The United States had recently engaged in trade wars with China and Europe that have taken a toll on the American economy. Here’s what you need to know about the developing situation.
China
Facts
President Donald Trump has shown anger towards the lack of fairness in trade with China, and on this part he isn’t totally incorrect.
With regard to trade, in some aspects, China has an advantage. For instance, while the US has a 2.5% tariff on Chinese motor vehicles, China has a 25% tariff on American cars. However, China exports few cars to the American market – only 0.03% of cars bought in America are of Chinese origin. Overall, the US averages a 2.9% tariff on Chinese goods, while China averages a 6.3% on American products.
Trump acted on this by instigating a trade war with China, and so far, China seems poised to gain an upper hand: its 25% tariff on American goods like pork and soybeans hits $50 billion worth of US goods, while the US is only taxing $34 billion worth of Chinese goods. China also slashed tariffs from five Asian countries, including cutting taxes on beef and soybeans to zero percent. Not only that, but Chinese subsidies are an astonishing $165 billion, or more than eight times higher than American agricultural subsidies.
However, despite these subsidies (that have pre-existed this trade war), in 2016, the US exported $21 billion in agricultural products to China, while only importing $4.3 billion that same year. Clearly, the US model is superior to the Chinese model when comparing the agriculture industries – this could be a result of a greater prevalence of capitalism, or more favorable weather conditions or a combination of both.
After farmers across the Midwest began to struggle, Trump responded with a $12 billion bailout for farmers as relief.
First off, agricultural subsidies in the past haven’t been for everyone. While the US government spends $20 billion a year in agricultural subsidies, 61% of farms receive nothing, while the top 1% of farms received 20% of the benefits. We don’t know if Trump’s farm subsidies will reflect how subsidies have normally been distributed.
There’s certainly reason to believe that there is a political motive at play, as farmers are clearly a Republican-supporting demographic. In a Farm Journal Survey given out before the 2016 election to over 2000 farmers, Trump defeated Clinton 74%-9% in the survey. There’s obviously a political component to this, but whether or not that’s the reasoning behind the subsidies is unknown.
Overall, the US exports 6 times more cars to China than it imports and exports nearly 5 times more agricultural goods than China, yet it still has a $337.2 billion trade deficit.
Analysis
I think it’s unreasonable not to concede that China has taken advantage of the US via trade, not just through subsidies and tariffs, but also through currency manipulation and violations of intellectual property rights. The solution to this problem has actually already been proposed in my opinion.
Notice that China’s first action to lessen the blow of America’s tariffs was to slash tariffs with five Asian countries, that’s simply so that those Asian countries would hopefully reciprocate and Chinese companies that rely on exports can replace their dwindling and more expensive American markets with different foreign markets.
Under President Obama, the US negotiated the Trans-Pacific Partnership. It wasn’t without flaws, but it would’ve created free trade with fourteen countries across North America, South America and Asia and most importantly, it didn’t include China. One of the tariffs the TPP would’ve phased out would’ve been auto tariffs, which currently range from over 40% in Vietnam to 6% in Chile or Canada. A free trade deal of this caliber, that I believe should’ve gone further to include more countries like Taiwan or South Korea, would’ve devastated the Chinese economy as much as the tariffs without any American economic turmoil as a result. Unfortunately, Trump tore up the TPP on his first days in office via executive order.
I hope Trump’s endgame is to end tariffs, subsidies and currency manipulation across China and America, but so far, his attempt to do so has been reckless. China is responding with very calculated moves: a tariff on an industry that America has a trade surplus on, agriculture, while cutting tariffs with mutual Asian trade partners.
Free trade promotes economic prosperity among all nations above as I explain in a book that I co-authored that will soon be released called Igniting Liberty, and I’m glad we’re fighting for free and fair trade with China, but this is a poor way to achieve that goal.
The Chinese tariffs are already detrimentally impacting America’s farming industry, and tariffs on Chinese products will ultimately be a tax on the American consumer as prices rise. Trump then responded with this mistake with another: an expensive subsidy that will likely prove ineffective at a time when the US is already running a $665 billion deficit. The problem shouldn’t be “fixed” with angry tweets, random tariffs and politically-charged socialist bailouts, but rather proper negotiation for mutual tariff reduction with China, while creating a free trade agreement with our American and Asian allies. While I hope Trump’s endgame is to reduce barriers, taxes and subsidies to zero with Asian nations, his immediate exit from the TPP coupled with his impulsive tariffs leave me skeptical.
