Tag Archives: Trade Wars

US and China trade war and what it means.

Doing trade barriers with my NCEA Level 2 class and below is a good clip from Al Jazeera about the issues that are arising from it and who will lose the least from a trade war. The last ten years saw a marked improvement in trade between the United States and China. But Trump’s battle of the tariffs is threatening that. And there are fears of an all-out trade war. The U.S. is putting tariffs on 50 billion dollars worth of Chinese imports. The president says he wants a fairer trade with China. But Beijing’s fired back with a tit-for-tat response. It’s published a list of more than 600 American products it plans to hit with its own taxes. Is it a case of who blinks first in this economic brinkmanship? And what will it mean for global trade? The comments by Philippe LeGrain are particularly good.

USA China trade war – who would win?

After a third round of trade talks between China and the US ended in stalemate a US$100bn trade war is on the horizon. America has published a list of 1,300 Chinese products which it proposes to hit with a 25% tariff. China has it own list covering 106 categories. As the Chinese embassy in Washington DC said “As the Chinese saying goes, it is only polite to reciprocate.” See graph below from The Economist.

US list covers Chinese products worth – $US$46bn in 2017 – 9% of exports to USA.
Chinese list covers US products worth – US$50bn in 2017 – 38% of exports to China

Historians of trade have an advantage over those who study wars of the military kind. Each side is a trade dispute lays out in detail the products to be affected. That makes it easier to analyse their strategies. Trump’s blunt attack targeting of a particular industry – steel and aluminium – is to supposedly make the industry in the US stronger. China retaliated by placing tariffs on US$0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and US$1.2bn-worth of aluminium waste.

The US face a trade-off between protecting their own industries with import tariffs at the same time as increasing the cost of goods for its consumers. There is also the likelihood of causing disruptions to the US economy by increasing the cost of intermediate goods (aircraft parts, robots, semiconductors) which ultimately leads to higher prices.

Good long-run deal for China

It seems that China has the dominant position for the following reasons:

  • China can stop purchasing US aircraft
  • Impose an embargo on US soybean products
  • Dump US Treasury Bills and other securities
  • Chinese companies could reduce demand for US business services
  • The government could persuade firms not to buy US products

China is indirectly one of America’s biggest employers. China could look to buy all it commercial aircraft from European consortium Airbus rather than Boeing. That move alone wold cost 179,000 US jobs. China controls key components in global supply and production networks

Initially a trade war would mean job losses for both countries but in the long-run with China looking to develop a more domestic led consumption model the export market becomes less significant – Project Syndicate. See video below:

Source:                                                                                                                                                        The Economist – Blow for Blow – April 7th 2018

Looming US China trade war – What can China do?

China’s share of global trade has surged since the 1990’s with both exports and imports increasing significantly – see graph below. Exports have been on a steep rise since 2001 with only a slight plateau with the GFC in 2008-9.

On Friday Donald Trump signed an order to impose tariffs on as much as $60 billion worth of Chinese imports. Trump wants to punish Beijing what he said is “the theft of American technology and Chinese pressure on U.S. companies to hand it over.” This deficit is significant – largest deficit of any country (see graph) – and Trump is blaming the US China trade imbalance for the loss of jobs in the US. This is an area that Trump focused his attention on in his campaign and now he is trying to fulfill the rhetoric.

Source: National Australia Bank

China has already warned that it will take “all necessary measures” to defend itself, raising the prospect of a trade war between the world’s two biggest economies. China has a few retaliatory measures it could use:

Soyabeans – US or Brazil?
The United States exported more than 30 million tons of soybeans — worth more than $10 billion — to China last year, over 57 percent of total U.S. exports of the popular legume. The soybean industry is heavily subsidised by the US government and this allows them to dump their produce on the Chinese market below the Chinese market price. China could look to Brazil for soy.

Boeing or Airbus?
Boeing make over 50% of commercial aircraft operating in China. Last November they signed an agreement to sell 300 planes to China worth $37 billion. This order supports approximately 150,000 jobs. In future China could look to the European plane manufacturer Airbus.

Sorghum
Earlier this year Trump imposed the following on Chinese products:

  • 20% tariff on the first 1.2m imported large residential washers in the first year, and a 50% tariff on machines above that number.
  • 30% tariff will be imposed on imported solar panels

In retaliation China has launched an anti-dumping and anti-subsidy investigation into imports of the grain from the US. China is the top buyer of US sorghum – US provided 4.76 million of CHina’s 5 million metric tonnes of sorghum imports – US1.1bn. China could retaliate after its investigation wraps up, expected next February.

Apple
China is a major market for the iPhone maker. Apple also depends on China’s workforce to make most of its products. As a result, China’s government has enormous leverage over the company and could, as it has in the past, target Apple for violating Chinese consumer rights.

General Motors
The Chinese market is imperative for GM – China has been the largest retailer for the last 6 years. 4 million cars were sold in China last year, up from 4.4% from the previous high a year earlier. Chinese automakers like Geely and BYD are competing for market share, though, and China could make it more difficult for both GM and Ford to operate on Chinese soil. In late 2016, China fined GM’s China joint venture $29 million for “price fixing,” or setting minimum prices for certain Cadillac, Chevy and Buick models.

