Does the United States need to launch a commercial war?
Is the US economy in danger due to the huge trade deficit they carry along with them each
year?
Is China competing in an unfair way?
How can Donald Trump
protect and defend the United States?
Dear viewer, intentions are
one thing... and results are another thing entirely.
That’s precisely what almost always happens with protectionist policies: they’re aimed
at doing one thing, but end up doing a very different one.
Donald Trump was very clear about this during the election campaign that led him to the
White House... and has continued to be just as clear since he arrived in the Oval Office:
protectionist policies are a fantastic idea.
“Trump Signs New Tariffs On Steel And Aluminum Into Law”.
“Trump moves to crack down on China trade with $60 billion in tariffs on imported products”
“Trump proposes $100 billion in additional tariffs on Chinese products”.
So far, only the first tariffs have been approved, such as those on steel and aluminum, and it
excludes many US-allied countries.
But according to the news...
Trump is very, very clear about one thing: that one of his main priorities is “fighting”
the external deficit, that is, reducing the difference between imports and exports.
A difference of over 500 billion dollars per year.
And that's where tariffs always come into play.
Something like, So my people want to buy foreign products?
Fine, tariffs will teach them.
Now, let's be fair.
Many argue that Trump doesn’t really want to get involved in a full-blown commercial
war, and that the US president’s threats, especially against China, are nothing more
than a gamble, 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, just in case, and to clear things up, I think we
need to ask ourselves a few questions:
Does it help the United States 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?
Let’s see.
A
BAD PLAN FOR A NONEXISTENT PROBLEM
Folks, here’s a question, what does a politician want when he puts protectionist policies on
the table?
No, winning votes isn’t a valid answer.
Yes, I know, winning votes is every politician’s number one priority, but for that very reason...
let's not cheat, let's focus on the protectionist policies’ specific objectives.
Well...
I think we could say that 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 the results?
If the United States starts a trade war with China, will it achieve those objectives?
Well, let's do this step by step:
First of all, this is what Donald Trump says:
Under my Administration, the theft of American prosperity will end.
We’re going to defend our industry and create a level playing field for the American worker.
Donald J. Trump
Wow, thank goodness that politicians are here to defend the American people...
By the way, this is the same excuse he uses to prosecute immigration: defending the American
worker.
There’s only one problem:
The statistics show a very different reality.
See, the US labor market is undergoing one of its best moments in almost two decades.
The unemployment rate is at around 4% and the number of unfilled vacancies is growing
like foam.
The American economic machine is beginning to suffer shortages of the most important
input: labor.
You heard that right.
If migration policies don’t change, and the economy doesn’t collapse of course,
it is estimated that in the next 10 years, the United States will have more than 8 million
jobs to be filled.
And this is actually happening quite intensely in the Midwest, in states like Wisconsin,
where there’s a lot of employment but very few workers:
“It’s great to have more people working in Wisconsin than ever before, but it creates
a challenge.
We just essentially need more people.”
Tricia Braun, chief operating officer for the Wisconsin Economic Development Corp
Right now, unemployment rates in the states are below 3%... 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, for example for trains in Chicago and here on YouTube to attract workers to
the state.
But... not only that….
See, the truth is that the manufacturing industry now employs a lot fewer people than it did
two decades ago, but do you think this is this due to Chinese competition?
Well…
The numbers tell quite a different story…
not only is employment at its highest levels in the US’s economic history, industrial
production has also reached its highest levels.
Yes, the industry hires fewer people, but that doesn’t mean it produces less.
What’s happening is that factories, thanks to robots and technology, are becoming increasingly
productive.
Want an example?
Let’s take a look at the steel industry, which Trump said is being threatened by Chinese
competition, which poses a danger to national security...
Well, the truth is that the US produces 70% of the steel it consumes, for which only 3%
is for military use – National security?
Ha! - and that, on top of that, China isn’t even among the top 10 suppliers.
Yes, employment in the steel industry has decreased to almost half in the last 10 years,
but folks, the vast majority of jobs lost aren’t due to China or international trade,
but to technology.
And a commercial war wouldn’t change this.
But... as you can see, this isn’t precisely bad: nowadays, in the United States, there
are more jobs than ever, and the trade deficit...
well, despite what Trump may say, isn’t that high, being less than 3% of the GDP...
and in fact it has decreased considerably in recent years.
