Opinion: Trump’s trade war will be easy to lose

Opinion: Trump’s trade war will be easy to lose

US President Donald Trump it would seem is living in the past. Nowhere is this more apparent than the president’s obsession with that special kind of alloy called steel. On 23 June, Trump was quick to tweet that “steel is coming back [to the US] fast! US steel is adding great capacity also.” The elder Trump must look back wistfully on his youth, when US steel production was riding high and Coca-Cola was universally revered as “The Real Thing”. In 1975, the steel industry helped employ half a million workers in the US. Today, that industry accounts for just a fraction of its former headcount.

Beginning in the 1970s, steel production started to shift away from the United States as other players including Europe and Japan upped their production. Today there is a considerable excess of steel capacity flowing out of China. Some, most notably President Trump, have argued that US-based companies are at a competitive disadvantage. When his administration moved to implement a universal 25 percent tariff on steel imports, Trump was understandably feeling a bit nostalgic.

One of the first things they teach in Macroeconomics 101 is that trade always produces more winners than losers. Despite the short-term pain – worker displacement, job losses and the slow inexorable death of “company towns” – trade is that unmistakable special sauce to the global economy. In both theory and practice, trade spurs countries to specialize in their comparative advantages: examples include Germany with its high-tech manufacturing sector, Switzerland with its hand-crafted watches and premium chocolate, and Japan with robotics. This typically confers a twofold benefit for consumers: (1) it provides for a wide selection of goods to purchase and (2) more importantly, it enables consumers to purchase those goods at much lower prices than if they were to produce the goods themselves.

The current sitting president of the United States does not believe in the economics of comparative advantage. More importantly, Donald Trump does not fully appreciate the value of  free trade, that is trade which does away with tariffs, quotas and non-tariff barriers. The former real-estate magnate views trade as a “zero-sum” game: where there are winners there must inevitably be losers (one can easily imagine Trump rehearsing the word out loud). In Trump’s view, in any 1-to-1 relationship between two countries, the country which maintains a trade surplus is the one that’s winning… economics be damned.

This might help explain why in the past three weeks the Trump administration has resorted to waging economic warfare on its global trading partners. The list of tariffs already implemented include a 25 percent tariff on steel imports, a 10 percent tariff on aluminum and a 20-30 percent tariff on washing machines and solar panels, an estimated combined total impact of $60 billion worth of goods. On 6 July, the first round of tariffs aimed squarely at Chinese imports will come into effect. All told, some 800 different Chinese-made products will be subject to a 25 percent tariff which broadly includes “industrially significant technologies” for an estimated total impact of $34 billion ($50 billion over two implementation phases).

China’s English-language newspaper, China Daily, was quick to point out that these measures are self-defeating and a “symptom of paranoid delusions” ostensibly pointing at the sitting American president although not mentioning him by name. With China however, President Trump believes he’s picked a fight he can win. His administration frequently cites the large trade surpluses China runs up against the US and how American exports are comparatively thin when compared to China’s massive export reliance on the US. In this respect, Trump does have some leverage.

However, trade isn’t as simple as one country’s basket of goods versus another’s basket. Today, the global economy is more integrated with more interlocking parts than at any point in the history of modern civilization. To take just one example, consider for a moment that most storied consumer product: the iPhone. A reasonably intelligent American consumer might assume that Apple’s  engineers design the phone in Cupertino while their Chinese counterparts at Foxconn help assemble it. They might not know however that the phone’s screens are actually made in Japan (sometimes South Korea); the touch ID sensor is produced in Taiwan; accelerometers are made in Germany; audio chipsets in the US; batteries in South Korea; gyroscopes (enabling its compass feature) in France and Italy; and mixed-signal chips in the Netherlands. Apple’s complete supplier list runs several pages and spans three different continents.

This is what makes a “trade war” both fascinating and terrifying. Multinationals (including US-based companies) have developed extremely nimble supply chains in the last 30 years. Consumer electronics are a perfect example of the breadth and depth of these complex networks. For the production of a single product hundreds of companies are engaged in an (almost) perfectly choreographed dance to deliver. An iPhone’s various different components may pass through several tax jurisdictions, trade zones, and ports of entry before finally landing in a consumer’s pocket. Under a system of  perfectly free trade, these components would pay no attention to the the different borders they cross over. Tariffs, essentially a tax on the flow of goods, change all of this by forcing companies to rethink their path of least resistance.

Trade wars are not easy nor always winnable despite what Trump suggests. Instead tariffs, once implemented, become extremely difficult to remove. Internal politics can get in the way. France, Germany and the rest of the EU may suspect that the next American president will be more amenable to free trade. However, the US may not always have such forgiving trade partners. Companies which physically move plant and equipment cannot just pick up shop and move back to whence they came. Multinationals make investments, deploy capital and hire new workers based on continuously updated long-term forecasting. These forecasts become decidedly less reliable when you’re dealing with heaping mounds of uncertainty.

President Trump rode into 1600 Pennsylvania Avenue on a wave of trade-bashing and #MAGA hashtags. He railed against the “totally unfair” practices exacted by America’s trade partners, was defiant that “they’re all taking our jobs” (referring to China, Japan and Mexico) and famously claimed that China was “raping” the US. As told by Trump, Lady Liberty was under assault and a cast of presidents from both political stripes stood by watching helplessly. Many Americans, especially in states where the adverse effects of trade-induced shocks were most acute, ate this story up. And many of those supporters remain firmly attached to that narrative. For these people especially, protectionism writ large is neither the remedy nor the solution to their economic woes.

Categories: Economics, North America

About Author

Steven Spinello

​Steven A. Spinello is based in New York City. He currently works as a Senior Analyst for EY. Steven holds a B.A. in economics from the University of Maryland. His primary writing interests include global finance, ​trade, ​maritime security​, ​and interstate relations especially at it relates ​to the US, ​Latin America and Asia.​