Tuesday, October 16, 2018

Trade War

Trade negotiation is inevitable, while trade wars are rare. Will today’s actions lead to a trade war? Much of the discussion of a looming trade war comes from those who emphasize that the US has a trade deficit with many countries. This means that we buy more from those countries than they buy from us. Thus, they have much more to risk in a trade war. We buy a lot from them and if we stop buying it will harm those countries mortally. 

There is nothing wrong with that logic except that it is incomplete. It focuses only on the bilateral relations between us and them. The bigger picture examines the importance of trade to the USA and its main trading partners. 

Let’s begin with a review of the countries that purportedly take advantage of us in the USA. President Trump’s goal is to reduce bilateral trade deficits. Below I list the biggest bilateral US trade deficits in billions of dollars in 2017:

            China             $375
            Mexico              71
            Japan                 69
            Germany           64
            Vietnam             38
            Ireland               38
            Italy                   32
            Malaysia            25
            India                  23
            South Korea      23

(Also among the top 15 countries are Thailand, Canada, Taiwan, France, and Switzerland.)

According to President Trump those countries are the “bad actors.” Notice that China holds a special distinction because the US trade deficit with that one country roughly equals the trade deficit with the next nine. China and the others, according to the logic discussed above, ought to cave soon because they sell so much to the USA. If we tax all that inflow to the US, it could hurt them a lot.

Let’s widen the story. Think about the importance of trade to these countries. The next table shows the total trade deficit of each country – the trade deficit of each country with the rest of the world. That deficit is presented as a percentage of each country’s GDP. Note that the corresponding number for the USA in 2017 was 2.8%.
            China             Surplus
            Mexico             1.4
            Japan                3.9
            Germany       Surplus
            Vietnam            6.2
            Ireland              0.9
            Italy                  1.4
            Malaysia           3.0
            India                 6.4
            S. Korea        Surplus

The point? These countries, except China, Germany, and South Korea, have trade deficits too.  How willing do you think they will be to making their deficits larger so that the US can have a smaller one?

Next, let’s turn to imports. If President Trump had his way, we wouldn’t import anything, except for maybe Cognac and a cigar or two. But he wants the bad actors to buy more from us. He wants them to import more. Below I report each country’s imports as a percentage of its GDP. US imports were 15% of GDP in 2017.

 China               18%
            Mexico            40
            Japan               15
            Germany         40
            Vietnam          99
            Ireland            88
            Italy                28
            Malaysia        64
            India               22
            South Korea   38

The point? These countries love imports even more than we do. But how much more can a country import when it already has a trade deficit? How much more of US exports can they consume?

It is nice to think that we are being taken advantage of by the rest of the world. But the larger truth is that many countries have trade deficits and already import a lot of goods and services. This reality is surely going to stiffen their backs as the US tries to solve its own trade problems by limiting imports to the US and raising exports to the rest of the world.



  1. Dear LSD. My take on what DJT desires is not to provoke surpluses with all trading partners but rather to level the field and in particular achieve fairness (as with China’s theft of 'merican IP). I don’t think he’d take issue with reasonable (however that is defined in the eye of the beholder) surpluses/deficits as long as he sees ’merican jobs and wages doing well.

    1. I doubt Trump would consider any country's surplus with us as reasonable. But that wasn't my point today. I was trying to say that many countries have a surplus with us but a deficit with the world -- and they have very high imports. These countries might not want to negotiate with Trump since a win for Trump means an even bigger deficit for them.

    2. Obviously I failed Evelyn Wood speed reading.

    3. That's what Pete told me so it must be true. :-) Keep on truckin.

  2. Global trade is a fact of life and the transition of many of these countries with a economic cost advantage to compete on price. Quality also comes into play as the US and other wealthier trading partners expect it. Korea has done well in this area as has Japan. Wages are another issue. We are transitioning from a closed economy system to a global free market system. Just as Japan did in post WWII they caught up, pay similar wages, have a middle class and make good products. The others will eventually follow. Global trade with some countries like Vietnam is much more powerful than a war.

  3. Putting aside the already mentioned issue of IP theft along with things like China putting spyware in some of the tec stuff they sell to us there is still a 500 pound monkey in the room.

    There is a reason the US dollar is the reserve currency for the world and the renminbi is ignored to a great extent. Currencies that float like the dollar are a safer option while the renminbi is manipulated to make goods and services from China better able to compete.

    For as long as I can remember the US has allowed almost every country to institute trade rules that disadvantage the US and often manipulate their currencies.

    I am not aware of the official definition of "trade war" but it is possible to make an argument that a country that manipulates it's currency and has rules that restrict or require certain things in trade is engaging in a trade war.

    1. Thanks Rage. Not sure it matters a lot which is the chicken and which is the egg. What matters is if there is a real trade war. My piece thinks that our trade partners may be willing to risk a trade war these days. They have a lot to lose by not resisting US demands -- even if the US demands are reasonable.