“Trade wars are good, and easy to win”

Written by Theodore Chow

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The controversial Trump strategy needs a tweak for it to succeed

“Unfair trade policies” harming American workers. Globalization putting the “middle-class” out of jobs. Chinese imports “threatening” the American economy. These are what President Donald Trump uses to justify the trade war against China.  This rationale was the focus of intense discussion when Professor Jackie Chan Man Lung from the Chinese University of Hong Kong (CUHK) came to give the inaugural talk at the RCHK Economics Club on March 6th. Speaking to Year 12 and 13 Economics and Business Management students, Chan outlined the issues at the heart of this debate.

After listening to Chan’s talk, I agree with much of what he said. Contrary to popular opinion, trade wars are not good and aren’t easy to win. Trump’s tariffs may have the American’s best interest at heart but this doesn’t translate when it comes to real life implementation.

Trump has criticized China’s trading practices ever since his election in 2016. The US-China Trade War started on July 6th, 2018 when the US imposed tariffs of 25% on 50 billion USD worth of Chinese exports. Since then, China has retaliated by imposing tariffs of their own on US exports. Over the course of 2018, Trump imposed tariffs on over 250 billion USD worth of Chinese goods. His aim was to pressure China to reduce the trade gap (the difference between a country's imports and its exports) between them. This month, Trump delayed the March 1st deadline for additional  tariffs to allow for further bilateral negotiation currently in progress.

A wide range of products and services are affected, from handbags to railway equipment. China, on the other hand, has strategically targeted tariffs on products made in Republican districts and goods that can be purchased elsewhere. However, damage goes beyond the Republican states as, at the end of the day, it is the entire United States that will bear the burden of the trade war.

Trump’s entire mantra behind his presidential victory was to appeal to Americans who lost out due to increased globalization. There was a heavy emphasis on protectionism, specifically for the American middle-class who are constantly overlooked by producers as it was cheaper to purchase goods from China than from American suppliers. Thus, the tariffs imposed by Trump could theoretically make US-made goods more attractive to suppliers than imported goods. This hypothetical outcome may have helped Trump fulfil his election promise of “America first”.

To explore how the average working-class American could theoretically benefit from such tariffs, we must explore how globalization has affected the average American in the 21st century. In a post financial crisis world, many American producers struggle to make ends meet, facing reduced demands due to external competitors who are able to drastically reduce costs of production. This is a tale many Americans tell - total employment in manufacturing has fallen by 25% since 2001, putting almost 4.5 million Americans out of a job.

Although American producers wish to remain competitive, legal restrictions in the form of minimum wage laws prevent them from doing so. Other producers which operate in countries with a lower minimum wage are able to cut costs of production, passing their cost savings onto their consumers. The restrictions faced by American producers resulted in their inability to compete with foreign firms, which Trump capitalized on during the 2016 presidential election, promising to reverse the tide.

Trump’s protectionist stance could also theoretically give infant industries the valuable breathing room to invest in production equipment, train personnel and gain trust in the local consumer market, before having to compete for market share against international competitors. Such as in the successes of Japanese, South Korean and Chinese industrialization, shielding industries in their infant stages may prove to benefit them in the long run.

However, this hypothesis is far from how the outcomes of Trump’s decisions have materialized. The biggest problem that Trump faces in his quest to protect local suppliers is that tariffs actually raise prices for American consumers. Although Trump may have the American workers’ best interest in mind, but protecting a few narrow industries can generate broader and higher costs on the consumers as they will now have to pay more for everyday goods. This is especially true given that many of the imposed tariffs are on basic products like consumer electronics, shoes and apparel. This problem is especially acute for low income families who rely on low cost necessities to make ends meet.

When almost 80% of Walmart’s suppliers are from Asia, an increase in the price for basic goods may do more harm than good for American consumers, especially for the low and middle class. States like Louisiana, Alabama and South Carolina were hit harder than others, given per capita incomes are below the national average.

Trump’s tariffs also pose a threat to American companies that depend on foreign imports. Firms need to generate profit to survive, meaning that when the cost of supplies increase, the firm will have to look to other areas to cut-costs to achieve profitability. This is especially impactful to car and airplane manufacturers as the tariffs on metals could endanger their competitiveness, raise their cost structure and disrupt their supply chain.

When companies look for areas to cut costs, one area that will be drastically affected would be the labour industry. Around 4.6 million Americans are employed in industries dependent on metals as their main input and even more are employed in the installation and maintenance of these products and services. An example being the solar market, which has stagnated after the implementations of the tariffs.

So, Trump’s theory of putting “America First” may have unintended ramifications on consumers not only in the US, but all around the world. However, it is important to note that Trump’s intentions weren’t necessarily bad - the sad news is that in the global trade arena, some industries will inevitably shrink due to foreign competition.

The argument against protectionism is the theory of free trade. This rests on the assumption that if every country produced goods and services that they specialize in, cheaper and higher quality products could be produced. Through the trade of these products, everyone would theoretically win. Free trade could rake in profit from abroad, pushing firms to innovate and expand their international market share. Additionally, socio-economic ties between countries can be formed and strengthened through the derived mutual benefit.

Interestingly, many economists, including Professor Chan, believe that since the affected industries are primary in nature, that their contraction is not necessarily a bad thing. Trump should be looking to transition workers from the primary (e.g. farming) and the secondary (e.g. manufacturing) to tertiary (e.g. services) industries, which promise better working conditions and more growth potential.