Intentions are one thing but results are entirely another thing. That is precisely what usually happens with protectionist policies: they are aimed at doing one thing, instead end up doing something completely different. Donald Trump was very clear about this during the election campaign that led him to the White House. Likewise, he has continued to be just as clear since he arrived in the Oval Office: protectionist policies are a fantastic idea. He signed ‘new tariffs on steel and aluminum into law’; he has begun his mission to ‘crack down on Chinese trade with $60 billion in tariffs on imported products,’ and he also proposed ‘$100 billion in additional tariffs on Chinese products’. So far, only the first tariffs have been approved, such as those on steel and aluminum, excluding many countries allied with the US. However, if recent developments are to go by, Trump is very clear that one of his main priorities is fighting the external deficit, reducing the difference between imports and exports which amounts to $500 billion per year.
And that is where tariffs always come into play. Many argue that Trump does not want to really get involved in a full-blown commercial war, and that the US President’s threats, especially against China, are nothing more than a gamble and a way to force Xi Jinping’s government into sitting and negotiating. And yes, that may be so, but since one never knows with Trump, it would be sooth to ask ourselves a few questions: Does it help the US to open fire and trigger a trade war? Are tariffs the best way to help the US economy? Is China breaking the rules? Are they competing in an unfair way? Do we need to punish Beijing?
Many argue that Trump does not want to really get involved in a full-blown commercial war, and that the US President’s threats, especially against China, are nothing more than a gamble and a way to force Xi Jinping’s government into sitting and negotiating.
One could say that when a politician pursues protectionist policies, the objectives are usually defending industrial jobs, punishing alleged unfair competition – usually by poorer countries – and boosting the local economy. Now those are the intentions, but what are the results? If the US starts a trade war with China, will it achieve those objectives?
First of all, this is what Donald Trump says: ‘Under my Administration, the theft of American prosperity will end. We are going to defend our industry and create a level playing field for the American worker.’ One can find a similar tone in his voice to the one he uses while justifying the prosecutions on immigration. There is only one problem though, the statistics show a very different reality. The fact is that US labor market is undergoing one of its best moments in almost two decades. The unemployment rate is at around four percent and the number of unfilled vacancies is growing like foam. It is ironic that the American economic machine is beginning to suffer shortages of the most important input: labor. If migration policies do not change and the economy does not collapse, it is estimated that in the next 10 years, the US will have more than eight million jobs to be filled. And this is actually happening quite intensely in the Midwest, in states like Wisconsin, where there is a lot of employment but very few workers:‘It is great to have more people working in Wisconsin than ever before, but it creates a challenge. We just essentially need more people,’ says Tricia Braun, Chief Operating Officer for the Wisconsin Economic Development Corp.
Right now, unemployment rates in the States are below three percent and new jobs are constantly emerging. For example, the Taiwanese technology group Foxconn is investing more than 10 billion dollars in a gigantic campus to develop and produce new smartphones, tablets and television screens. It will employ more than 13,000 people. This situation is so peculiar that state authorities have been forced to launch an advertising campaign, like for the trains in Chicago and on YouTube, to attract workers to the state.
Not only that, the truth is that the manufacturing industry now employs a lot fewer people than it did two decades ago, but is this really due to Chinese competition? Well, the numbers tell quite a different story. Not only is employment at its highest levels in the economic history of US, industrial production has also reached its highest levels. Yes, the industry hires fewer people, but that does not mean that it produces less. What happens is that factories, thanks to robots and technology, are becoming increasingly productive. For example, let us take a look at the steel industry, which Trump said is being threatened by Chinese competition and poses a danger to national security. The truth is that the US produces 70 percent of the steel it consumes, for which only three percent is for military use. On top of that, China is not even among the top 10 suppliers. Yes, employment in the steel industry has decreased to almost half in the last 10 years, but the vast majority of jobs lost are not due to China or international trade, but as a result of technology and a commercial war would not change this.
