No winners in trade war

The looming trade war with China, if it hasn’t started already, isn’t going to help anyone. It will raise prices on everyone, including the consumer, as businesses try to figure out how to offset rising costs. The White House appears to be trying to tell people to take a chill pill over the potential of the trade war with China with new White House economic adviser Larry Kudlow pointing out nothing has actually been put in place.

There is a bit of truth to this, and maybe Kudlow can convince President Donald Trump to ease off on his tariff threats. The markets did relax a bit with Kudlow’s statement, but markets tend to be extremely reactionary to any sort of good or bad news coming down the pipeline. The market roller coaster probably won’t stop whilst Trump and China both play the snail from The Mock Turtle’s Song in Alice in Wonderland and try to decide if they’ll join the dance. The same goes for any other potential retaliatory tariffs from other countries, although Financial Times reported a few days ago the Japanese were staying quiet on any potential retaliation.

The lack of retaliation threats from Japan, despite anger and frustration at the US president’s decision to target a close ally, reflects confidence that many of the country’s steel exports can win product-by-product exemptions from the tariffs.

Japan’s calculated response highlights its determination to keep good relations with Mr Trump and the difficulty of using tariffs as a tool to force trade concessions when so many US industries rely on imports.

It’s an interesting strategy to take, but shows Japan’s willingness to look before leaping when it comes to hitting back. It wouldn’t be surprising at all to see Japanese products get plenty of exemptions because it’s not like an American company can say to a Japanese company, “We’re switching to U.S. Steel, go take a hike.” There are contracts involved between both parties, meaning the American firm could take an even bigger financial hit if it decides to break contract with the foreign partner for American products. It would also be financially foolish for an American steel company to try to buy out their competitor’s contract. This isn’t like when telecom companies offer to buy out a customer’s contract because those contracts are just worth hundreds of dollars. The steel contracts are worth millions, maybe even billions, and it’d be stupid for a rival steel company to make the offer if there was no way it’d survive financially. That would probably just promote more government action (i.e. bailouts), and conservatives were against bailouts last time I checked.

This doesn’t mean the White House isn’t going to promote the idea of tariffs to “help” the American economy. The Commerce Department came out today saying America has a horrible trade deficit with other nations (via CNBC/Reuters):

The Commerce Department said on Thursday the trade gap rose 1.6 percent to $57.6 billion. That was the highest level since October 2008 and followed a slightly downwardly revised $56.7 billion shortfall in January.

The deficit has now risen for six straight months. The goods trade deficit was the highest since July 2008 and the surplus on services was the lowest since December 2012.

Economists polled by Reuters had forecast the trade gap widening to $56.8 billion in February from a previously reported $56.6 billion in the prior month.

Part of the rise in the trade deficit in February reflected commodity price increases. The politically sensitive goods trade deficit with China fell 18.6 percent to $29.3 billion. The deficit with Mexico surged 46.6 percent in February.

Concerning? Not really, and here’s why. Trade deficits really aren’t as scary as people think they are because trade deficits happen every day in multiple different scenarios. To paraphrase the great Walter E. Williams, when I go to the local grocery store to buy food, I end up with a trade deficit. My trade deficit with multiple cigar stores (and the CAO and A Fuente cigar companies) is in the thousands because I’m giving them my money, in exchange for a product. One thing Williams did point out last year is there tends to be a surplus in another area (via Creators).

That somewhere else is known as the capital, or financial, account. This account consists of direct foreign investment, such as the purchase or construction of machinery, buildings or whole manufacturing plants. The capital account also consists of portfolio investment, such as purchases of stocks and bonds. In our capital account, the U.S. has a huge surplus with China. That means money is flowing into our country from China. In other words, Chinese people are investing more money into the U.S. — in the forms of home and factory purchases, stocks, and bonds — than Americans are investing in China. Of necessity, the deficit that we have with China on our current account, ignoring timing issues, must equal the surplus we have with China on our capital account.

Williams previously wrote at Town Hall how trade increases competition, and he’s right. There are multiple cigar companies (and cigar stores) competing for my business. The same goes for car companies, grocery stores, and computer companies. Getting into a trade war would only limit the chances for companies to compete in America and hurt everyone financially. It’d probably wipe out whatever gains we’re seeing from the new tax cuts. Here’s hoping the Trump administration decides to not do the tariffs. The alternative is going to hurt.