China has just released figures relating to trade with the US covering the entirety of 2018. While some might have expected trade to slow in the midst of the Trump trade war, China actually recorded a trade surplus with America that represents the largest such surplus since 2006. While the high figure was partly motivated by trade early in 2018 before the worst of the tariffs kicked in, as US businesses looked to stock up on crucial Chinese goods before they became artificially more expensive, the overall trade picture is demonstrative of the fact that manipulating prices through tariffs or through similar mechanisms cannot change the needs of businesses or consumers. Instead, such artificial methods can only make the existing requirements of businesses and consumers needlessly more expensive, without altering the overall balance of bilateral trade between any given set of nations.
The reason for this is that a tariff is nothing more than a tax paid by those importing foreign goods to any given country. The added cost to the importer is then passed along throughout the supply chain, eventually landing in the pocket book of the consumer. The Global Times reports that according to the latest estimates, the trade war against China could cost the average US consumer upwards of $850 extra per annum. All the while, US farmers are being artificially subsidised by the American taxpayer to let their unsold crops rot after losing their once valued Chinese customers. At the same time, the manufacturing sector that was supposed to be aided by the trade war continues to slump. While it is true that industrial jobs are up overall in the United States, this is mainly in domestic industries like utilities and mining, not in industries that create durable manufactured goods, such as the automotive industry, to name but one important example.
Crucially, as all of the above mentioned phenomena take place, China’s trade surplus has grown when the trade war was supposed to make it shrink. Those who were in business during the late 1980s will recognise some of these trends. In 1985, the US, Japan, Britain, West Germany and France signed the disastrous Plaza Accord. The goal of the Accord was to increase the allegedly undervalued Japanese Yen against the Dollar. The process was supposed to make US goods more attractive to a Japanese (and western European) market that did not want them, while also helping to end Japan’s large trade deficit with the US by virtue of making Japanese goods more expensive for American consumers, whilst simultaneously making American goods cheaper for export markets.
The result was that the US Dollar became weak, thus leading to inflation that punished both savers and consumers in America, while in Japan, easy credit spurred by low interest rates aimed at reducing the rocketing value of the Yen, caused an overheated asset bubble that burst in the early 1990s, thus ushering in a decade of total stagnation for a once vibrant Asian economy.
And yet in spite of all of the unintended (but foreseeable) woe associated with the Plaza Accord, it did nothing to stop Japan’s trade surplus with the US, all it did was made both goods and raw materials more expensive at the point of purchase for Americans.
The trade war with China is largely having the same effects, even though Trump has decided to create inflated prices with taxation (tariffs) rather than by lowing the value of the Dollar in the pocket of the American consumer. The end result however is the same. Manipulating the market through devaluing currencies, taxing the consumer or over-regulating enterprise simply does not change the real life needs of businesses of all sizes nor of consumers.
The only way to reduce the size of trade deficits is to create mutual free trading deals, the kind that China is now making with economic partners around the world, in-line with China’s aim to open its markets to more imported goods and foreign capital than at any time in the history of the PRC. Secondly, one needs to produce goods that are attractive to foreign buyers. As China is a bigger market for US made luxury cars than the US itself, anything other than a robust bilateral trade agreement with China will represent a lose-lose scenario for businesses and consumers in both countries, but particularly in the United States.
Contrary to what Donald Trump stated last year, trade wars are not easy to win. In fact, the statistics show that the US has clearly lost the trade war during its first and hopefully only year of existence.