Yahoo Finance Is Donald Trump right that trade wars are 'good'?
Fears are growing that US president Donald Trump is to spark an international trade war.
Trump has once again turned to Twitter to threaten to impose hefty tariffs on steel and aluminium coming into the US from abroad, particularly China.
He says the cheap metals are undermining American industry, eroding jobs and investment, and says tariffs are one answer to rebalance the equation.
MORE: Trump’s tariffs set to dominate final day of NAFTA talks
Trump went further over the weekend, threatening higher import taxes on EU-made cars. But now the EU has promised it could hit back with sanctions of its own on US goods.
Who has said what?
Trump has decried the “$800 Billion Dollar Yearly Trade Deficit because of our ‘very stupid’ trade deals and policies”, and vowed to end it.
On Thursday, he said steel imports would face a 25% tariff and aluminium 10%, adding that “trade wars are good”.
A couple of days later, he turned his ire on the European car industry, tweeting: “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S.”
If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!
— Donald J. Trump (@realDonaldTrump) March 3, 2018
He’s also since said Canada and Mexico could be in line for a shock.
British prime minister Theresa May spoke to the president Trump on Sunday raising “our deep concern at the President’s forthcoming announcement on steel and aluminium tariffs, noting that multilateral action was the only way to resolve the problem of global overcapacity in all parties’ interests”.
MORE: Australia opens door to UK joining Trans-Pacific trade pact after Brexit
Zhang Yesui, spokesperson for China’s National People’s Congress, said China would take “necessary measures” if its interests were hurt.
We are on the losing side of almost all trade deals. Our friends and enemies have taken advantage of the U.S. for many years. Our Steel and Aluminum industries are dead. Sorry, it’s time for a change! MAKE AMERICA GREAT AGAIN!
— Donald J. Trump (@realDonaldTrump) March 5, 2018
And on Monday, Cecilia Malmström, EU Commissioner for Trade, told the BBC that the EU had a list of US products – including such goods as Levi’s jeans, Harley Davidson motorbikes and bourbon – it could add taxes and tariffs on.
Are trade wars “good”?
The US president seems to believe so. His mantra in the White House has been to “make America great again”, promising to re-energise US manufacturing, the coal industry, car industry and to protect and grow US jobs.
Trump believes the US gets a raw deal on many trading relationships – he’s already pulled out of the Trans-Pacific Partnership trade pact.
While a great headline grabber, appealing very much to his core support, trade wars are far from being an easy win – or of a major benefit to industry.
The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!
— Donald J. Trump (@realDonaldTrump) March 3, 2018
As is already being spoken of, tit-for-tat tariffs will likely be imposed – and that, the majority of economist say, will constrict international trade.
That said, the UK steel industry has suffered greatly because of cheap steel from China on the market. It was one of the major reasons for the near total collapse of British Steel before Indian group Tata bought it a couple of years ago
In effect, no one wins.
What will consumers see from a trade war?
Trump believes protecting US industry from cheap foreign imports will boost jobs – but he’s banking on US consumers buying (cheaper) US-made goods.
However, the US imports steel from more than 100 nations and brings in four times more steel from abroad than it exports.
If tit-for-tat tariffs are applied, US producers will be hit hard – and those costs will likely be passed on to consumers.
Similarly, the US exports $2.3 trillion-worth of goods – and if they are subject to higher taxes and tariffs that will hit domestic producers and potentially jobs.
Equally, if US-made cars, car parts, jeans, bourbon become substantially more expensive to import into Europe, again those costs will likely be passed on down the line to the consumer – and why pay £5, £10, £20 more for a pair of Levi’s if Italian made Diesel are just as good but way cheaper?.
Ultimately, the gains for the US could be marginal at best.
Where do we stand, then?
The World Trade Organization says taxes and tariffs used as protectionist measures “ultimately leads to bloated, inefficient producers supplying consumers with outdated, unattractive products, in the end, factories close and jobs are lost despite the protection and subsidies”.
It adds: “If other governments around the world pursue the same policies, markets contract and world economic activity is reduced.”
However, Trump is using a threat to “national security” to justify his moves, an area that is exempt from WTO rules.
Bahrain, Saudi Arabia and United Arab Emirates used it to enact their economic boycott of Qatar.
At this moment, Trump has spoken but has yet to impose sanctions – if he does, the EU, China and other trading partners are sure to retaliate.
As European Commission chief Jean-Claude Juncker said on Friday: “So now we will also impose import tariffs. We can also do stupid. We also have to be this stupid.”
