Why is Donald Trump’s trade war dangerous?
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The annual global trade of the U.S. is worth around $5 trillion and the country ends with an annual deficit upwards of $500 billion. In the first year of Donald Trump’s presidency, it was $556 billion. Mr. Trump believes this deficit is proof that all its trading partners are unfair to America. He also believes manufacturing decline in the U.S. has weakened the country and pauperised its working class. During the 2016 campaign, he promised to implement policies to reduce the deficit and revive manufacturing. This is the mainstay of Mr. Trump’s ‘America First’ policy. The announcement this week of a 25% duty on steel and 10% on aluminium is one definitive step in that scheme. Canada and Mexico are exempt for now, and the tariffs will be effective in two weeks.
“A strong steel and aluminium industry are vital to our national security, absolutely vital… Steel is steel. If you don’t have steel, you don’t have a country,” he said, announcing the decision. The notion that the country’s greatness comes only from its ability to make things was central to Mr. Trump’s campaign. He invoked a rarely used national security clause in a law in support of his tariffs that fall foul of international trade treaties. The emphasis on domestic manufacturing and trade deficit overlooks the transformation of the U.S. economy in recent decades. The U.S., increasingly an exporter of services, has a surplus in the sector, though overall it runs a deficit. The U.S. exported more and more of services and imported more and more of goods. That equilibrium is under threat.
Is a global trade war looming?
With other countries planning retaliatory measures, the prospect of a global trade war looms large, but Mr. Trump believes it may be good for America. “When a country [the U.S.] 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 any more — we win big. It’s easy!” he posted on Twitter, a few days before the tariffs were announced. The European Commission may increase tariffs on American goods such as Bourbon whiskey, Levi’s jeans, Florida orange juice and peanut butter. American agriculture produce, aircraft and medical equipment could face pressure in the global market. America’s own industries that use steel and aluminium as raw materials could take a hit. Many economists have expressed fear that Mr. Trump’s measure may trigger a global slowdown.
What will be the impact?
It is unclear whether the tariffs on steel and aluminium will have the desired effect on the American economy, but the direct association of these sectors with the working class adds immense symbolic value to the decision. China, with which the U.S. runs the biggest deficit, will only be marginally affected. A more intense trade war is going to be in intellectual property, and Mr. Trump has threatened to open that front soon. “The U.S. is acting swiftly on Intellectual Property theft. We cannot allow this to happen as it has for many years!” he wrote on Twitter on March 7.
U.S. Trade Representative Robert E. Lighthizer had initiated a special inquiry into Chinese trade and investment practices for potential intellectual property rights violations last August. A report is due. U.S. companies have long complained that the Chinese government arm-twists them into sharing technology. American companies that want business in China are allegedly forced into joint ventures and pressured to transfer technology to a Chinese partner, in one such practice. Some Americans reporting on the issue recently put the loss to the country’s economy due to intellectual property rights violations at $600 billion each year. Observers feel hostile measures in the high-tech sector will be more provocative for China.
What about India?
India found a mention in several remarks made by Mr. Trump on trade in recent weeks. He believes Indian tariffs are high and has threatened to impose reciprocal tariffs on Indian goods. The U.S. has been critical of India’s intellectual property rights standards and this year’s report may take a harsher position. Stakes are high for India in Mr. Trump’s trade war.