They’re tempting, but no one really wins a trade war

They’re tempting, but no one really wins a trade war

Trade wars, on the face of it, sound harmless; no one shoots anyone, no blood is spilled, no destruction appears to take place. And as Donald Trump tweeted: “Trade wars are good, and easy to win.” Well, not that easily. Trade wars are rarely won. In fact, negotiations and agreements that break the zero-sum nature of trade wars are the arrangement that serve an economy best. Worse, trade wars defined as “a situation in which countries try to damage each other’s trade, typically by the imposition of tariffs or quota restrictions” are likely to spill into other areas of contention and spin out of control, sometimes ending in actual wars.

Cutting the US trade deficit was a centerpiece of Trump’s presidential election promises. He went as far as pledging to tax Chinese imports by 45 percent. He has harshly criticised the North American Free Trade Agreement (NAFTA), tweeting: “We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for USA. Massive relocation of companies & jobs.” Similarly, he has opposed the Trans-Pacific Partnership (TPP) as “the worst trade deal the US has ever signed.” Even before stepping into the White House, he threatened to tear apart most of the US’s major trade agreements. From a campaigning point of view, his strategy was an obvious one, attempting to lure the disenchanted working class  to vote for him by blaming the loss of manufacturing jobs on America’s global trade agreements. While there is a grain of truth there, he oversimplifies global trade relations and reduces the complex issue of job creation to a single variable explanation, ignoring the jobs created by these agreements, the impact of automation on employment, and the evolution in the US economic structure.  

There is a debate among economists about the impact of trade deficits, and whether they are sustainable. Most agree the solution is not trade wars, which harm the globalised economic regime and create more losers than winners. The New York Times, admittedly not a great fan of Trump, argues that he has a fixation with America’s widening trade deficit. This motivated him in the first place to impose new tariffs, starting with solar panels and washing machines in January, followed in March by steel and aluminium. 

Although Trump argues that the US is not in a trade war with China, and that he and China’s president Xi Jinping “will always be friends, no matter what happens with our dispute on trade,” it feels very much like at least the beginning of a trade war. This could have a negative impact on both countries. China invested a huge amount of money to cope with the global recession and sustain its economic growth. It has done so not only to ensure prosperity, but also to avoid social unrest. Trump might argue that he is doing what is right for the American people. Nevertheless, destabilising China is not in US interests, nor would it earn any gratitude from his friend in Beijing. 

Although Trump argues that the US is not in a trade war with China, and that he and China’s president Xi Jinping “will always be friends, no matter what happens with our dispute on trade,” it feels very much like at least the beginning of a trade war.

Yossi Mekelberg

To make things worse, there are no guarantees that these tariffs will make a huge difference to the American job market. Only a few thousand jobs will be created in the steel industry, and at a huge cost for steel users, which in turn would cut the workforce in related industries and retail sectors. The Trump administration has yet to provide any conclusive evidence that these measures are a game changer in job creation.  Nonetheless, it threatens a further $50 billion in tariffs on China, targeting 1,300 products. And even if this created new jobs, one has to wonder whether is worth risking crisis not only with China, but also with other countries likely be affected. China has already retaliated with tariffs of up to 25 percent on 128 US imports, including pork and wine, and in response to the US escalation it is threatening tariffs on an array of US goods to the tune of $50 billion, equal to the one threatened by the US.

Factually, Trump is right that the US is running a trade deficit with China, although it is $375 billion, and not $500 billion as he suggests. He also has a point in claiming that China has an advantage in the manufacturing sector as the standard of living there is lower, allowing companies to pay lower wages. And the Chinese government is indeed fixing the exchange rate to keep it lower than its real value, combined with respect for intellectual property being well below par. 

But a budget deficit with one country, or even a group of countries, doesn’t provide the full picture. At times it is beneficial as it maintains lower inflation and a higher standard of living. Moreover, the US, due to structural changes over the past few decades, is running a goods deficit with the world, but a surplus in services. 

Issues such as China’s disregard for intellectual property rights, as much as its exchange rate protectionism, are legitimate concerns, but they need to be addressed within the right forums, such as the World Trade Organization. Some of the solutions lie within structural changes in the US itself. Trade wars, on the other hand, risk pushing the world into a recession in which the main victims would be exactly those Trump claims to protect.

  • Yossi Mekelberg is professor of international relations at Regent’s University London, where he is head of the International Relations and Social Sciences Program. He is also an associate fellow of the MENA Program at Chatham House. He is a regular contributor to the international written and electronic media.

    Twitter: @YMekelberg

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