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Tariffs: Fair trade or trade war?

Tariffs: Fair trade or trade war?

By Louis Rumao:

American economists are unanimous that trade, and trade with China in particular, is good for the USA, but President Donald Trump intends to use tariffs to force fair trade – but wait for the next Presidential tweet!

A tariff is a tax imposed on imported goods and services. There are several reasons, chiefly economic, for a sovereign country to levy tariff on imported goods and services. Countries may also use tariffs as a political or retaliation technique, if they think that a trading partner has not played by the rules. Tariffs increase prices of imported goods, thus protecting domestic producers who do not have to reduce their prices, while domestic consumers are left paying higher prices as a result. Tariffs also reduce efficiencies by allowing companies that would not exist in a more competitive market to remain open.
Back in September 2009, in response to a petition from the union that represents tyre manufacturing workers, the Obama administration imposed punitive tariffs on tyres imported from China from the normal rate of 4% all the way up to 35%, followed by a 30% tariff in 2010 and then a 25% tariff in 2011. This tariff was a raw deal for US consumers, and a rawer deal for many Chinese factory workers who were put out of jobs. A 2012 study by the Peterson Institute for International Economics found that tyre imports from China fell by 67 per cent due to the tariff, hitting Chinese tyre manufacturing workers hard. The study also reported that employment in the US tyre industry grew by a mere 1,200 jobs, but it cost American consumers $1.1 billion more who were forced to pay higher prices for tyres!
Now President Trump has shaken up the global trade scene with his actions and intentions to impose tariffs on a variety of imported goods from some select countries, China being the main target. “I’m not doing this for politics, I’m doing this to do the right thing for our country,” Trump said. “We have been ripped off by China for a long time.” President Trump maintains that it’s about creating more jobs in America and is using his authority under “Section 232” of the Trade Expansion Act of 1962.

Widening net

First, it was the tariffs on steel and aluminium imported from Canada, Mexico and the European Union, with each of those regions enacting retaliatory measure. And now, in the burgeoning trade war, the US has slapped tariffs on $34 billion of Chinese products, which China met with retaliatory duties on $34 billion of American imports, mainly on agricultural products from states that helped Trump win the presidency. Trump has indicated that he is willing to slap tariffs on every Chinese good imported to the US should the need arise. “I’m ready to go to 500,” the president told CNBC’s Joe Kernen in a “Squawk Box” interview. The reference is to the dollar amount of Chinese imports the US accepted in 2017 — $505.5 billion to be exact, compared to the $129.9 billion the US exported to China, according to Census Bureau data.
Thus far, the US has slapped tariffs on just $34 billion of Chinese products, which China met with retaliatory duties. By sheer dollar volume, the Chinese won’t be able to come close to the US in a tit-for-tat battle. “At this stage, the biggest impact is probably uncertainty, which is already having an impact,” said Jacob Parker, vice president of China operations at the US-China Business Council. “Businesses hate uncertainty. If you are uncertain, you don’t invest; if you are uncertain, you don’t hire. Companies don’t know how big this may get, or how it will end.” Surely, the actions the US is taking may have serious consequences. The National Retail Federation claimed that $50 billion worth of tariffs against Chinese goods would reduce US GDP by nearly $3 billion and cost the nation 134,000 jobs.
The Trump administration also contends that imported vehicles and auto parts are a threat to US national security and has a proposal to slap a 25% tariff on vehicles and 10% tax on auto parts imports, alleging that US is allowing automobiles into the country from places like Germany with few barriers, while our vehicles face steep tariffs in Europe. As expected, this proposal is facing strong opposition. The Motor & Equipment Manufacturers Association argues that high tariffs disrupt the international supply chain for autos and auto parts. Many of its members, particularly when it comes to the steel and aluminium imports, often have access to only one or two global sources.
The Center for Automotive Research released a 20-page analysis that estimated job losses of at least 750,000, and 2 million fewer autos sold annually, if the 25% tariff on imported vehicles and parts is imposed. The research gave less dire job and sales predictions if the tariff was reduced to 10%, or if imports from Canada and Mexico were exempt. This tariff will cause auto prices to increase by between $455 and $6,875 per vehicle, depending on the assembly location and the level of imported content, the report projected.

‘Carmageddon’

“Carmageddon” is how the Canadian Auto Parts Manufacturers’ Association describes the likely impact American automotive tariffs would have on the Canadian industry. “As a result of a trade war, sparked by auto tariffs, the US and most of its major trading partners would face recession by the year 2020,” said Scotiabank’s economist Brett House on July 3, 2018.
“There is no compelling rationale for auto tariffs. It is disruptive to the auto industry and will slow down the US economy. The talk of tariffs is OK if it is a negotiating brinksmanship,” said Mike Jackson, the CEO of AutoNation group of public dealers who sell about 2 million vehicles a year, during a radio interview in Detroit. Still, there is hope that Trump, who wrote a book titled “The Art of the Deal,” is using the threat of tariffs as leverage to force permanent binding bilateral trade agreements.
As if the tariff wars were not enough, Trump has opened a new front involving currency. He claims that many countries have purposely devalued their currency, while a strong dollar puts American businesses at a disadvantage.
Much is at stake in these trade battles, but three things are clear. First, there likely will be no winners in a trade war between the US and its trading partners. Second, antagonising long-standing allies, such as Canada, Mexico and the EU will hurt the US economy in the long run. Third, stay tuned to the tweets from Trump!

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