Trade is Boring … But Very Important
America is involved in a trade war and will suffer losses, as will every nation on the planet. But it is worth examining what can be done to minimize problems.
The first thing you must recognize is that tariffs focus on manufactured goods and not services. For example, 30% of the value of an automobile comes from the services that go into it – research, design, engineering, distribution logistics, marketing and sales. So, tariffs disrupt value chains, including the services that provide the “glue” connecting production in the global value chain.
Currently (September 2019), China’s exports to the U.S. have dropped 1%, and China’s U.S. imports have reduced by 5.6%. Tariffs even affect unrelated areas to product making. The U.S. National Travel and Tourism Office cites Chinese tourism in the U.S. grew about 20% per year for the past decade, but it contracted 2% since this all began in 2018. Trade instabilities have even reduced Chinese student flows to the U.S. All of this is estimated by the Peterson Institute for International Economics to result by mid-December 2019 in an impact on 98.6% of U.S. imports from China as instigated by the current trade war.
Given time, serious damage to the global economy will result as protectionist actions escalate. All nations facing new tariffs experience declines in real exports and GDP, calculated to reduce 0.1% in 2018, 0.8% in 2019 and 1.4% in 2020. The threshold and trigger for world recession is commonly said to be 2%. The U.S. is expected to experience the largest decline in real goods and services imports, down 4.5% in 2020, while China’s drop in real imports is projected to fall 3.2% more in 2020, experiencing its lowest growth in 27 years. There is no other way to say it – global economic growth has already slowed.
Concurrent with these circumstances, and about which the American public seems to have no clue, some nations gain from the trade war. For example, Vietnam exports to the U.S. (up 40% in 2019 compared to 2018) comprise 26% of their national GDP and show a $40 billion trade surplus with the U.S. and a 7% national economic growth for the year. Other nations that “fill the gap” created by trade disputes and third-party tariffs include Chile, Malaysia, Argentina, South Korea (increased electronics exports), Mexico (automobiles) and Brazil (soybeans). Others do not do well in comparison. Germany, for instance, may well lose one in four jobs due to export curtailments.
When the trade war between the U.S. and China began in 2018, the imbalance was $419 billion (U.S. exports at $120 billion and imports from China at $540 billion). The cause for the imbalance is that China’s standard of living is much lower than the U.S. and their currency exchange rate is always manipulated by government. Furthermore, U.S. debt to China was $1.1 trillion in April 2019, 27% of the total public debt owed by all foreign countries. The situation was exacerbated by continued tit-for-tat tariffs over many years, with China being the world’s largest exporter and America the largest importer.
When China joined the World Trade Organization (WTO) in 2001 it agreed to cut tariffs. But, and this is crucial, China blatantly violated WTO and other trade laws by stealing U.S. intellectual property and coercing U.S. firms to transfer technology to Chinese companies in order to access Chinese markets. The estimated cost of IP theft to U.S. companies is $225-600 billion annually. Then, in March of 2019, the National People’s Congress passed a foreign investment law to take effect in 2020, which explicitly prohibits forced transfer of IP and grants better protection for trade secrets and foreign IP.
What to do about all this is quite important, but it is NOT something that Congress has addressed. My suggestion is that we all get on their backs and either drive them to do their job or kick them out of office.