Trade Wars

Wikipedia: “A trade war refers to two or more states raising or creating tariffs or other trade barriers on each other in retaliation for other trade barriers.” Sometimes, it can provoke a real war. For example, back in the 18^th and 19^th centuries, Britain felt that their balance of payments (in gold and silver) – mostly due to the Brits’ addiction to Chinese tea – to China was grossly unfair. When the Chinese declared that there was nothing that England manufactured or grew that they wished to import in exchange, the Brits decided that their massive surplus of opium was going to fill that void.

The Qing Emperor was aghast, telling the British authorities that he would never accept escalating addiction rates, the lost productivity, the rising mortality rates and the families that would be decimated from dealing with an addict in their mix. Britain demanded “free trade,” joined by her allies (including the United States) and literally fought two Opium Wars (1839-42 and 1856-1860) to force the Chinese to their knees, ultimately resulting in territorial concessions (including England’s taking Hong Kong), opening areas and ports to Western traders.

Perhaps less known is what some call the world’s greatest case of industrial espionage in history, a really nasty (sneaky?) side of trade wars. The British East India Company deployed (between 1848 and 1851) a Scottish botanist, appropriately named Robert Fortune, to steal both tea plants and tea brewing secrets. While the penalty in China for such efforts was death, Fortune managed to smuggle enough plants to begin massive replantings in northeast India, with a comparable climate. Before that time, the tea that was already being grown in Indian regions like Assam and Darjeeling were considered terribly inferior and unacceptable to English palates.

As the transportation systems improved – particularly with the introduction of railways and steamships and as the British Royal Navy dominated (and stabilized) the seas – the world marched steadily towards the globalized economy we see today. “For the first time in history, steamships and railroads made it possible to transport bulky commodities across oceans and continents, linking together regions of the world with very different endowments of land, labour and capital. Faced with an invasion of cheap grain from Russia and the New World, governments in France, Germany and other Continental countries caved in to the protectionist demands of their agrarian constituencies, raising agricultural tariffs significantly.” VoxEU.org. Trade barriers! Indeed, the power of the Royal Navy rapidly overcame these trade restrictions with a show of raw military power.

Two World Wars disrupted this stability, even as transportation technology improved dramatically, but following WWII the big powers embraced a new globalization that favored them at the expense of under-developed nations and colonial subjects. “And while in the rich countries of Western Europe and North America the post-1945 period saw a gradual reconstruction of open trading conditions, deglobalisation characterised much of the rest of the world until the 1980s thanks to the spread of communism and decolonisation, which themselves had their roots in the century's two world wars, and the intervening economic debacle.” VoxEU.org.

Reducing tariffs and eliminating trade barriers always negatively impact someone, usually incumbents within the nation opening trade who have benefited from either subsidies or trade barriers that kept cheaper foreign equivalents out. But likewise, tearing down trade walls will always benefit a different constituency, notably consumers (who enjoy the cheaper prices of imported goods) and the traders/retailers who service the new imports. And since dropping trade barriers in one country generally requires reciprocity in the markets of the foreign trading nations, in our case, American exporters/service providers and manufacturers benefit from the greater accessibility to foreign markets.

The reverse is also true. When one nation resurrects or adds trade barriers to another country, that “other” nation will retaliate with reciprocal barriers and perhaps more. Free trade agreements have become seminal campaign points in the current presidential race. Not a lot of support for the Trans-Pacific Trade Agreement among any of the candidates, and of course, there would be winners and losers should it be adopted by the U.S. Big American winners: manufacturers of passenger cars, the apparel sector, the dairy industry, retailers and wholesalers,  and providers of business services. Big American losers: auto parts manufacturers, the textile industry, soybean farmers and the transportation, chemical and drug companies, and tourism industry.

But GOP candidate Trump also wants to tear down existing trade agreements, from NAFTA on down, and “level” what he believes is a distorted playing field, particularly between our neighbor to the south, Mexico, and the nation with the greatest trade imbalance with the United States (roughly half a billion dollars a year), China. The Washington Post wondered exactly what a likely economic scenario might look like if Mr. Trump were in fact to implement his stated trade policies. So they engaged Moody Analytics to run some hard numbers.

“Trade has been one of Donald Trump's great selling points on the campaign trail. China and Mexico are killing us, he has told crowds on his way to the lead position for the Republican presidential nomination, and if Trump wins the White House, he will fight back. The implication is that getting tough with our trading partners -- by taxing their exports as they cross America's borders -- will bring jobs and prosperity to the United States.

“An economic model of Trump's proposals, prepared by Moody's Analytics at the request of The Washington Post, suggests Trump is half-right about his plans. They would, in fact, sock it to China and Mexico. Both would fall into recession, the model suggests, if Trump levied his proposed tariffs and those countries retaliated with tariffs of their own.

“Unfortunately, the United States would fall into recession, too. Up to 4 million American workers would lose their jobs. Another 3 million jobs would not be created that otherwise would have been, had the country not fallen into a trade-induced downturn. [See chart above]… The job losses would be halved if China and Mexico chose not to retaliate to the tariffs of 45 percent and 35 percent, respectively. In which case U.S. growth would flatline, but the country would not fall into recession.

“The amount of predicted economic damage surprised Mark Zandi, chief economist for Moody's Analytics, who prepared the model. He said it is magnified by the precarious -- and historically unusual -- state of the U.S. and global economies right now: Under the Moody's model, the Federal Reserve has little power to slow the recession, because interest rates remain near zero. Congress refuses to enact any stimulus measures, such as spending increases or tax cuts, that might increase the federal budget deficit further.

“What results, in the model, is a downward spiral of reduced economic activity. Prices rise on imported goods from China and Mexico, which has the effect of reducing spending power for American consumers. If China and Mexico retaliate, U.S. exports fall, forcing layoffs at American companies that sell to those foreign customers. The ensuing growth slowdowns spread to other trading partners, particularly in Europe, and cause stock markets to plunge, which in turn slows growth even more…

“The Moody's analysis projects the U.S. economy would be 4.6 percent smaller by the end of 2019 if America levies tariffs on China and Mexico and those countries respond, compared to where it would be with no tariffs. It forecasts U.S. employment would be 7 million jobs lower than it would have been, and that the unemployment rate would hit 9.5 percent in the middle of 2019. The federal budget deficit would grow to be 60 percent larger than it would have been.” The Washington Post, March 25^th.

This also assumes that China doesn’t elect to amplify its retaliation by also tanking the value of the dollar by dumping their roughly $3.23 trillion of currency reserves into the global market, which would in fact hurt China… but decimate the United States by radically reducing the real exchange value of the dollar in global markets, which would in turn increase consumer prices a whole lot more.

Let’s see, Mr. Trump, fewer jobs, lower real wages, less growth, higher consumer prices, recession and broader federal deficits. How appealing! But don’t worry, Mr. Trump, most voters won’t drill down into these numbers… and would only get depressed after the fact… if you are elected.

I’m Peter Dekom, and as the old slogan goes, “be careful what you ask for, because you might just get it”… and a bit more.