Trade Wars

I am intrigued by arguments about who will win a trade war between China and the United States. Those who think life is only about winning and losing have watched too many Westerns.

There are few real winners in a trade war. Just like military wars, the winners usually find out too late that the costs of winning were much greater than they expected. For example, Britain and the United States thought that they won the second world war (started to defend Poland), but found that all of Eastern Europe was controlled by the Soviet Union.

In the same way, no one really wins a trade war. There will be winners and losers in the United States, and there will be winners and losers in China. We can be certain of two things. The winners in both countries will be the businesses that collude with government to protect their patch.

The unintended secondary consequences will fall far and wide in unexpected places and be more severe than expected. Just as with military war, the losers in both countries will be the ordinary people who get caught in the crossfire.

We should not trust political leaders who think that war is a good thing, whether military or economic.

The questions that Christians should be asking is what are the spiritual powers of evil intending to accomplish through a trade war. War of any kind increases their freedom to operate.

Trade Wars

Donald Trump thinks like a businessman, when it comes to trade. One wins at the expense of another. This struggle between direct competitors is real. If another hotel chain lures away some regular patrons of Trump Hotel by undercutting the room rate, Trump Hotel loses. The other hotel chains win. If one building contractor undercuts another to get the contract to build Trump Towers, the former wins and the latter loses.

However, most trade does not work like that. Most other businesses are not direct competitors, but are suppliers and customers of each other. Trade between businesses that are suppliers and customers of each other benefit the entire community (while the few that are direct competitors win and lose against each other).

Donald Trump seems to take his win-lose business experience over into international trade. He assumes that if China has benefited, the US must have suffered. Consequently, he assumes that if he can make China lose, America will win again. This flawed thinking.

International trade is not a zero-sum game. All nations can benefit from an expansion of trade. When trade expands, a few suffer, but most people get richer. Expanded trade means bigger markets with more competition, with more specialisation, more choices, gains from scale, more innovation and more investment.

Businesses in different nations are good at doing different things. Nations have different resources, knowledge and skills. Trade between nations usually makes people better off.

It is true that the people of China who have moved from rural areas to work in manufacturing have benefited hugely from more open trade. However, many American businesses have made immense profits by getting their manufacturing done in China. People employed in dying American industries have suffered, but most Americans have benefited by being able to buy cheap consumer goods imported from China (phones and televisions) that they could not afford if they had to be manufactured in the United States.

Donald Trump assumes that America can win a trade war. Unfortunately, no nation wins a trade war. The problem is that all nations export and import. One nation’s imports are another nation’s imports. If a nation’s exports are reduced by trade sanctions, its capacity to import is goods and services is also constrained. This means that any change that limits a nation's exports also limits its ability to pay for the exports of other nations. Some smaller nations may be affected worse than others.

The American companies that are protected from competition by tariffs on imports will benefit. Those that have invested in manufacturing capacity overseas might lose. Many Americans will be worse off because they have to buy more than they consume.

Donald Trump believes that the US can win a trade war. That is mistaken. Everyone nation loses in a trade war. The best that Trump can hope for is to suffer less than other nations. Given that the US is a large market and depends on exports less than most nations, that could be the result.

But the fly in the ointment is that the US is running a massive budget deficit. In the past,, it has been able to fund this deficit by borrowing (selling treasury bills) from trading nations that needed US dollars for reserves. Most this funding from nations that Trump is fighting the trade war against. If a trade war goes too far, this source of cheap funding might disappear, with serious consequences. The US might lose more in a trade war than it expects./p>

The leaders of the EU, US, China and Canada are incredibly stubborn. I do not see any of them backing down. They are more likely to up the ante and get into a tit for tat struggle by the raising tariffs and imposing financial penalties. Each one hoping that one more hit will win if for them. This is what I call a trade war./p>

In a world that has not recovered from the GFC, but just papered over the cracks, that would be high risk. The US would be hurt the least, but it would be painful for the world.

Trade Wars

Donald Trump is angry about the US trade deficit. He blames manufacturing nations like China and Japan for ripping off America, so he is imposing tariffs on Chinese imports into the US to punish them.

Unfortunately, Donald Trump does not understand the economics of international trade, so he is attacking a symptom, rather than dealing with problem.

There are several reasons why the US has been running a trade deficit for many years.

• The United States is a high-income country, (although many Americans are not feeling it.). High-income countries find it hard to compete with manufacturing from low-income countries. Multi-national countries tend to move their production to places in the world where educated labour is cheap. High-income countries have to concentrate on the highly-technical and capital-intensive manufacturing where they have an advantage. The United States has done well in this area, but it needs to do better because many blue-collar workers in the US are still directly competing with cheap labour in Asia.

• Low oil prices and container have made the shipping of manufactured goods from Asia to the United States economic an economic activity.

• The trade balance is only one part of the Balance of Payments, and they all interact with each other. The United States trade balance is the natural corollary to a surplus on the capital account.

• The US dollar is the strongest currency in the world. Since the demise of the Bretton Woods system, many nations in the world hold their international reserves in US dollars. They do this by purchasing US dollar assets, mostly treasury bonds. This inflow of funds has given the US a surplus on its capital account, which has to be balanced by a deficit on its current account. The trade deficit is the direct consequence of the US dollar role as a reserve currency.

  The big benefit of this role is that the US has been able to import cheap manufactured goods without paying for them. The US has been able to engage in numerous overseas wars without paying the full cost. (Wars affect the Balance of Payments in the same way as imports because stuff needs to be purchased overseas. The difference is that they are blown up, rather than carried into the US). Wars and imports have been paid for with bits of paper (mostly US treasury bonds).

  Buying things with bits of paper is good if you can get away with it. Donald Trump does not like the Chinese buying US treasury bonds, however if he wants to stop that practice, the US will have to start paying for all its imports and wars.

• One reason why the US dollar is popular as a reserve currency is that oil is mostly traded in US dollars. Following a spike in oil prices in 1974 the United States persuaded Saudi Arabia to only sell oil for dollars. The U.S. agreed to buy oil from Saudi Arabia and provide the kingdom military aid and equipment. In return, the Saudis would plough billions of their petrodollar revenue back into Treasuries and finance America’s spending. This dollar hegemony worked well for the US, so it has attacked countries like Libya that tried to sell oil for currencies other than the US Dollar. The petrodollar is becoming less important as US dependence on Middle East oil. However, if the US lets it go, the need for US dollar reserves would decline and the trade balance would improve, but US economic hegemony would weaken. I am not sure that this is what Donald Trump wants.

• The United States congress has consistently approved budgets that do not balance for many years. The ongoing budget deficits have to be paid for by issuing treasury bonds. If these were only sold within the United States, interest rates would have to rise significantly. No one wants that, so many of the treasury bonds are sold outside the United States with the Chinese being the main buyer. If the US balanced its budgets, the supply of treasury bonds would shrink dramatically, and the US surplus on its capital account would shrink too. This would have a positive effect on the trade deficit, but no US politician is interested in that solution.

The US trade deficit is mostly the result of decisions made within the US that have produced a surplus on the capital account. Without getting rid of that surplus, the trade deficit is likely to remain, whether or not Donald Trump engages in a trade war.

The Chinese may have manipulated their currency to make sure that they get their share of the US trade deficit. This does not harm the US. They benefit from the cheap televisions and refrigerators. Rather it harms other manufacturing/exporting countries (especially in Asia) that get squeezed out of the US market.