2018/07/11

How the U.S.-led Trade Wars Imperil the Global Economy

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Penn's Jacques deLisle, Fordham's Matt Gold and Syracuse's Mary E. Lovely discuss the implications of the Trump administration's trade wars.
The recent trade skirmishes between the U.S. and China escalated into what many are calling an all-out war last week, with the U.S. levying tariffs on $34 billion worth of imports from China and the latter immediately responding with eye-for-an-eye tariffs on imports from the U.S. Those actions come on top of U.S. import levies in January on solar panels and washing machines, and in March on steel and aluminum. They triggered retaliatory tariffs on U.S. exports from its NAFTA partners Canada and Mexico, and from the European Union.
The trade wars are set to escalate as the U.S. and its trading partners have planned further tariff actions for the coming months. Left unchecked, these actions could threaten the global trade order, leaving casualties in disrupted supply chains that will hurt U.S. companies, and potentially lead to a flight of investments and jobs from the U.S., experts told Knowledge@Wharton. Hopes run low for a resolution of the U.S. trade disputes with China in particular, with the Trump administration leaving no “exit ramps,” although the EU might play along until the midterm elections to the U.S. Congress in November, they added.
America’s trading partners have said the Trump administration’s actions are in violation of World Trade Organization policies in some instances. The administration has defended its actions on various grounds, ranging from defense of national security to shielding American investments and jobs from protectionist policies and inadequate intellectual property rights.
The Trump administration’s characterizations of some trade matters as threats to national security are specious, according to Mary E. Lovely, economics professor at Syracuse University and a fellow at the Peterson Institute for International Economics. She referred in particular to Section 232 investigations under the Trade Expansion Act of 1962, which examine the impact of imports on national security. The Trump administration is taking an approach that “does not give our allies any political space to back down,” Lovely added.
“One of the main concerns is how willing this administration is to paint outside the lines to use [provisions] like the Section 232 national security clause for things which are obviously protectionist,” she said. “That has very severe ramifications for the future of the global trading system. It’s a trading system that is showing strains and clearly needs to be modernized, and yet we’re breaking a lot of dishes instead of building anything new.”
Multiple Trade Wars
“This is definitely a trade war,” said Matt Gold, adjunct law professor at Fordham University and a former deputy assistant U.S. Trade Representative for North America. He broke that down to “two or three separate trade wars” and said “none of it is good for trade.” The first is with China for the past 15 years over protection of U.S. intellectual property rights. The second one is over steel and aluminum imports into the U.S. from Canada, Mexico, the EU and China. The third is over tariffs on imports of automobiles and auto parts between the U.S. and other countries, where the Trump administration wants to renegotiate agreements struck by previous U.S. administrations. Gold said the U.S. tariffs on steel and aluminum imports violated WTO rules, triggering retaliatory action from the other countries.
The actions on imports of solar panels and washing machines were “safeguard tariffs” that were legitimate, he added, but agreed that the Trump administration went about those in an aggressive manner. Lovely said “it was emblematic of the approach that the Trump administration takes, which is largely one of giving our trade partners really no room for political maneuver — sort of a take-it-or-leave-it approach.”
“This is a trade war, but the real risk is of further escalation beyond what’s already happened.”–Jacques deLisle
Gold said the U.S. was legally entitled to levy the safeguard tariffs on solar panels and washers, and countries that oppose the move would be willing to sit down and negotiate. “But if [Trump is] threatening to impose tariffs that he’s not legally entitled to impose, it doesn’t even matter how diplomatic he is; the other [country] won’t negotiate,” he said. “And that’s why the latter causes a trade war, and the former doesn’t. It’s an enormous bright-line difference.”
“This is a trade war, but the real risk is of further escalation beyond what’s already happened,” said Jacques deLisle, University of Pennsylvania professor of law and political science and director of Penn’s Center for East Asian Studies. Gold listed the other actions on the cards. The Trump administration is set to impose duties on another $16 billion of imports from China, taking the total value of imports affected by the tariff actions to $50 billion. He expected China to do likewise on imports from the U.S. “Then the ball will be in Trump’s court to do what he’s trying to do, which is add tariffs to another $200 billion of Chinese products,” Gold said.
