Donald Trump’s trade war with China could make political sense in key US states – Donald Trump’s America
A trade war could help US President Donald Trump solidify his political position in key states. (AP: Markus Schreiber)
You can’t say we weren’t warned.
China was in Donald Trump’s sights throughout the 2016 presidential election campaign. In rally after rally, he bellowed threats to take tough action on a country he claimed was taking advantage of the United States.
Now he’s the US President, Mr Trump is delivering on those threats.
The world’s two biggest economies are locked in a trade war that has the potential to derail global economic growth.
It might be easy to blame the path into trade for tit-for-tat on Mr Trump’s apparent economic illiteracy, but it’s also possible to interpret a political cunning that will result in electoral success.
The stakes have risen quickly. The US fired the first shot with a 25 per cent tariff on $US34 billion ($45.9 billion) worth of Chinese goods last Friday. This will be extended to a further $US16 billion ($21.6 billion) worth of goods.
China has responded in kind, slapping its own tariffs on US imports.
The US says it has $US200 billion ($270.3 billion) worth of Chinese goods, including bovine semen and badger hair, it will target with a 10 per cent import tax.
Mr Trump has personally threatened tariffs on $US500 billion ($675.7 billion) worth of Chinese imports if China dares retaliate again. That’s basically everything China exports to the US.
These tariffs will cause prices to rise and economic growth to slow. But despite the costs, the US leader appears to be digging in.
Why is he doing it?
It’s difficult to discern exactly why Mr Trump is resolutely marching down this path when almost every mainstream economic expert argues it’s a bad idea.
It could be his ignorance of how trade works. He sees trade as a zero-sum game — for one country to be benefitting, another must be suffering.
He rates a trade surplus, when a country is selling more than it’s buying, as a win. He sees a trade deficit, like the one the US is running with China, as a loss.
This is not how trade works. Trade can and should be mutually beneficial.
Trade means access to cheaper and better goods. It allows countries to purchase things that they either could not produce themselves, or at least not as cheaply. It also allows them to sell their own goods to more people and to focus on doing the things that they are best at.
Putting up trade barriers makes people worse off.
Donald Trump and Xi Jinping get along in person, but their trade war is escalating. (Reuters: Jonathan Ernst)
The benefits of trade are hard to sell
The lowering of trade barriers over the last few decades has helped spur economic growth and lowered the cost of living.
Weird tariff targets
Now that the Trump administration is planning to put tariffs on around half of the US imports from China it has had to tax some pretty random goods. Here’s ten of the weirdest:
- Bovine semen
- Oxygen and carbon dioxide
- Bidets and lavatory pans
- Labels and badges
- Vinyl tile floor coverings
- Knives and crowbars
- Passenger boarding bridges (for planes)
- Farm wagons and carts, not mechanically propelled
- Parking meters
- Time of day recording apparatus
The benefits of trade, however, have not been spread evenly. Some people have born the cost of a more globalised economy.
Important politically, there are understandable grievances particularly in the so-called rust belt in middle America which was instrumental in electing Mr Trump.
These are the areas where the traditional blue collar manufacturing jobs have been lost and which harbour animosity to those extolling the benefits of trade.
For example, a great deal of steel production in the US has shut down, unable to compete with cheaper overseas producers.
Cheaper steel fed through to things like cheaper cars and lower construction costs. These benefits were spread across a large population but could be relatively incidental to any particular individual.
However, the costs were acute and keenly felt; people lost their jobs.
So yes, politicians and economists can argue that overall lower trade barriers are better for the economy because in aggregate people are better off.
But it’s hard to convince someone who has lost their job at a steel mill that trade is a good thing because now a car is a bit cheaper.
The trade war has spooked investors and will cause economic growth to slow. (Reuters: Lucas Jackson)
This is the grievance that Mr Trump has tapped into and which in part got him elected.
The benefits of trade are quite hard to describe and don’t make for a sexy soundbite.
Conversely, talking about bringing back jobs is an easy message to sell.
Ric Deverell, the chief economist of Macquarie Bank, explains that despite Mr Trump being attacked as inept, if his aim is to bring manufacturing back to the US, then higher tariffs and winding back of international trade makes sense.
“If one had a view that you didn’t like globalisation and you would like all of these big companies to do the production back in the United States, what I would do is I would do something like I would have a big tax cut which would incentivise people to bring the production home and I would put a big tariff on to block those global supply chains,” he said.
It’s a one-two combination. Mr Trump has enacted a giant tax cut. The corporate rate has been slashed in the US from 35 per cent to just 21 per cent. This is the carrot, the incentive for American companies to bring back production to the states. The tariffs are the stick which will whack those companies who continue to produce things outside the borders.
Donald Trump’s moves could earn plenty of support in America’s ‘rust belt’ by creating manufacturing jobs. (AP, Pablo Martinez Monsivais)
This is not to say that a winding back of international trade is a good thing and it’s important to recognise that jobs at US factories will be lost as American-made products are hit by reciprocal tariffs and become more expensive. But Mr Trump will be hoping more jobs are created than lost.
The risk of inflation
The most immediate impact of the new tariffs will be higher prices. Tariffs are a tax which will force up the cost of goods.
If Mr Trump is successful in forcing companies to bring back production to the US, it should also mean higher wages as companies compete for workers.
This higher consumer and wage inflation comes at a sensitive time for the US. It has already seen its central bank, the Federal Reserve, push up interest rates multiple times and is due to continue to turn up the dial over the next two years. Higher inflation will force them to go harder and faster.
Higher tariffs will force up prices for Americans and will mean lower economic growth in the longer term and higher prices, but if Mr Trump can claim it’s brought American manufacturing jobs back, it’s going to play very well in the states he needs to win to get a second term.
It might be bad economics but could prove to be shrewd politics.