Note: An audio version of this story is available on the online article page at amestrib.com.
Last week, two words were on the minds of financiers, farmers and anyone focusing on trade across the world.
China announced a 25 percent tariff on 106 U.S. goods last Tuesday, including corn, soybeans, beef, cars and chemicals in response to ongoing threats from President Donald Trump’s administration to impose 25 percent tariffs on Chinese products for alleged intellectual property theft.
The announcement particularly roiled soybean producers in Iowa and across the country as China buys almost a third of every soybean grown by American farmers.
But what exactly is a trade war, and why should anyone care about it if they’re not a farmer or an economist?
First, some definitions
ISU economist Edward Balistreri said a trade war occurs when two or more countries start applying more and more tariffs on each other to take greater and greater revenues from their trading partners. In traditional economics, there is an optimal tariff balance where each side has a small tariff on the other that doesn’t draw the ire of either side’s industry or trade groups.
Balistreri said the talk of the past few weeks don’t look like a traditional trade war to him because the proposed tariffs from both sides are way higher than what an economist would consider to be rational thinking.
“This is really going to be painful if we had say 25 percent tariffs on goods from China and China imposed 25 percent tariffs on goods from us,” he said. “That’s going to be really painful and much worse than what we would estimate from a rational trade war.”
Effect on consumers
Everyday consumers would probably feel the effects of a large tariff skirmish on their “real incomes” in two ways: the price of goods imported from China will increase as U.S. importers raise prices to offset the tariff or smaller incomes due to less economic activity.
The price hikes would likely be seen in machinery, furniture, toys, sports equipment and footwear, which were the top import categories from China into the U.S. in 2016, according to the U.S. Trade Representative’s office.
Trump has previously said his tariffs are in response to alleged intellectual property theft by China. Balistreri said American companies trying to sell their products in China sometimes have to “open their books” and reveal their trade secrets to the Chinese government or partner company, which makes them vulnerable to counterfeiters selling their products at a cheaper rate.
But Balistreri said tariffs likely won’t do much to sway China away from intellectual property theft. It’s possible Trump’s threat is a negotiating tool that both parties will eventually back down from, but Balistreri said intellectual property theft complaints are usually handed by the U.S. International Trade Commission.
“There’s a whole office of unfair trade at the ITC do deal with these things, and in that regard I don’t see the tariffs solving that problem,” he said. “The tariffs at this point are just a point of contention between the U.S. and the Chinese.”
If you’ve seen “Ferris Bueller’s Day Off,” you’ve already been exposed to one of the most visible examples of a trade war in U.S. history. In the movie, Ben Stein asks the class about the Smoot-Hawley Tariff Act of 1930 in between close-up cuts of bored students.
However, that bill is one of the most visible historical examples of what happens when the U.S. imposes heavy tariffs. It installed tariffs on over 20,000 import items at the request of U.S. agriculture and industry, leading to reactionary tariffs on U.S. exports by its trading partners.
“A lot of economists would suggest that those tariffs in the 1930s led to an exacerbation of the problems that the economy was having at the time,” Balistreri said.
“It’s not a zero-sum game”
Balistreri said there has been a rise of the idea of trade as having only winners and only losers, something most economists don’t believe in. In the aftermath of World War II, countries turned towards trade as a way to rebuild the world’s economy after it was ravaged by the conflict.
“There was an understanding that international trade is not a zero-sum game, it’s not ‘I win and you lose,’” he said. “Everybody can win by cooperative trade.”
But recently, both in the U.S. and in Europe, there has been a marked rise in rejecting that mindset. Trump’s moves towards tariffs have been buffered by his threats to leave the North American Free Trade Agreement, and he pulled the U.S. out of discussions to join the Trans-Pacific Partnership, a trade bloc agreement between 11 Pacific Rim countries, shortly after taking office. As of Thursday morning, Trump has ordered his staff to consider re-entering the TPP at the behest of farm state lawmakers.
Meanwhile, the United Kingdom is in the process of leaving the European Union and its trade zone after it held a referendum on whether to stay or leave the group in 2016.
Balistreri said the rise of nationalistic thinking is a rejection of global economic policies, particularly through trade, because it isn’t comfortable for people to see economic activity they depend on move outside of their political influence.
However, he said keeping that influence comes at the cost of fewer external markets for a country to sell its product.
“We gain a lot in specializing what we do,” he said. “We grow a lot of soybeans and corn, and we have really low production costs relative to world markets. That’s the thing that we do best, and that’s the thing that we export.”
“It’s not something you can win at”
When asked about a tweet Trump made several weeks ago saying “trade wars are good, and easy to win,” Balistreri was blunt.
“I have no idea what he’s talking about in that regard,” he said.
Balistreri said a trade war, like trade in general, isn’t seen as something that has an outright winner and an outright loser. The point of trade is to cooperate together, he said, and what the Trump administration has proposed goes above what an effort to fix a trade balance would look like.
However, U.S. Trade Representative Robert Lighthizer previously said the tariffs likely won’t go into effect until June while the administration gathers public input. That gives Balistreri some hope that the tariffs will be axed before they take effect.
“I’m cautiously optimistic that when we get through this 60-day period where they’re going to be talking about these things, people will back away from the edge,” he said.
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