If one wanted to write a book on how to lose friends and inflame rivals, Donald Trump’s new set of tariffs on steel and aluminium could read as the opening line. After intense speculation on weather the new 25% US tariffs on steel and 10% tariffs on aluminium would be applied throughout the world or only selectively, a White House official has confirmed that the tariffs will apply uniformly across the world. Stocks in the US have already taken a downturn even before the implementation of the new tariffs.
This new announcement regarding worldwide tariffs will not only anger China, but also traditional US allies including Japan, South Korea, the EU and Canada. While Canada enjoys free trade with the US as part of the 1990s era NAFTA agreement, Trump who is seeking to amend or revoke NAFTA has already put the North American free trade zone into jeopardy with his new tariffs.
It would appear that the US rationale for a worldwide import tariff is motivated by a combination of hesitation in respect of singling out China with a pinpointed provocative measure, while also attempting to see how generally US friendly countries respond to measures that could harm both steel and aluminium exporters as well as businesses and consumers in the United States.
Yesterday, I suggested a hybrid model for the US to jump-start its lagging industry without resorting to creating a hostile and unpopular trading atmosphere with countries that American consumers and business rely on. I stated:
if the US uses tariffs to attempt and price Chinese goods out of the US market, it could trigger several domestic crises. Most immediately, US businesses who rely on Chinese goods and raw materials would bit hit hard. This includes not only the large retail and service sectors, but also US producers who use Chinese parts in the production of their goods. This could hurt US employment figures while also rendering US made goods more expensive both for domestic and international consumers due to a lack of widely available and reasonably priced parts and materials.
The Japanese car company Toyota has already stated that its vehicles would become more expensive in US markets as a result of the tariffs. This would apply not only to cars manufactured in Japan, but also to Japanese brands that assemble vehicles on US soil. Without a plan to stimulate domestic economic growth, this could mean that those who remain employed in the US will end up paying more for less throughout the retail sector.
But while these are the most immediate effects, in the longer term, Trump’s trade war could end up destroying the value of the Dollar. For the moment, China continues to purchase and hold US Treasury Bonds, thereby helping to underwrite America’s soaring sovereign debt. If China were to release these bonds on the open market, an increasingly fragile Dollar could plunge even more, thereby hurting the purchasing power of the US as a whole and that of ordinary US consumers who rely on important goods for their work and their daily lives.
China is currently the largest single holder of US debt, at over 1 trillion US Dollars. Thus far, Beijing and Washington have an unspoken agreement that in return for China’s friendly trade policies in Washington, Beijing will continue to be a good faith holder of US debt. If China released the debt onto international markets, this would trigger a rise in the value of the Chinese Yuan while also lowering the value of the Dollar. This would not be to China’s advantage in the short term, insofar as it would make Chinese goods less desirable in the US market place. But if China were to be systematically priced out of the US market place due to tariffs, China might just pull the proverbial trigger, having lost the central rationale for holding so much of America’s debt. At such a point, China could then reap the rewards of a strong Yuan, including its increased value as an international reserve currency in addition to an enhanced domestic purchasing power.
As for Chinese exports to the wider world other than the US, a China with an incredibly strong Yuan could always do what Japan did in the 1980s and artificially lower the price of its goods on the international market place in order to compensate in terms of volume, for goods whose price would otherwise be too expensive for certain markets. In any case, it is not likely that the Yuan would automatically skyrocket to 1980s Yen levels even if China sold off US bonds en masse and China already has many successful free trade or near free trade agreements with countries across the world that unlike the US, remain satisfied with mutually beneficial arrangements.
There is a way to avoid such an economic confrontation, but it would require the United States to abandon both classical laissez-faire dogmas, as well as the protectionist dogmas of Donald Trump. According to the above mentioned scenario, which is becoming more likely with every new tariff the US proposes, the US economy would be hit hard for one simple reason: the US does not produce enough high quality goods to be internationally or even domestically competitive in the event of artificially or organically losing easy access to competitively priced imports.
