Global Trade War Baked in the Cake: Boeing Faces China's Wrath
I have been warning about the increasing likelihood of a serious global trade war for quite some time.
That warning is now my baseline scenario. Unless there is an immediate deescalation of rhetoric and a return to rational thinking, a very destructive global trade war is baked in the cake.
I seek ways that a global trade war does not start, but I come up short.
China is upset because the EU and US Rejected China's Market Economy Status over alleged steel dumping. In response, Beijing fired counterattack charges at the WTO.
China has launched a legal challenge against the EU and US over their reluctance to treat it as a "market economy" under World Trade Organisation rules.
Beijing is unhappy with a provision that allows trading partners to use a special formula and prices in third countries to calculate punitive tariffs for non-market economies in anti-dumping cases. It is pushing for the provision to expire with Sunday's 15th anniversary of its WTO membership.
But the EU, US, Japan and other WTO members have resisted the move, prompting China on Monday to take the first step in launching a case with the global trade regulator.
In a statement, China's commerce ministry said it had requested consultations with both the EU and US and would seek to have a WTO panel rule.
"China has communicated through many channels for the third-country comparison to expire. What's very regrettable is that EU and US have not acted to allow it to expire. It has had a severe impact on Chinese exports," it said. "China is protecting its lawful rights and acting appropriately to maintain the WTO rules."
In the EU, fears of an onslaught of cheap Chinese goods prompted the European Commission to recommend a fundamental shift in how it conducts anti-dumping cases. Under EU rules, Brussels imposed a 21 per cent tariff on the same steel products that were hit with a 266 per cent US tariff in 2015.
In a sign of the commercial stakes, the US on Friday imposed punitive anti-dumping tariffs on Chinese-made washing machines, imports of which into the US were worth more than $1.1bn last year. It also announced the launch of an anti-dumping investigation into plywood imports from China, which were also worth more than $1bn last year.
Those US cases and the fight over Beijing's market economy status point to the trade battles already being fought with China even as Donald Trump, the incoming president, promises to get tough with Beijing over trade and other issues.
"One of the most important relations we must improve?.?.?.?is our relationship with China," Mr Trump said last week. "China is responsible for almost half of America's trade deficit [and] they haven't played by the rules."
"They have acted like a non-market economy in so many respects with their state-owned companies, with subsidies, with dumping?.?.?.?there are more dumping cases brought against China than against all the other countries combined," said Sandy Levin, the top Democrat on the House ways and means committee.
A US official said it would continue to fight any attempt to grant China market economy status at the WTO, pointing to "serious imbalances in China's state-directed economy".
"China has not made the reforms necessary to operate on market principles," the official said. "The United States is prepared to defend its right at the WTO to protect American workers and firms from the damaging effects of persistent distortions in the Chinese economy."
Boeing Faces China's Wrath
Please consider Boeing Faces Prospect of China's Political Wrath Thanks to Trump.
"China Inc.," the combined group of airlines and lessors directed or controlled by the government, is Boeing's largest customer, an analysis of the company's' backlog at Dec. 5 shows.
Boeing's website lists "China" with 292 orders in backlog. Fifty of these appear to by Unidentified orders. LNC arrived at this figure by viewing the Chinese customers in Boeing's identified list, which amounts to 242 orders. Some believe the number of Unidentifieds attributable to China may be higher.
The data shows just how much Boeing has at risk with the so-far unpredictable foreign trade policy espoused by President-Elect Donald J. Trump.
Will the EU Benefit from a Trump Trade Policies?
After reading the above snips, readers may conclude the EU will benefit from Trump actions.
Banish the thought. Instead consider Iran, Boeing reach agreement on big aircraft order; Trump casts cloud.
Iran and Boeing reached an agreement on the 80-airplane order that includes 50 737 MAX 8s, 15 777-300ERs and 15 777-9s.
The final contract still has unspecified contingencies before it can be booked as firm orders, Boeing said. One of those contingencies is clearly President-Elect Donald Trump, who criticized the larger Iran-US-allies deal of which the Boeing order is a part.
Airbus has 116 orders pending that could also be upended if Trump, upon taking office, vitiates the deal.
