Just The Facts:
Trade War (noun): a situation in which countries try to damage each other’s trade, typically by the imposition of tariffs or quota restrictions.
Trade deficit (noun): the amount by which the cost of a country’s imports exceeds the value of its exports. This occurs when a country imports more than it exports.
Tariff (noun): a tax or duty to be paid on a particular class of imports or exports.
International trade is the exchange of goods and services between countries. This exchange is what creates a world economy and it is a critical component of economic policy for any presidential administration. According to the US Census Bureau of Foreign Trade, as of May 2018 the top five trading partners for the US are:
- China – $636 billion traded with a $375 billion deficit.
- Canada – $582 billion traded with an $18 billion deficit.
- Mexico – $557 billion traded with a $71 billion deficit.
- Japan – $204 billion traded with a $69 billion deficit.
- Germany – $171 billion traded with a $65 billion deficit.
The trade deficit with China is primarily due to the massive amounts of manufacturing (with low labor costs) and exporting of electronics, clothing, and machinery to the US. As Chinese wages have been rising, the advantage of manufacturing there begins to decrease.
Historical trade balance since 2008 Trade deficit increases towards the bottom of the chart.
According to the US Census Bureau: “Balance of Trade in the United States averaged -$14,270.75 USD Million from 1950 until 2018, reaching an all time high of 1946 USD Million in June of 1975 and a record low of -67823 USD Million in August of 2006. The US trade deficit narrowed sharply to USD 43.1 billion in May 2018 from a revised USD 46.1 billion in the previous month and below market expectations of USD 43.7 billion. It was the smallest trade gap since October 2016.”
There are two main approaches to International Trade:
- Free Trade: Little to no restrictions on trade. Supply and demand will automatically promote trade and growth.
- Protectionism: Regulation is needed to make sure the market functions appropriately. Tariffs, subsidies and quotes are common forms of protectionism.
Trump was elected in part due to his “America-first” campaign promises to put the country’s interests first in economic policy, and his perceived ability to succeed in the business world. He promised not only more jobs, but that he would bring jobs back from other countries, doing this through negotiations and greater tariffs on imported goods.
Trump ran his campaign on promises to broker “better” trade deals for America, to “revive” the American economy. His policies on trade, and the fact that they promote a nationalist attitude, raises concerns for the left and has some now using the term “trade war” to refer to his new policies concerning trade, especially with China.
At a campaign rally in Tampa, Florida, Trump said:
“Any country that devalues their currency to take unfair advantage of the United States and all of its companies that can’t compete will face tariffs and taxes to stop the cheating.”
Search results for “Trade War” on SpecrumReport.com, showing article counts, headlines, and AI emotional analysis of language.[/caption]
Narratives from the Left:
In contrast to many headlines of the right, the headlines from the left label Trump’s policies as a blatant trade war and blames these seemingly bad economic policies on Trump’s ignorance of global economics as well as posturing/ need to fulfill aggressive campaign promises. Headlines highlight the left’s concern that these trade policies will lead to a recession and have other economic consequences, especially for the middle and working classes that Trump claims to be protecting.
The left is also concerned that Trump’s behaviors will damage long-standing relationships with countries that are critical partners, and that protectionism will isolate the US in a world where being globally connected and interdependent improves life for people in the US and abroad, helps to stimulate and share innovations, and reduces the chances for war. As recently as the 1990s and early 2000s, the left was critical of many trade deals and organizations, including the World Trade Organization, which held meetings in Seattle, WA that were met with intense protests. The current position doesn’t necessarily negate the left’s past concerns with what they saw as unfair trade policies, but the reaction to Trump does seem to signal a move towards a more free-trade-friendly left.
Articles from left-leaning publications highlighting perceptions of Trump’s trade policies.
Narratives from the Right:
As the “trade war” heats up with China and tariffs go into effect, the narrative of the right is mixed. There is both support for Trump’s more aggressive trade policies as well as nervousness at unintended consequences for middle-America. Overall the right is more confident that these policies will lead to a more robust economy for America. They see Trump as negotiating from a position of strength, where they perceived Obama and the left as negotiating from a position of weakness, kowtowing to other countries, and apologizing for the country for asserting itself on the world stage. The right, along with Trump, claims that there are already benefits from an America-first economic policy, which the right sees as evident in: a dramatic increase in employment, a spike in jobs-or more specifically, onshore jobs-and a revival of previously restricted industries, such as coal starting production again.