Ironically, if the US had a strong, confident, quality orientated domestic industrial base, it could actually benefit from a lower dollar for the same reason that all large exporting nations can benefit from a weak currency – it makes the goods more attractive in affluent markets abroad. The problem is that over the last four decades, America’s domestic production base has been decimated in terms of output capability as well as quality control.
The reason for US industrial decline was a perfect storm of governments failing to invest in domestic private sector industry, while happily taxing them out of a competitive position, combined with an American labor union policy which was hostile both to private management as well as to political opponents. By contrast, West German trade unions used a model where union representatives sat on the board of major companies and therefore had responsibility both to the workers and to the overall corporate health of major industrial producers.
In China’s market socialist model, while free enterprise is allowed at structural level, on a macro-economic level, the profits generated by Chinese industry are re-invested into the nation for the benefit of multiple sectors ranging from infrastructure, to health and housing to new industrial endeavours.
No single model can be interpolated onto another with perfect results and therefore it would be naive to suggest so. In the case of the US, what is needed is a more harmonious relationship between domestic producers in the private sector, government and workers organisations. In the US, there is a kind of phobia of government investment into companies and when such things do happen, it is usually to bail out a company on its last legs, rather than to rejuvenate a company in need of modernisation. Likewise, among US labor unions, there is a kind of allergic reaction to the kinds of quality control that exists in Germany. This is one of the reasons that German cars remain the most sought after in the world, while US cars continue to languish in consumer opinion polls.
Ironically, there is one industry in the US that does run effectively on a model where government, management and the work force coexist on generally good terms. This is the defence industry. Here, government funds many research and development programmes, fulfils many orders and promotes products abroad, while the workforce is well paid, highly trained and due to the sensitive nature of the defence industry, has to go through special clearances in order to demonstrate both company and national loyalty.
There is no reason why the US automotive, computing, electronics or textile industries could not work on the exact same model, minus the security clearances. If there was a US Senate Automotive Services Committee that suggested General Motors (GM) produce a certain kind of cutting edge, high quality care and invest in its development, and if GM had this incentive to find a domestic workforce that was incredibly skilled, hard working and well paid, all of the sudden one would see a US consumer product that would be attractive in both domestic and international markets. Imagine if all the seriousness devoted to Capitol Hill hearings on national defence, instead defined Congressional hearings on getting the US to make cars that people want to drive and audio/visual equipment people want to listen to and watch? It would represent a pivot from hostile practices in the name of war, to constructive practices in the name of prosperity.
While it is true that in the defence industries, Russia and China sell their weapons for lower prices than the US, this has not stopped the US from selling many weapons abroad. Likewise, the cost of a Mercedes-Benz has not prohibited Mercedes vehicles from being purchased in high quantities throughout the world.
As China’s workers begin earning even better pay and as automation takes over factories throughout the world, there is likewise no reason why the US could not enter into profit sharing agreements between the management of automated factories and American workers facing lay-offs due to automation. This way one would still be saving production costs due to automation, but one could ameliorate the problem of industrial unemployment by giving former workers a combination of shares in the company as well as a regular living wage that is related to the profits of said factory.
The US might never be able to match China in terms of overall output and with China becoming a leader not only in quantity but also quality, China is without a doubt going to be the industrial king of the 21st century. Yet, this has not made Japan, South Korea, Germany or other major producers give up entirely. It is ironically in the US, a nation whose pop culture invented “the power of positive thinking”, that when it comes to industrial innovation and embracing hybrid economic models, deep pessimism sets in.
At the end of the day, any product that is somewhat reasonably/competitively priced and is of high quality or unique in nature, will sell. There will always be a market for quality and unique goods and in an age where global purchasing power is diversifying in geographical terms.
The US could and should accept geopolitical decline while embracing economic renewal. To the ordinary person, they would have more money in their pocket, domestically produced products that the world actually covets and enjoys and moreover they would be able to enjoy these goods in a more peaceful world.
Sadly, the US is as allergic to peace as it is to the economic innovation that could result from pivoting its defence industry model to the consumer/civilian sector.