However, despite the rhetoric from the leaders of the countries involved, deLisle saw reason for hope. “The optimism stems from the almost desperate view that if this gets really bad, it’s so bad we can’t believe people will let it happen,” he said. “At this point, we are in the early stages. There is still room for negotiation, if people want to sit down and do it, but the question is about getting there.”
Lovely, Gold and deLisle discussed the likely impacts of the trade wars on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
No Exit Ramps
Gold was not as hopeful of a resolution, however. “This idea that the world won’t let it happen is unfortunately something we can’t rely on,” he said. “As a former U.S. trade negotiator, I can tell you Trump has left no one any exit ramps here. There is literally no exit ramp except Donald Trump himself unilaterally saying, ‘I was wrong,’ and reversing the steel and aluminum tariffs and also reversing the retaliatory tariffs against China until the WTO approves them, which could take a few years.”
As deLisle read the moves, Trump expects the other countries to step forward and negotiate with him. “But they won’t and they can’t,” he said. “When you threaten to impose tariffs that are WTO-illegal or you impose tariffs there are WTO-illegal, in diplomacy, no country will … negotiate on that. That’s why we’re really stuck.”
Strength in China
China has shown strength in the face of U.S. actions, deLisle noted. “The Chinese position is they can weather this,” he said. “Their view is that they can outlast the U.S. on this because they have obviously a very different system — less pressure from consumers, and this is an issue of almost national pride.”
At the same time, deLisle sensed “some befuddlement in China about what exactly Trump wants.” He noted that the U.S. has accused China of going about intellectual property transfers “in a somewhat coercive way,” as well as outright espionage and dumping.
China has made some overtures such as offering to buy more American products, but they have been rebuffed, deLisle said. “They’re not getting clear signals of what exactly … the Trump administration’s priorities are. Now they feel that they can’t sit by and watch the U.S. engage in WTO non-compliant behavior that they’re [seeing] as bullying. It’s very hard for them not to stick to where they are, but they would like to negotiate their way out of it. The problem is Trump’s not leaving them a lot of off-ramps.”
Widespread Impacts in the U.S.
Gold said the tariffs would hurt all parties. “But the impact is more spread out with regard to the goods coming into the U.S., increasing costs for consumers, but also for U.S. production that has to buy inputs for its manufacturing,” he added. “At the same time, the cost for U.S. exports — particularly agricultural exports — is much more focused on a smaller number of U.S. companies. You’re going to see a louder, clearer or more organized reaction to that particular set of problems.”
“Trump has left no one any exit ramps here. There is literally no exit ramp except Donald Trump himself unilaterally saying, ‘I was wrong.’”–Matt Gold
According to Lovely, firms that rely on global supply chains would be among the worst affected. “Only one percent of the goods are consumer goods, and the rest are either capital equipment such as machines or intermediate inputs and parts,” she said of the tariff actions against China. Many of those are from foreign enterprises operating in China as part of supply chain trades, she added. “[For example], they are inputs from a BMW operation in China and coming back to plants here in Georgia. So, these tariffs are going to hurt the U.S.”
Much of the value-add in the products that come from China are not added in China, said deLisle. “The vast majority of the value is embodied in components that go into China, are assembled or transformed in various ways and come back here. A big chunk of it is actually U.S.-sourced material and material sourced from other countries that goes into the products that are exported here. We’re hurting those suppliers’ inputs, and we’re hurting the American companies that are working in China with intermediate goods from the U.S. and elsewhere to produce what they’re producing.”
“It’s a little bit naïve to think that by imposing a 30% tariff on solar panels, we are going to be creating jobs,” Wharton management professor Mauro Guillen told Knowledge@Wharton when the U.S. imposed the tariffs on solar panels and washing machines earlier this year. “In fact, if the higher prices depress demand, it could hurt employment. All of those other jobs — most of them service jobs and in some cases paying very nice wages — are not going to grow as much. And some of them might actually be disappearing.”