Europe
Facts
While inequalities in tariffs and regulations exist across industries, the weighted tariff rate between Europe and America are practically equal: 1.92% average weighted tariffs on America and 1.95% average weighted tariffs on Europe from America in 2016.
In the G7 summit in Canada, Trump accused foreign nations of ripping us off on trade, which based on this number alone, I don’t exactly agree with.
Trump references the EU 10% tariff on American cars versus the 2.5% tariff on Eurozone cars, but there are also examples of America having an edge against Europe.
The average European tariff on American footwear was 3.14% in 2016, while America taxed European shoes at 7.41%, and footwear isn’t a small industry when you consider all of the European brands such as Adidas, Reebok, Puma, and so on.
Unlike China, the trade deficit isn’t nearly as large: the US exported $501 billion to the EU in 2016, while importing $593 billion from the EU. It goes without saying that an imbalance of trade doesn’t prove an imbalance of policy, but the trade imbalance between US and Eurozone isn’t substantial.
The price level estimated by the OECD is 114 in the United States compared to 92 in the European Union, and higher prices in the US may partially explain why the US has a trade deficit with the EU.
Trump again instigated the trade war with a 25% steel tariff and 10% aluminum tariff on Mexico, Canada and the EU, to which the Eurozone retaliated with tariffs hitting $3.3 billion worth of American goods, which EU officials claim is dollar for dollar with American tariffs. Recently, Trump met with the European Commission President and is moving forward to reduce tariffs, barriers and subsidies, which if carried out, would be a phenomenal alternative to a trade war.
Analysis
While I don’t believe the European Union was taking advantage of America as a whole, I applaud President Trump for liberalizing trade with Europe. His tactics seemed immature and spontaneous, but the result is lower tariffs and freer markets for American producers and consumers alike, and for that, I applaud him. I look forward to see where this leads to and I encourage Trump to also meet bilaterally with Eastern European countries such as Bosnia, where the US average weighted tariff rate is 5%, or Slovenia, a country that both myself and Trump’s wife have ethnic heritage from.
Trade with the European Union currently support 2.6 million American jobs, and if tariffs are cut from 2% to 0%, causing trade and job growth to grow at a convenient 2% in reaction, trade with Europe could hypothetically support an additional 52,000 more American jobs. The next step should be to eliminate subsidies that do nothing less than hurt the American taxpayer.
Conclusion
If I were to grade Trump’s handling of trade with China, I would give him an F, but if I were to grade his performance with Europe, I would give him nothing short of an A.
The disparity in success we’ve seen thus far can be attributed to numerous things. First off, the Chinese economy is much healthier than Europe’s. China’s unemployment rate hovers at 3.9% and it exports more than any country in the world at a whopping $2.27 trillion. Meanwhile, Europe still hasn’t recovered from the debt panics of Southern European countries like Spain, Greece and Italy. The European Union has an embarrassing 57.7% labor force participation rate and 7% unemployment rate, all the while only touting a 0.4% quarterly GDP growth rate. The Chinese economy can survive a trade war right now, but the European Union isn’t certain.
Second, as previously mentioned, Europe isn’t really exploiting the United States via trade, so giving in to Donald Trump’s demands isn’t particularly difficult, whereas China is aware of the long-term impacts of equalizing trade barriers and practices with the United States.
The third reason is more political: China is a one party dictatorship that can quickly react to American policy decisions; the EU is a multinational bureaucracy.
I wish Trump the best if his genuine motive is to liberalize trade across all countries, but I’m both skeptical of his tactics and motives.
I expressed my concerns with his unorthodox methods for dealing with foreign leaders and trade, but despite his tweets calling for an elimination of barriers, tariffs and subsidies, he continues to criticize NAFTA and he destroyed the TPP the second he took office.
What is clear, however, is that the best outcome for the American people is an end to these trade wars and an elimination of tariffs, regulations and subsidies that hold back companies, workers and consumers alike from financial prosperity.
Jake Dorsch
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