Trade wars are not good or easy to win, Mr Trump

Tuesday, March 06, 2018

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United States President Donald Trump campaigned on a political platform that the economic malaise and unemployment among the traditional white working class was due to “bad” trade deals.

These trade pacts, he argued, opened the American economy to cheap imports, encouraged corporations to ship jobs overseas and put the US at a disadvantage. Mr Trump, as any good leader, has a duty to put the interest of his country first.

Yet, in the interest of good international relations, especially with America's trading partners, he also needs to provide credible empirical data to support his claims that existing trade agreements give other countries an unfair advantage over the US.

He charges that countries are cheating, ie not adhering to the established rules by having underpaid labour and indulging in exchange rate manipulation, using China as an example.

His response has been to push ahead with renegotiation of existing trade agreements, starting with the North American Free Trade Agreement (NAFTA), and refusing to sign any more trade agreements, as he did with the Trans-Pacific Partnership Agreement.

Mr Trump has therefore cancelled domestic regulations and international agreements that increase the production costs of companies operating in the US. For example, he abolished the existing environmental standards, in the same way that withdrawal from the Paris Agreement on Climate Change obviated the need to meet standards that increase costs.

Last week, he announced his intention to impose increased tariffs of 25 per cent on steel and 10 per cent on aluminium, prompting expressions of concern across the world and from a broad cross section of American business.

The common worry is that this type of unprovoked unilateral action could spark retaliation and set in motion a downward spiral degenerating into a trade war. The European Union is already threatening to raise some tariffs in retaliation.

This would be unfortunate, because world trade experienced a tepid recovery in 2017 after 'flatlining' since the global economic crisis which erupted in 2008. Another similar dip in the global economy will help no one, including the US.

Mr Trump's move seems destined to fail because steel and aluminium are very capital- intensive and hence any increase in production will create few, if any jobs. But it will cause inflation estimated to be as high as 15 per cent in the price of goods produced using more expensive American-made steel and aluminium. Notice that these concerns ignited a 420-point plunge in the Dow Jones.

It is noteworthy that when a country is internationally competitive it is usually an advocate of free trade and a level playing field for all countries. The reverse is true.

Inefficient firms will lobby their governments for protection from imports; accuse more efficient foreign producers of unfair trade; and engage in currency manipulation, underpaid labour and dumping.

Mr Trump seems undeterred by this looming scenario. Indeed, on Friday he tweeted: “Trade wars are good, and easy to win.”




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