America First: ‘Winning’ Mr. Trump’s Trade War Roberto J. Garcia, School of Economics and Business 13.15 - 14.00 Festsalen, Urbygningen 12 November 2018
America First: ‘Winning’ Mr. Trump’s Trade War Outline of the presentation Introduction America First Motivation: Why pursue a trade war? Chronology of the trade war Theory Winning a trade war?: Some indicators Concluding observations 2
1. Introduction America first “ Protection will lead to great prosperity and strength … because we protect …[the US] border from countries making our products, stealing our companies, and destroying our jobs …” – Inauguration address, 20 Jan 2016 “ Trade pacts are no good for us . . . or for our workers” – CBS republican primary debate in S. Carolina, 13 Feb 2015 3
Introduction, continued … “ Trade wars are good and easy to win … the US is losing many billions of dollars with virtually every country…” – Tweet announcing steel/aluminum tariffs, 2 Mar 2018 “The era of economic surrender is over. From now on we expect trading relationships to be fair, … and reciprocal… protect American workers and … intellectual property through enforcement of our trade rules .” – State of the Union address, 30 Jan 2018 4
Introduction, continued … Motivation: why pursue a trade war? Stable genius and master dealer? • Stage 1. Challenge existing world order • Stage 2. Renegotiate from strength or … Reckless, unpredictable, unfit leader? • Shake things up, cut deal, claim victory • No attempt to ask: What next? Sources: Financial Times , “Chinese are wary of Trump’s creative destruction”, by M. Leonard, 25 Jul 2018, 5 p. 9. photos: Economist , 3 Feb 2018, p. 33; https://theatlantic.com/politicas/archive/2016109/
2. Chronology of the trade war Trump’s trade war Underlying logic Objectives • American workers, jobs • US companies, products and technology Strategy • Attack trade imbalances • Inflict asymmetric pain 6
Chronology of the trade war, continued … Theater of war Sources: Economist , “Trade with America: Assessing the pain”, p. 53 - 5; “Japan and the US: Watching nervously”, 7 8 Sep 2018, p. 41-2
Chronology of the trade war, continued … 4 battle fronts: of differing degrees and scope 1 st front: solar panels + washing machines • Nov 2017 US ITC finds injury to industry; recommends tariffs • Jan 2018 Tariffs: $8.5bn on panels; $1.8bn on washing machines China initiates investigation into US dumping of • Feb sorghum ($1bn in export value) • Apr China applies tariff at 178.6% S. Korea challenges US safeguard tariffs at WTO; • May China ends sorghum tariffs during talks with US • Aug China challenges US tariffs at WTO 8
Chronology of the trade war, continued … 2 nd front: steel + aluminum US DoC initiates investigation under Section 232, US • Apr 2017 Trade Expansion Act of 1962: “national security threat” • Feb 2018 DoC reports a national security threat Tariffs: 25% on steel, 10% on aluminum; applies to all • Mar exporters; exemptions for quotas; Tit-for-tat announced • Apr China: tariffs on $2.4bn of US exports in 2017 EU: 25% tariff on $34bn of steel, aluminum, iconic US • Jun goods; Harley-Davidson moves production of EU-bound Canada: tariffs on $12.7bn; US subsidy to farmers; US • Jul challenges retaliation at WTO • Aug Tariffs on Turkey’s steel/aluminum to 50% and 20% 9
Chronology of the trade war, continued … 3 rd front: automobiles and parts US DoC initiates national security investigation into • May 2018 imports of automobiles and parts Public hearings scheduled to discuss implications of • Jul 25% tariffs • Aug US-EU ceasefire through trade talks NAFTA renegotiated with Mexico, Canada • Sep - 75% local content - 70% steel/aluminum content regionally sourced - 40% labor content at $16/hr Peterson Institute for International Economics, “Trump’s trade war timeline: An up -to- date guide”, C. Brown and M. Kolb, http://piie.com/blogs/trade-investment-policy -watch/trump-trade-war-china-date-guide, accessed Sep 2018. 10
Chronology of the trade war, continued … 4 th front: Unfair trade, tech transfer + intellectual property theft USTR initiates investigation of China under Section 301 • Apr 2017 of Trade Act of 1974 – US can retaliate unfair trade • Mar 2018 USTR reports unfair practices worth $60bn in tariffs Tit-for-tat tariff threats on $50bn. US: 25% on electrical • Apr equipment, capital goods; China: 25% on cars, aircraft, ag • May US-China hold talks; tariff threats on hold US revises list to cover firms dependent on Chinese • Jun imports ($46.3bn of 2017 value) Tit-for tat: China, tariffs on $34bn; US threat on $200bn • Jul China: tariffs on remaining $16 bn • Aug Restrained tit-for-tat. US: 10% on $200bn; China: 10% • Sep on $60bn; US to raise to 25% in 2019 if China retaliates
