growing proportions in this century. The $17 billion deficit with Canada last year was only half that recorded in 2011, 2012, 2013, or 2014, in fact, at least one-third or one-quarter less in each year this century up until the Great Recession of 2008-11.

Deficits with China have quadrupled in this century alone, from $83.8 billion in 2000 to $152.2 billion last year. When one considers how imbalance in 2000 was itself eight-fold larger than in 1990 ($10.4 billion), indeed, the 1990 figure being four-fold bigger than in 1985, alarm would ring for any country at the receiving end.

With Mexico, startlingly, the last time the United States had a surplus (of barely $1.3 billion), was in 1994, the year when NAFTA implementation began. Ever since, its deficits have ballooned, from $15 billion in 1995 to $70 billion last year, with not a single year showing less than a $30 billion deficit in this entire century.

It does not get any prettier with Germany (representing the European Union). Last year's $63 billion deficit was less than other post-Great Recession years. As with China, there is not a single surplus year for the United States since 1989, that is, when Germany was united.

From a US voter viewpoint, these add up to a gang-bang. As demand for a game-changing formula grew, Trump's voice was publicly understood better, almost like Father Coughlin's was during the 1930s Depression. We may assail his style, point out his mistakes (and there are so many of them that 'fake' news has now displaced factual news from the limelight), and fasten our seat-belt tighter, but can one fault an elected official who is living up to precisely what the voters elected him for? While a cottage industry seems to be cropping up around everything Trump says or does in every relevant nook and corner of the world, his single-minded focus on recapturing his 'base' voters for the Republicans in 2018 is beginning to show why he might end up on the winning side, even as his tariffs sink the country.

As the next article on the trade war architecture shows, those tariffs have already begun changing the game.

Dr. Imtiaz A. Hussain is Professor & Head of the newly-built Department of Global Studies & Governance at Independent University, Bangladesh.

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