The right sees Trump as attempting to follow through on his campaign promises to broker better trade deals for America and to revive the American economy to what they believe it was in decades past, using the slogan “Make America Great Again” to point back to a perceived golden era of America-first foreign and economic policy. Trump addressed a reasonable concern on the campaign trail that the US manufacturing base has become virtually non-existent over recent decades because companies have moved operations to lower-cost countries. How these enforcement of fair trade practices will affect the economy has yet to be seen.
Articles from right-leaning publications highlighting perceptions of Trump’s trade policies.
His own party has expressed concern towards his aggressive policy. House Speaker Paul Ryan has said:
“We are extremely worried about the consequences of a trade war and are urging the White House to not advance with this plan,” said Ryan spokeswomen Ashlee Strong in a written statement. “The new tax reform law has boosted the economy and we certainly don’t want to jeopardize those gains.”
But his administration denies it is starting a trade war.
Commerce Secretary Wilbur Ross has said on CNBC March 7:
“We’re not looking for a trade war. We’re going to have very sensible relations with our allies. We hope and we believe that at the end of the day, there will be a process of working with the other countries that are our friends.”
Fact Checking the Narratives:
Are trade deficits a bad thing?
Because of trade deficits, prices for products in the US can decrease, creating short term increase in buying power for Americans. However, over the long term America could lose the skills needed for jobs that are outsourced abroad, while those countries build their skills.
Is the US in a trade war?
Trump has not declared war on any specific country concerning trade; however, he has highlighted China and Mexico more than other countries and has threatened to impose greater tariffs on these countries. Some of these threats are becoming a reality, as the US and China have implemented retaliatory tariffs and trade limits on each other. Whether the situation will escalate into a full-blown trade war is yet to be seen.
Is the USA being treated unfairly by globalization and global trade?
The most well-known example of a controversial free-trade agreement is NAFTA, or the North American Free Trade Agreement, which covers the largest free trade area in the world: Canada, United States and Mexico. In 2008 all tariffs were eliminated, and between ‘93 and ‘09 trade tripled to $1.6 trillion. But NAFTA has also been labeled as the destroyer of a half a million American jobs and responsible for a dramatic US wage decrease. Because of NAFTA many manufacturers moved to Mexico to utilize lower labor costs. Pre-NAFTA four manufacture-centered states, California, New York, Michigan and Texas, had a large number of factories in industries such as automotives, textiles, electrical appliances and computers. These industries are now more concentrated in Mexico.
China itself has nationalistic “China First” policies that increase costs on foreign goods and favor its domestic products. For example, according to the Office of the US Trade Representative, China’s currency manipulations amounted to around 25-40% increase in prices of American goods, and other tactics, like product and service restrictions, procurement directives are used according to a 2010 report.
What are the impacts of tariffs?
There is evidence that previous policies of advancing globalization have affected the US in many positive ways, such as economic growth, reduced prices for goods. However, the idea that “a rising tide raises all boats” has not been entirely true for all Americans. While the overall economy has grown and made many Americans richer, many high-paying manufacturing and retail jobs have been lost to a combination of globalization and automation, leading to an unequal share of the benefits of growth. While technology and high-skill jobs have strongly advanced, many low skill workers have lost jobs and seen less opportunity. Not all Americans believe they have seen a fair benefit from these globally-focused policies.
Tariffs and trade wars may have been at least partially responsible for the Great Depression. According to research by PolitiFact: “Specifically, the Smoot-Hawley Tariff Act of 1930 — sponsored by Sen. Reid Smoot, R-Utah, and Rep. Willis Hawley, R-Ore. — raised tariffs on manufactured foreign imports to 40 percent in some cases, the highest in U.S. history. It also extended tariff protection to some agricultural products. It was signed on June 17, 1930, or seven and a half months after Wall Street’s “Black Tuesday” on Oct. 29, 1929.”