We’re also forgetting some other very important details...
like for example, investments.
Yes, you heard that right.
The United States has a positive net investment balance.
That is, foreigners invest more in the United States than Americans do abroad, which is
obviously very good for the US economy’s future.
In 2017, this positive balance surpassed 250 billion dollars.
Think that’s all?
Well, you are very, very wrong.
We don’t know if a commercial war would decrease the external deficit... but it would
have other, not exactly desirable, consequences.
Listen up.
(THE CONSEQUENCES)
Let's say it loud and clear, the ones who’d be most affected by a trade war against Chinese
imports would be US companies.
You heard that right.
Buying cheaper materials abroad decreases production costs for local industries.
And if in addition, a foreign country, in this case China, sells below cost, it’d
be as if Beijing was subsidizing American industries.
And that doesn’t sound too bad, right?
Don’t believe me?
Well, take a look.
We need to bear in mind that the United States 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, here’s an essential question.
What would tariffs achieve?
Well, precisely that: it would damage American companies’ competitiveness.
That is, 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.
The result?
Millions of jobs destroyed.
For example...
the new tariff on steel and aluminum will make production – in the United States – of
things that use steel and aluminum – like cars or airplanes more expensive... and therefore
less competitive...
Will new tariffs have to be set on cars to offset this higher local production cost?
All this, my friends, explains why when in 2002 President George W. Bush imposed tariffs
on imported steel, the toll was the destruction of 200,000 jobs.
This was a clear backfire of the intended policy.
But there’s another very important detail: when you set tariffs, the usual reaction is
for the other party to defend itself.
I'm not saying it's the right thing to do, but it happens.
If the United States announces an additional $100 billion list of tariffs, China has already
fully prepared, and will not hesitate to immediately make a fierce counter strike."
Gao Feng, China's Commerce Ministry spokesman.)
Imagine, for example, 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.
Well, a commercial war could damage their long-term competitive position.
China, for example, could favor other companies such as Airbus and accelerate the development
of a local industry.
Yes, it seems difficult today... but in the long term the consequences could be gigantic.
And not only that.
China could also resort to other, less orthodox means.
For example, let's not forget that China is the largest foreign debt owner for the United
States.
Would it be good for Washington if China stopped buying debt or if they began decreasing securities
to incite pressure?
Clearly, the answer is No.
Especially due to the huge public deficit that the current administration is fueling.
But... wait a moment, because there’s something Trump is right about.
(IS CHINA BREAKING THE RULES?)
Donald Trump has one thing right: China isn’t precisely a free market or a country that
plays well.
And it isn’t just about the fact that they have high tariffs or that they favor local
companies…
the problem is, for example, blackmailing large multinationals.
For example, if foreign companies want to sell freely in China, they have to ally with
local partners…
partners who can access their technology...
Yes, this technology transfer is a problem in some way, because these Chinese companies
use them to grow and compete…
However…
technological companies know what they’re getting themselves into when they access the
Chinese market.
It has to be they who decide where to produce, how to compete and what businesses to get
involved in.
Of course, this doesn’t mean that the US government shouldn’t pressure or negotiate
with China… but unleashing a commercial war would be a terribly bad solution.
As long as it’s just threats, the US should be all right… but they have to be careful
not to cross the line.
That’s how large crises start.
Fortunately, unless Trump insists, it looks like this won’t happen.
“China initiates WTO dispute complaint against US tariffs on steel, aluminum products”.
“President Xi Jinping announces plans to open up China's economy, including lowering
tariffs for autos and enforcing the legal intellectual property of foreign firms.”
Now, having said this, let’s wait just a moment, because there’s still a question
on the table: how can the United States reduce its trade deficit?
Well, the best way to achieve this is with bets, with structural policies, doing what
great exporting powers like Germany and Switzerland did:
Favor 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, favoring talent attraction – yes, immigration – and
lowering taxes, as the last fiscal reform of the Republican Party did, which we talk
about here in this video.
Those are the paths... while a commercial war... would be bad for everyone.
And in any case, external deficit doesn’t have to be bad.
It all depends on how much the economy grows, what it’s used for or what happens with
the investment.
But now it’s your turn, do you favor setting tariffs on China?
Leave your answer in the comments as well as in the survey.
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