Source: 5 Ways China May Try To Win A Trade War With The U.S.

Trump – why is he really putting tariffs on steel and aluminum?

Donald Trump announced on 2nd March that the US will impose a 25% tariff on steel imports and a 10% tariff and aluminum imports. A tariff protects domestic firms against overseas competition and raises revenue for the government. A tariff is a tax placed (or levied) on imports that raises the price of imported goods thereby making locally-made products relatively more price competitive. This may protect jobs and/or improve the balance of payments but it can cause resentment overseas. High tariffs on imports may cause a country’s trading partners to retaliate and follow suit by placing tariffs on exports of foreign made goods. Notice on the graph below how a tariff reduces the quantity of imports from 6m bottles to 2m bottles and the domestic supply increases from 2m to 4m bottles.


For many years US producers have found it hard to compete with cheap imports and this has led to many steel plants closing down with thousands of workers losing their jobs. Two main factors have caused this:

  1. Global steel and aluminum production has increased significantly over the last 15 years which has created excess capacity.
  2. Chinese firms have been widely accused of pricing below the cost of production in order to get rid of excess stock

Previous Tariffs – nothing new here.

The US is not the only country or group to impose tariffs on foreign products. The EU has done the following:

  • Put a tariff of 28.5% on certain types of steel pipes and tubes made in China after it was found that the prices were artificially low.
  • Imposed 43 anti-dumping and anti-subsidy measures, 20 of which are on products originating from China

The Obama Administration also was active in counteracting alleged Chinese dumping.

  • March 2016 – they put a 265.79% on imports of cold-rolled steel, used to make auto parts, appliances and shipping containers, from seven countries including China.
  • May 2016 – to clampdown on the glut of steel imports the US imposed anti-dumping and anti-subsidy duties of up to 450% on corrosion-resistant steel form China.

What is the difference between previous tariffs and Trumps announcement?

The difference here is that Trump’s tariffs would apply to all products rather than targeting particular areas of steel and aluminum production. Trump seems to be threatening action against any nation that runs trade surpluses with the United States. He tweeted last week:

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,”

“Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore—we win big. It’s easy!”

The EU maintain that the key problem is as mentioned above is global over capacity caused by non-market production – producing the output even though there is no demand for it. They are of the belief that this can be dealt with at the source – i.e. those countries over producing. The oil industry seems to work in a similar way with OPEC where production can change with negotiations between oil producing countries. However if a trade war does eventuate Europe has warned the US to expect imports tariffs on American icons like Harley-Davidson, Levi’s jeans and Kentucky bourbon.

China is not the big importer into the US

It seems that in a lot of his communication he singles out China as being the problem especially with the trade deficit the US has with that country. However China only supplies 2.9% of US steel imports – see below:

Top steel exporters to the United States with their corresponding percentage of total U.S. steel imports:

 

Canadian steel producers, like their U.S. counterparts, have been complaining about Chinese firms dumping products in the domestic market. Sensitive to these complaints, the Canadian government has long imposed protective duties on some Chinese exports, such as hot-rolled steel plate. On Thursday, the Canadian International Trade Tribunal indicated that these duties would remain in place. On this issue, at least, the United States and Canada should have been able to find common ground. Instead, Canada, like the E.U., is threatening to retaliate against Trump’s plan.

 

 

Source: Wood Mackenzie

Why is Trump really doing this?

As with any politician it is all about popularity. Part of his rhetoric on the election campaign was to make America great again and to revive the heavy industry in areas such as Pennsylvania (steel production) a normally very safe seat for the Republicans – in fact the Democrats didn’t even field a candidate in the last election. However, Trump voters are disappointed with his presidency and, with the Democrats fielding a candidate, the forthcoming special election in western Pennsylvania is too close to call. An upset victory by the Democrats, or even a narrow loss, would make the midterm elections a very close contest as the Democrats try to retake control of the House of Representatives.

The big question is will Trump go ahead with the tariffs or back down as he has done with immigration etc.

Source: New Yorker – Will Trump Really Start a Broad Trade War? by John Cassidy

Here we go again – high tariffs and currency wars

In 1930 the Hawley-Smoot Tariff Act was passed by the Republican-controlled House of Representatives. It was an attempt (by increasing tariffs) to ease the effects of the Great Depression but in fact it made it worse. Recently the House of Representatives passed legislation aimed at imposing trade sanctions against China unless it allows its currency to appreciate, thus diminishing its export advantage. Furthermore Treasury Secretary Tim Geithner warned against currency policies that might intensify “short-term distortions in favour of exports.”

So is it 1929 all over again? Is America preparing to raise its economic drawbridges? Has the ghost of Smoot-Hawley returned?

It helps to start with a clear-eyed view of Smoot-Hawley itself, which was just one of many mistakes committed by Depression-era policy-makers—and not the most consequential of them. If we want to avoid the sort of destructive, beggar-thy-neighbour trade wars that contributed to bringing down the world economy in the 1930s, we have to draw the right lessons from this chapter of our history.

Click here for an excellent article from the Wall Street Journal.