Yesterday, President Trump announced
trade tariffs on imported steel (25%) and aluminum (10%). Although such measures were in line with
campaign promises, financial markets reacted negatively and many commentators
darkly warned of impending doom. Earlier
in the week, the President commented that foreign trade was the one problem
which could threaten bilateral relations with China. What to make of all that?
China’s steel production
capacity is almost 8 times that of the US; it employs a lot of people
and, like any heavy industry, it needs to operate at a high utilization level
to remain viable. This had led to the
creation of a variety of subsidies, ranging from grants to loans at preferential
rates, price controls on key inputs, lax environmental regulations, and equity infusions. Such subsidies, in turn, triggered capacity
expansion and the need for further subsidies.
Findings of Chinese
anti-competitive practices are not new, nor are they limited to the US: last
year, the European Union imposed duties of 17.2% to 28.5% on a variety of
Chinese steel imports.
So far, it is unclear to
whom, how and when these tariffs will be applied. As usual with this administration, seemingly
good ideas are weighed down by poor presentation or poor execution. Furthermore, one can question whether the US
should want to expand an industry, steel-making, which is highly polluting and
generates modest value-added.
But the steel dispute highlights
a much deeper problem, which is how to deal with an economy that is the second
largest in the world, yet enjoys a treatment which is normally applied to
emerging countries. The table below
points to a striking imbalance which is difficult to ignore:
US Foreign Trade with China in 2017
US exports of goods
|
$130 billion
|
US imports of goods
|
$506 billion
|
Trade deficit
|
($376 billion)
|
Adding back the US surplus in
services would reduce the above deficit by only $30-$40 billion.
Looking into the main
components of trade is instructive:
Main
components of US-China Trade in 2016
Top US exports
|
Top China exports
|
||
Grains, seeds, fruits
|
$15 billion
|
Electrical machinery
|
$129 billion
|
Aircraft
|
$15 billion
|
Machinery
|
$ 97 billion
|
Electrical machinery
|
$12 billion
|
Furniture and beddings
|
$ 29 billion
|
Machinery
|
$11 billion
|
Toys and sport equipment
|
$ 24 billion
|
Vehicles
|
$11 billion
|
Footwear
|
$ 15 billion
|
The largest US export to China
is low value-added agricultural products; Chinese machinery exports are 10 times the
size of the US ones.
By comparison, the European
Union trade deficit with China is about half that of the US, in both absolute
and percentage terms.
Much more important than
steel imports from China is the ongoing investigation into Chinese practices
relating to intellectual property and technology transfer. These deal with US assets which have far greater
value, both strategically and financially than steel and aluminum products.
In parallel, the US (and the
EU) continue to oppose recognition of China as a “market economy”. This goes beyond matters of prestige: such
recognition would limit the ability to impose tariffs on China for unfair trade
practices.
Taking the broad view,
pressure has been building up under the US-Chinese trade imbalance for a long
time. In recent years, it was
exacerbated by the Great Recession, yet critics didn’t get much support from
Washington as proponents of globalization were better organized and better
financed.
This seems to be changing as
President Trump made “fair trade” with China a major plank of his campaign and won
significant voter support for it. There
is not much argument that the US consumer benefitted from low prices brought by
globalization. The question which is
being asked today is whether this should be the ultimate goal.
To the extent that other very
large economies make their products artificially attractive and their own markets
hard to access, this will result in a hollowing out of their competitors’
industries and result in some social hardships.
In the end, will American consumers willingly trade a somewhat lower
purchasing power in exchange for greater social stability? That is the question.
Steel, aluminum, intellectual
property, we are at the beginning of a struggle between the No. 1 and the No. 2
world powers, not about which has the best nuclear arsenal, but how the
greatest engine of wealth will work for their respective populations, and
indirectly, their political establishments. The current US administration launched its campaign by lowering corporate taxes and cutting down regulations. It is now entering the more political and aggressive field of tariffs.
Who will be the winner? Will there be a (lasting) winner? I don’t know.
But I would bet that the current system will change.