The US House of Representatives passed a bill to prevent any US-sourced financing for the Boeing purchases. The Senate hasn't acted on the bill and President Obama vowed to veto it. The legislation doesn't kill the Boeing deal, per se-just US-sourced financing, leaving open non-US financing.
But President-Elect Trump said he opposed the Iran nuclear deal, which involves the US and five allies. Trump vowed to cancel the agreement, which would kill the Boeing order. It probably would kill the Airbus order, because of the US content in the Airbus airplanes.
Trump to Blame?
When this blows up, and it will unless cooler heads prevail immediately, Trump will undoubtedly take the blame. But as I have pointed out, Trump is no different than Hillary or Bernie Sanders.
I you disagree, please take my Trade Quiz: Donald Trump, Bernie Sanders, Hillary Clinton - Who Said It?
Close analysis shows that Hillary, Bernie Sanders, Donald Trump and even president Obama all have the same trade policies. If you disagree, please explain 266 per cent US tariff on China that Obama placed in 2015.
Earlier today I noted China Tells Trump "Nothing to Discuss" If US Drops "One China" Policy.
At best, Trump is playing a dangerous game. No one ever wins trade wars.
The Smoot-Hawley Tariff Act at the start of the Great depression is the classic example.
Threats of retaliation by other countries began long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to increase rates against American products, even though rates could be increased or decreased by the Senate or by the conference committee. By September 1929, Hoover's administration had received protest notes from 23 trading partners, but threats of retaliatory actions were ignored.
In May 1930, Canada, the country's most loyal trading partner, retaliated by imposing new tariffs on 16 products that accounted altogether for around 30% of U.S. exports to Canada. Canada later also forged closer economic links with the British Empire via the British Empire Economic Conference of 1932. France and Britain protested and developed new trade partners. Germany developed a system of autarky.
In 1932, with the depression only having worsened for workers and farmers despite Smoot and Hawley's promises of prosperity from a high tariff, the two lost their seats in the elections that year.
For or Against Free Trade?
The above discussion ought to settle the hash once and for all, but economic illiteracy prevails.
Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, was the economic adviser to Vice President Joseph R. Biden Jr. from 2009 to 2011, has this March 14, 2016 Op-Ed in the New York Times: The Era of Free Trade Might Be Over. That's a Good Thing.
In Defense of Free Trade
Sam Seitz, presents a nice case for free trade in his article In Defense of Free Trade.
I want to address NAFTA because it's the bogeyman of the Left and according to Trump "a bad deal." NAFTA was actually a very successful free trade agreement. When it was implemented, the number of American jobs increased. Of course, some low-skilled labor was displaced, but because NAFTA increased the size of the overall economy, it actually increased the demand for labor and boosted employment in the U.S.
Finally, I want to talk about trade surpluses/deficits because they are a common argument used by opponents of free trade. A trade surplus is just the total value of exports minus the total value of imports. However, it doesn't mean that much. For example, the United States maintained a trade surplus throughout the entire Great Depression, yet it clearly didn't make life easier or the economy stronger. Conversely, the U.S. has a significant trade deficit now, yet it has the largest, most dynamic economy of any country on the planet. What matters is not the total amount of net-trade income, it's the amount of goods and services American citizens can access. To quote Thomas Sowell, "If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a ‘deficit' or a ‘surplus' in the international balance of trade." It's also important to realize that even though Americans don't produce as much as the Chinese, we invent pretty much everything that other countries produce. So, while iPhones are built in China, the profits flow back to an American company that pays taxes to the American government and employs American computer scientists and engineers. Instead of focusing only on where the end product is produced, it is crucial to also account for the non-tangible elements of production: the innovation, R&D, and investment. It is easy to pretend that the U.S. is weakened because of the trade deficit, but if one actually accurately accounts for the value of American innovation, it becomes clear that the U.S. possesses a trade surplus with China. Just don't tell Trump or Sanders.
The Question of "Fair Trade"
The best case I have seen for free trade comes from Ana Eiras, Senior Policy Analyst on International Economics, Center for Trade and Economics (CTE).
