Losing The Trade War: America’s Trade Deficit at a Ten Year High

Donald Trump stated that trade wars as a good thing and are “easy to win”, but the end of year statistics for 2018 tell a considerably different story. Not only was America’s year end trade deficit with China at an all time high of -$419.2 billion, but the total US trade deficit finished at a ten year high of -$621 billion. Additionally, the US ran up record deficits both with the European Union and with neighbouring Mexico. Clearly, Donald Trump’s protectionist onslaught that was supposed to decrease America’s multiple trade deficits has not achieved its intended outcome. The inverse is in fact true.

Due to the inter-connected nature of the modern global economy, protectionist measures do little more than sever one’s own economy from mutually dependent supply chains whilst cutting off domestic producers from lucrative foreign markets that are forced to levy retaliatory tariffs. Finally, as tariffs are a tax on imported goods, trade wars have the effect of creating consumer price inflation on goods that most consumers in a country like the United States can scarcely go without. In this sense, protectionism is equally bad for exporters, consumers and domestic manufacturers that rely heavily on international supply chains in order to produce their finished goods.

The Global Times recently reported that according to the latest figures, 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.

Thus, in spite of the US feeling the pain of the trade war, US producers and consumers have yet to receive any of the alleged benefits associated with protectionism. 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 year of its existence. Only a speedy win-win resolution to the trade war can help to mitigate the negative effects wrought by Donald Trump’s protectionist zeal. Thus far, the trade war has failed to achieve any positive goals whilst the negative impacts of protectionism have already become self-evident.

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