As is evidently clear, this is not precisely bad. Nowadays in the US, there are more jobs than ever, and the trade deficit, despite what Trump may say, is not that high (being less than three percent of the GDP); and in fact it has decreased considerably in recent years. If we look towards investments, the US has a positive net investment balance too. This means that foreigners invest more in the US than Americans do abroad, which is obviously very good for the US economy’s future. In 2017, this positive balance surpassed $250 billion. So, it is unclear whether a commercial war would decrease the external deficit. However, it would have other undesirable consequences.
I think it is time to admit that the ones who would be most affected by a trade war against Chinese imports would be US companies. Buying cheaper materials abroad decreases production costs for local industries. And if in addition, a foreign country like China sells below cost, it would be as if Beijing was subsidizing American industries. Which is a very good thing from an economic point of view. We need to bear in mind that the US not only imports products to consume from China, they also import many intermediate goods and capital goods, such as machinery. In fact, more than half of all imports from China correspond to this type of product. So, the essential question that arises is: what would tariffs achieve?
It would damage the competitiveness of American companies. It would increase the cost of producing much more advanced goods, an aspect in which the North American industry is currently a leader. This would mean decreasing their exports to the rest of the world as well as the consumption capacity of Americans themselves. As a result, millions of jobs would be potentially destroyed. For example, the new tariff on steel and aluminum will make production of goods – like cars or airplanes – more expensive in the US and therefore, less competitive.
The truth is that the US produces 70 percent of the steel it consumes, for which only three percent is for military use. On top of that, China is not even among the top 10 suppliers. Yes, employment in the steel industry has decreased to almost half in the last 10 years, but the vast majority of jobs lost are not due to China or international trade, but as a result of technology and a commercial war would not change this.
But there is another very important detail: when you set tariffs, the usual reaction is for the other party to defend itself. If the US announces an additional $100 billion list of tariffs, Beijing will definitely strike back. Let us take the case of Boeing. China is the largest market for this company, and in the next few years it will deliver hundreds of new aircrafts to this country. But a commercial war could damage their long-term competitive position. China, for example, could then favor other companies such as Airbus and accelerate the development of a local industry.
It seems difficult today, but in the long term the consequences could be colossal. Not only that, Beijing could also resort to other, less orthodox means. For example, let us not forget that China is the largest foreign debt owner for the US. Would it be good for Washington if Beijing stopped buying debt or if they began decreasing securities to incite pressure? The answer would definitely be a ‘no’, especially due to the huge public deficit that the current administration is fueling.
However, Donald Trump has one thing right: China is not precisely a free market or a country that plays well. And it is not just about the fact that they have high tariffs or that they favor local companies. The problem is blackmailing large multinationals. For example, if foreign companies want to sell freely in China, they have to ally with local partners who can have access to their technology. From the perspective of the foreigners, this technology transfer is a problem in some way, because these Chinese companies use them to grow and compete.
Technological companies know what they are getting themselves into when they access the Chinese market. After all, they are the ones who decide where to produce, how to compete and what businesses to get involved in. Of course, this does not mean that the US government should not pressure or negotiate with China but unleashing a commercial war would be a terribly bad solution. As long as it is just threats, the US should be all right; but they have to be careful not to cross the line because that is exactly how large crises start. In this context, Trump’s decision to poke the Chinese bear after tensions had seemingly cooled down, seems pretty unwise.
So then if not a trade war, then what? How can the US alternatively reduce its trade deficit? Well, the best way to achieve this is with structural policies; doing what great exporting powers like Germany and Switzerland did. Favour saving – and therefore, long-term productive investment – decreases the public deficit which boosts import consumption by overheating the economy and improves the competitiveness of local businesses. For example, reducing bureaucracy, favouring talent attraction by allowing controlled immigration and lowering taxes could be a few of the alternatives that the US can ponder upon because a trade war would just be bad for everyone.