Trump’s tariff moves are also likely to face strong pushback from sections of the Republican Party, Wharton finance professor Jeremy Siegel had told Knowledge@Wharton when the U.S. imposed the steel and aluminum tariffs. “This was always the part of Trump that the market never liked,” he noted. He recalled that before the presidential election, “the markets seemed to have a clear preference for Clinton over Trump — and it was mainly fear of trade, tariffs, restrictions, quotas, barriers and whatever.”
Unconventional Retaliation
China could retaliate in unconventional ways that could stump the U.S., deLisle pointed out. “China has been very clear that it will use and is using qualitative as well as quantitative measures, to use their terminology,” he said. “We’re starting to hear concerns from U.S. businesses in China that suddenly they’re going to be facing more serious inspections on environment and perhaps labor. U.S. goods imported into China aren’t just facing tariffs, but also stricter quarantines, more spot inspections, and all sorts of delays. There are lots and lots of ways that China has … to make life miserable.”
Beyond that, Chinese consumers could also turn against American branded products, driven by feelings of national pride, deLisle said. Consequent to China’s imposition of tariffs of 25% on soybean imports from the U.S., several large Chinese companies have begun sourcing those agricultural products from other countries, he noted. Some of the American producers are starting to complain about less interest in their products from China, he added.
“A lot of the Chinese leverage will be in these qualitative hard-to-track-down measures, which aren’t traditional trade war mechanisms,” said deLisle. “They’re not WTO actionable; they’re decisions by consumers or decisions by companies; and they’re discretionary decisions by regulators. That’s really where the Chinese have an ability to put the screws to a variety of U.S. companies.” He noted that these concerns are being aired at recent meetings held by the American Chamber of Commerce in China and other such U.S.-China business groups. “They’re really worried about the consequences for their businesses in China — both in selling to China and in producing for re-export to the U.S.”
The U.S. as a ‘Production Island’
Lovely also pointed to some multinationals changing their production plans. “For example, we have reports that some European car makers are already considering changing their production lines that they make [in the U.S.], moving some production lines out, particularly for vehicles that they export to China,” she said. She cited the case of automaker BMW, which could use its production facilities in Pretoria, South Africa to import parts without duties and then export its vehicles without the tariffs. “So [BMW] will still produce in the U.S., but it becomes what I call a ‘production island.’ People will be here to produce for the U.S. [market]. It makes it very difficult for these countries to then use this as a great place to build for exports.”
“The great economic growth that we’re experiencing … is hiding the pain that we will experience long-term because of these really ill-considered policies.”–Mary E. Lovely
Notwithstanding claims to the contrary, the most visible evidence of the U.S. tariff impositions is in the threat of a flight of capital and jobs from the U.S. to escape retaliatory tariffs on the EU. Notable among them is motorbike maker Harley-Davidson, which two weeks ago announced plans to shift some manufacturing overseas over the next 18 months to avoid the impact of the EU retaliatory tariffs of up to $100 million annually it would otherwise face.
“America’s trade adversaries have become more sophisticated in understanding America’s political system,” said Gold. “Our trade adversaries are now targeting U.S. brands that they think will tell the story of why Trump’s trade policy is a mistake” directly to his supporters. “That’s why they go after brands like Harley-Davidson.” A similar theme is visible in Canada levying 10% tariffs earlier this month on $12.5 billion worth of imports of U.S. products. They included dairy products that are critical to suppliers of yogurt from Wisconsin, the base of U.S. House of Representatives Speaker Paul Ryan, according to a CNBC report.
Although U.S. consumers “will feel the pinch” of the trade wars, “what is making it easier for President Trump to wage this trade war is the fact the U.S. economy is performing beautifully right now,” said Lovely. While U.S. economic growth is strong, “this growth is being used in a way to mortgage our future because we’re laying down policies which bode ill for future investment into the U.S., and the future competitiveness of U.S. products overseas,” she added. “The great economic growth that we’re experiencing — we’re even beginning to see increases in workers’ real wages — is hiding the pain that we will experience long-term because of these really ill-considered policies.”

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