World Economy

Trump’s No-Win Trade War

Trump’s No-Win Trade WarTrump’s No-Win Trade War
Scholars of international political economy, recognize that trade hasn’t always been good for poorer Americans. However, the economic fundamentals are clear. Tariffs make things worse

President Donald Trump’s trade war may be fated to fail, for many reasons. One is that the target countries—prominently, China, Japan and Germany—won’t accede to his demands. This is already happening. Another threat is a backlash among US firms, which are hurt by tariffs that raise their products’ prices. This, too, is happening.

Even if all these possibilities were avoided, the larger threat to Trump’s trade agenda is the dollar’s role as the major world currency. It dictates trade policy in ways not widely understood and is the ultimate cause of chronic US trade deficits, Registerguard reported.

As the major world currency, the dollar is used to settle trade transactions and make cross-border investments, even when Americans are not involved. The resulting extra dollar demand boosts its value on foreign exchange markets. US exports become more expensive and US imports less so.

Trade deficits result. Since 1981, the United States has had only one current account surplus. (The current account is the broadest measure of the trade balance.) When something continues that long, it’s not an aberration. It’s an integral part of the global economy.

Americans are compensated for this service by receiving imports greater than exports. Many Americans benefit. Imports restrain inflation and expand consumer choice; the flow of money into dollar instruments (treasury securities, bank deposits, stocks, bonds) tend to lower interest rates.

 Many Losers

But there are losers: most conspicuously, US farmers, manufacturers and their workers. They face tougher foreign competition in both import and export markets.

None of this is easy to convey to the public. Much simpler is Trump’s narrative: US trade deficits prove that other countries discriminate against American products; US import restrictions are too loose. The cure is to eliminate the discrimination and to tighten import restrictions. The anti-American bias will disappear, as will large US trade deficits.

It’s a congenial theory, because—by assumption—trade deficits automatically become evidence that American firms are being victimized by someone, including their own government. If true, Trump’s obsession with trade deficits would make sense. The trouble is that it isn’t true.

The reality is that, well before Trump became president, global trade imbalances were shrinking. Figures from the International Monetary Fund show that, as a share of the economy (gross domestic product), the US current account deficit hit a peak of 5.8% in 2006 and dropped to 2.4% by 2017. The comparable figures for China were 9.9% of GDP in 2007 and 1.4% in 2017.

  Large Trade Imbalances

What caused the dramatic shift? Mainly changes in the business cycle, says a recent IMF report. Before the economy’s collapse in 2008, strong spending generated huge trade flows and high oil prices. These produced large trade imbalances. When the Great Recession struck, these trends reversed. Trade flows weakened; oil prices fell; trade imbalances shrunk.

The implications are unexpected. Even by Trump’s twisted view of trade, much of the needed adjustments have already occurred. If Trump succeeded—implausibly—in getting China and others to agree to reduce their trade imbalances, the needed changes would probably be milder than imagined.

Trump has maneuvered himself and the country into a no-win conflict. He has infuriated America’s allies by his reckless trade actions to raise tariffs and disrupt existing trade arrangements. If the impasse continues for months or years—a possibility—the damage to the world economy would be significant.

But even if these negotiations conclude successfully, the scope to make dramatic trade improvement is limited. The dollar’s role as the major global currency imposes constraints. An appreciating dollar will tend to widen the US’s trade deficits. Trump has backed himself into a corner from which there is no easy exit.

  Bad News for Workers

Trump says he’s fighting his trade war because a generation of free trade has failed working-class Americans, CNA reported.

Trump justifies tariffs on imports by arguing that “unfair trade policies” have harmed American workers. This has led to a trade war in which the US and China have placed tit-for-tat tariffs on each other’s products.

Most recently, China said it’s ready to slap tariffs on $60 billion on US imports if Trump goes ahead with his threat to tax another $200 billion of Chinese goods.

Scholars of international political economy, recognize that trade hasn’t always been good for poorer Americans. However, the economic fundamentals are clear. Tariffs make things worse.

The erosion of American manufacturing became a hot-button issue during the 2016 election. And for good reason. Total employment in manufacturing has fallen by 25% since 2001, putting about 4.5% workers out of a job.

Members of both parties now agree that free trade is largely to blame for this decline. Off-shoring and “bad” trade deals are cited as evidence that trade no longer serves America’s interests.

The Trump administration’s solution is tariffs. In recent months, entry barriers have been erected, first to protect solar panels and washing machines in January and then steel and aluminum in March.

Although he’s fighting these trade battles with many partners, including Canada and Europe, most of Trump’s attention is directed toward China. He claims that China manipulates its currency, fails to protect intellectual property and stunts economic innovation. Sweeping tariffs–beginning with a 25% increase on $34 billion of Chinese imports–are an attempt to combat those issues.

Unfortunately, there are several reasons to think that tariffs will only harm those Trump wants to protect: Tariffs raise prices for consumers; for companies as well as makes it hard to do business abroad.

As tensions continue to escalate, poorer households, already struggling to keep up, will face additional downward pressure on their incomes. That’s bad news for the workers whom Trump promised to help.

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