Eiras explains Why America Needs to Support Free Trade.
Eiras provides five well thought out positions why free trade is good. More importantly she puts a knife in the ridiculous discussion about "fair trade". Let's pick up the discussion from that point.
The Question of "Fair Trade"
Politicians, opinion makers, journalists, and businessmen commonly talk about the need to support "fair trade." Seldom, however, does anyone explain either what fair trade is or-even more to the point-to whom trade should be fair. In the name of fairness, different groups advocate different protections for their specific industries and call the comparative advantage of other countries "unfair."
For example, U.S. manufacturers think it is unfair that labor in China is cheaper than labor in the United States, and therefore ask for tariffs against Chinese products. But those tariffs would, in reality, be unfair to millions of U.S. consumers and producers who would be forced to pay higher prices for locally manufactured goods. "Fairness" assumes a dubious character in policies that pick and choose whom to treat "fairly."
Others argue that America needs to enact barriers to free trade in order to strengthen national defense. For example, a tariff to protect steel would be justified because we need our own steel to support the construction of tanks, missiles, and arms. This argument is built on the faulty assumption that America's wealth is at least constant. But a constant level may imply that the U.S. is falling behind other nations in relative terms. The strongest national defense depends on a relatively strong economy, and a strong economy is possible only with economic freedom.
Once economic barriers begin to emerge, a nation's wealth begins to decline. America's relative economic freedom and wealth have already begun to decline. In fact, according to the Index, the United States has lost considerable ground in economic freedom (declining from 4th freest economy to 10th freest in 2004), which means it has also lost more and more opportunities to increase wealth.
The only form of fair trade-if such thing exists-is free trade. When facing competition from Chinese manufacturing, U.S. manufacturers have two options: either adopt new technologies to cut costs and become more competitive or shift the focus of their operations to different areas in which they can be more competitive. Neither of these two options harms consumers, since they will continue to have access to the least expensive, best-quality products.
Most workers benefit as well. For some people, free trade requires change, but they also now have opportunities to use their skills in more efficient, advantageous, and productive ways that are created by the innovation and prosperity that competition promotes. Likewise, for a strong national defense, America needs the resources, innovation, and income that are derived from the absence of barriers to trade and investment.
Consumers Key to Debate
Consumers are key to this debate. If it's good for consumers, it's good for the economy, and bu default it is good for trade.
I encourage everyone to read the rest of Eiras' excellent article.
Fair Trade Fantasy
"Fair trade" is nothing but a misguided fantasy from producers who cannot compete in the real world.
It makes no economic sense for US citizens to pay double or triple for underwear, TVs, phones or anything else to "save American jobs".
The amazing irony in this debate is no jobs will be saved anyway!
NAFTA did not cause a loss of manufacturing jobs, productivity and robots did. No matter what Trump or anyone else promises, those jobs are not coming back.
Sure, the US has misguided tax policy that encourages foreign production. But that is a separate issue. At least Trump is correct on that score. Lowering corporate taxes is the right thing to do.
Tariffs are precisely the wrong thing to do. I fear we are going to find that out again, while the parrots all chant "Fair Trade, Not Free Trade".
- Reflections and Reader Comments on Free Trade: "China Doesn't Play Fair!"
- Fair Trade is Unfair; In Praise of Cheap Labor; Are Bad Jobs at Bad Wages Better than No Jobs at All?
- Obama's Trans-Pacific Partnership Fiasco vs. Mish's Proposed Free Trade Alternative; How Will TPP Function in Practice?
- Stacked Deck: US Bullies WTO, TPP Revisited
- Legacy Skills and Capital; Sugar and Steel; Turning TPP to TP
Trade is not between nations. Trade is between individuals who make constant
decisions about what and when to buy.
Tariffs distort that relationship, and only the weak produces benefit. Everyone else loses.
Consumers benefits are what's important in trade.
No one wins trade wars. As as side note, and I as often pointed out, the Fed, and its foolish policy of insisting on inflation in a deflationary world is largely to blame.
For discussion of that point, please see Decade of Negative Real Interest Rates: Who Benefited?