The Smoot-Hawley tariffs, in turn, led other countries to retaliate with high tariffs of their own, and damaged relations with many countries. This trade was was seen as unnecessary economically, but instead done for internal political reasons. Even if it was not the cause of the great depression, scholars conclude that it at least made it much longer and worse than it would have been otherwise.
The US economy is still in the lead, for now. According to the World Economic Forum, in 2017 the US had the largest economy in the world and was larger than the combined economies of countries rated number three to ten on the list. The forum also warned that the US could fall behind to China in the coming years, who trailed by $7 trillion. China’s economy grew by 6.7% in 2016, compared with America’s 1.6%, according to the IMF. The Chinese economy is on track to surpass the US economy, and has been developing rapidly for more than two decades, lifting 800 million people out of poverty. Has this been harmful or helpful to American jobs and prosperity? Both.
The US lost 5.6m jobs between 2000 and 2010. But the Center for Business and Economic Research at Ball State University recorded that 85% of the job losses can be attributed to automation or technology trade, not international trade issues. In 2017, the US Department of labor reported that there were 6 million open jobs, and 6.8 million Americans looking for work. However, the open jobs required skills that the 6.8 million unemployed workers largely did not possess. This signals a need for more re-skilling and retraining of Americans to do high-skilled work such as software programming. Often this phenomenon of capitalism is called “creative destruction”, which often leads to more advanced technologies and economies, but the destruction of lower-skilled jobs is not without real human pain and economic despair.
Are Trump’s policies actually improving the economy?
The president has followed through on his campaign promises to raise tariffs on foreign goods, especially from China. Trump has announced a 10% tariff on over $200B worth of Chinese goods. Goods include mostly industrial equipment and electronics. A full list of products can be found here. China has retaliated with a 25% tariff on over $36B worth of American goods, and vowed to retaliate more, but with only $130B worth of imports from the US, it covers only a third of what it exports to the US. Whether this puts the US in a strong negotiating position, or will spark a trade war and global downturn remains to be seen.
PolitiFact rates Trump’s claims of a strengthening economy as “Half True”, citing that the economy is in fact, but the president cannot claim total credit, as it is the continuation of a longer trend.
There is evidence that the number of jobs, specifically by re-shored, or onshore jobs has increased under Trump. According to a report by the Reshoring Initiative released in May 2017, more manufacturing jobs are returning to the US than are going offshore. And this is the first time this has happened in decades. The group found a record-high 77,000 reshored jobs in 2016, bringing the total since 2010 to 338,000. But these gains took place under Barack Obama. During the first three quarters of 2016, the number fell to an average of 12,000 per quarter. Then it picked up with the election of Donald Trump. In the fourth quarter of 2016, it almost doubled to 22,000. In the first quarter of 2017, it almost doubled again to 40,000. And the preliminary number for the second quarter of 2017 is even higher, at 50,000.
Figures from the US Labor Department show that nearly 2 million jobs have been created under Trump in 2017. This is comparable to the number of jobs created by Obama in the previous year. Revisions to the numbers showed that both presidents did better than previously measured.
The 3.8% unemployment rate is the lowest since 2000. But what is also true is that according to the Bureau of Labor Statistics, August 2017 was the 83rd successive month of continued job gains, including throughout the Obama presidency. However, there is still a lack of strong wage growth and productivity.
US unemployment is at its lowest level in years, but this is also a continuation of the trend under Obama since the 2008 recession.
According to McKinsey (a leading strategy consulting firm), 45% of jobs are able to be automated using today’s technology (78% of predictable physical work), and costs to automate these jobs are decreasing rapidly. The displacement of work could be the fastest shift in history, especially as artificial intelligence (AI) makes machines and computers more capable. As more jobs become redundant, while products become cheaper and more abundant, many wonder who will have an income to buy them. This has led to movements for universal basic income, the need for widespread sharing economies, and rethinking the dynamics of capitalism itself.
Will tariffs and taxes on foreign goods improve the US or global economy? It is difficult for anyone to predict exactly what will happen, but a few examples from history show a mixed bag, but generally over the long term, freer trade leads to more growth and wealth, with short term losses for unskilled labor. Threats of trade wars can be used as a negotiating tactic, but actual trade wars can also lead to protracted downturns and economic losses globally. At this point no one can say for sure where this historic trade conflict will take the world.