Trump's trade tariffs

Money and markets: The US-China trade war, what is it good for?

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The US is embarking on a trade war, ditching its previous love of free trade. President Trump sees it as an easy way to correct its trade balance (or imbalance), but it’s a messy route to go down.

The deadline of 6th July to do a deal has passed and a slew of 25 per cent tariffs on 800 types of goods amounting to $34 billion in import taxes is now in place. Another $16 billion is on the way and additional tariffs on $500 billion more goods is mooted.

According to President Trump, trade wars are easy to win. American Presidents should know by now that starting wars is easy, but winning or even ending them, not so much.

America has a need to right its balance of trade, which has run at a solid $400-500 billion a year for as long as I can recall, resulting in a huge loss of wealth. When the euro crisis struck, many of the countries hit could match their new inflated national debts to their recent run of trade deficits. Cheap money had let everyone go on a spending spree and ultimately that amounted to excessive imports of shiny things not made locally and then the countries went bust.

Every so called ‘workshop of the world’ has become the global political and economic powerhouse of its time. It was Britain, then the US, now it is China.

If a country can’t make stuff, its wealth dwindles and it becomes impoverished, enslaved in a neo-colonial thrall producing raw materials to be traded for finished goods. It can no longer afford to support engineering and technology and it becomes a backwater.

That’s the nightmare that unbalanced trade throws up. The anti-globalists see free trade as the slippery slope into national, economic and political degeneracy.

For free-trading globalists this is short-sighted, beggar-your-neighbour thinking. Free trade raises all ships. Global trade might raise poorer countries faster, but all parties benefit economically. Why should the first world lock in prosperity whilst leaving the rest of the world in poverty? It’s a win-win, not the win-lose of protectionism.

This doesn’t necessarily play well to rich countries with relatively small populations used to swaggering around the globe at will based on the power of their technological and financial superiority. Yet up to now, dangerously uneven trade balances have been downplayed.

Nationalistic exceptionalism aside, it is clear that countries like the US and UK who have run a runaway trade deficit are in danger ultimately of going the same way as Cyprus: bust. At its simplest, a trade deficit is a country’s wealth leaving its national pool and you need economic growth to keep things on an even keel.

The other side of the equation, countries with a positive trade balance, are getting richer without economic growth. If a county wants to be wealthy, one way to do it is to export like crazy and hoard the wealth. This is called ‘mercantilism’ and is frowned upon because it is a win-lose game. You buy all the stuff we make and we get all the gold.

Germany and China are considered the modern mercantilists. The countries are engineering, technological and manufacturing powerhouses that ‘put their back into it’ and focus on actually making things, rather than relying on others to do the dirty work of turning ideas into things.

America has been particularly bitten in the rear by taking the easy option, outsourcing all its stuff to Asia and particularly China. Apple, a US trillion dollar company, could not exist today without Chinese manufacturing – a fragile position to be in for such a huge asset. Like the crystal city of Dubai, Apple is not built to withstand war, trade or otherwise.

Trade war is a messy short cut to try and turn a bad situation around and like all wars it’s costly, mad and bad for all parties.

Countries like the US and UK can right their trade balances by righting their economic priorities. Economic barriers to actually producing things in many countries are very real and if you can’t make things, then you have to import them. Those barriers: red tape, lack of availability of capital, land to build on and so on are issues as important as ‘unfair’ trading barriers and dumping.

Germany is the proof of that. Germany does not have cheap labour, low environmental standards or a lack of regulation, yet it manages to swamp the world with fine motor vehicles.

The answer to out-of-control trade imbalances is strategic and can only come from government. It is right for Trump to try and stem the bleeding which the US has suffered for the best part of 20 years, but you can’t bully people into buying poor cars or products you don’t make. You can tax BMWs more, but it won’t make a gas-guzzling Cadillac a better car and if you don’t make lightbulbs anymore you can’t expect anyone to buy them from you.

To turn that tide, manufacturing needs support and respect. An internet company can get funded to spend billions on an idea and be valued at 10 times sales, while a company that makes the sort of physical things most of us buy from day to day is lucky to get a tiny fraction of that valuation and therefore access to capital. Starved of capital, loaded with red tape, manufacturing capacity will dry up and disappear. You are then left with an economic value-chain pyramid with the middle layer missing.

There is a blueprint for a turnaround and it is Germany; whether the US and the UK could stomach it is another matter.

They always say wars are easy to win; they are not. Trade wars are no different, but perhaps it will all be over by Christmas.

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