3. Theory Art of War, Sun Tzu Preparedness: plan, calculate, be deceptive Waging war: avoid prolonged operations When/how to fight • Know your enemy and yourself • Attack the enemy’s strategy Bargaining model of [trade] war International relations literature – breakdown in diplomacy? Economics: scarce resources, unlimited and competing uses Disagreement over resource allocation and/or policy choice Sources: https://fas.org/man/artofwar.htm; photo: http://blog.tutorming.com/expats/life-lessons-from-the-art-of-war; Reiter, D., “Exploring the bargaining model of war”, Perspective on Politics , Vol 1, no. 1 (2003):27-43. 12
Theory, continued … Theoretical economic principles relating to trade Taxing imports is taxing exports 4.00 Correlation of US export and import value, 1930-2016 Log export/import value 3.50 3.00 2.50 Imports 2.00 Exports 1.50 1.00 0.50 0.00 1930 1940 1950 1960 1970 1980 1990 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: US Census Bureau, https://www.census.gov/foreign-trade/statistics/historical/gands.pdf, accessed Sep 13 2018.
Theory, continued … Businesses are consumers too US imports by end-use-categories, 1970-2017 100 Import by end-use-category, % of trade 90 80 Industrial supplies and capital goods (49%) 70 60 50 40 Consumer goods (36%) 30 20 10 Car and car parts (15%) 0 1970 1980 1990 1994 1998 2000 2004 2007 2012 2016 2017 14 Source: US Dept. of Commerce, Survey of Current Business , Mar issues year after date.
Theory, continued … Trade imbalances reflect macroeconomic phenomena • Balance of payments – sum of international transactions • Main components: balance of trade and capital account • External imbalance reflects domestic macro imbalances 15
4. “Winning” a trade war Macroeconomic indicators US-China bilateral trade Bilateral export share 2017 of GDP: $506bn 4.1% 0.7% $130bn 16 Source: Financial Times , “Trump declares trade war on China”, 9 May 2018, p. 9.
“Winning” a trade war, continued … Current account position since tariffs US trade deficit lower China’s surplus lower, deficit Source: Trading Economics, https://tradingeconomics.com Accessed Sep 2018. 17
“Winning” a trade war, continued … • China’s rebalancing: GDP growth less dependent on exports 2006: China’s 40 Export share of GDP bilateral 35 Export share of GDP, % surplus was 30 10.2% of its 25 GDP 20 2017: only 15 3.1% in 2017 10 5 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: https://www.statista.com/statistics/256591/share-of-chinas-exports-in-gross-domestic-product/; Economist , Trade: A steamroller in reverse”, 10 Mar 2018, p. 54. 18
“Winning” a trade war, continued … GDP annual growth rates, US and China US GDP growth Problem: Fast growth in US makes deficit worse and lessens impact of tariff. China’s GDP growth China’s slowdown predates tariffs and is related to other macroeconomic factors than tariffs. Source: Trading Economics, https://tradingeconomics.com Accessed Sep 2018. 19
“Winning” a trade war, continued … Stock market valuations, US-China comparisons • US and Chinese stock market valuations, 2018 • US Dow Jones S&P index: increased since 2009 Sources: Thompson Reuters, Datastream, accessed Sep 2018; Economist , “Trade war (2): Metal clashing”, 11 20 Aug 2018, p. 59.
“Winning” a trade war, continued … Exchange rate, yuan to 1 USD Problem: A decreased value in the yuan makes China’s exports to US cheaper reducing effectiveness of the tariff. US initiates trade war 2014-01 07 2015-01 07 2016-01 07 2017-01 07 2018-01 07 Source: US Board of Governors of the Federal Reserve System. 21
“Winning” a trade war, continued … US’s ability to affect China’s macro policy – econ slowdown • Monetary policy – loosened to stimulate demand • Fiscal policy: tax cuts, spending on infrastructure, subsidies • Exchange rates: yuan Makes dollar debt more expensive Sharp drop can spark currency crisis and capital flight Source : Financial Times , “China unveils stimulus to fight ‘uncertainty’”, by G. Wildau, 25 Jul 2018, p. 4. 22
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