Friday , 17 August 2018


What Would the Consequences Be Of A Full-blown Trade War?

As an economist who studies international trade, I thought it’d be instructive to explore the trade relationships the U.S. has with each partner to show just how important they are – and what would be the consequences of a full-blown trade war.

The original article has been edited here for length (…) and clarity ([ ]). For the latest – and most informative – financial articles sign up (in the top right corner) for your FREE tri-weekly Market Intelligence Report newsletter (see sample here)

Why they’re upset

The Trump administration placed a 25% tariff on steel and 10% tariff on aluminum with the aim of propping up U.S. metals manufacturers.

A tariff is basically a tax on imports that raises the price of foreign company’s products for American consumers, putting imports at a disadvantage to domestic producers.

To see why these three U.S. allies are so upset, one need only look at the biggest suppliers of U.S. metals. Canada dominates, supplying more than a quarter of all U.S. steel, aluminum and iron imports in 2016. More importantly, steel exports to the U.S. make up more than half of total Canadian production.

The EU came second at 14%, while Mexico ranked fifth with 5.4% of U.S. imports. Steel exports to the U.S. also make up more than half of Mexican production.

America’s biggest customers

The EU is the single biggest market for exported U.S. goods, buying US$270 billion of American products in 2016, followed closely by Canada and Mexico. By comparison, China buys just $116 billion.

On the flip side, Americans purchase more from those countries than they sell, creating bilateral trade deficits that the president hates – even as most economists say they don’t matter. The U.S. imports $417 billion in goods from the EU, $294 billion from Mexico and $278 billion from Canada.

us.top.trading.partners

When the steel tariffs were first proposed in March, the EU, Canada and Mexico all reacted by threatening to retaliate with their own sanctions against some of these products.

So far, only Canada and Mexico have done so. Canada announced dollar-for-dollar tariffs on steel and aluminum, as well as sanctions of 15% to 25% on whiskey, orange juice and other food products. Mexico also slapped tariffs on U.S. steel, as well as various farm products, including pork, cheese, apples, whiskey, cranberries, grapes and canned goods.

While tariffs on these products won’t have much of an impact on the overall U.S. economy, they could be especially painful for particular industries or regions. For example, Mexico is the second-largest consumer of U.S. pig meat, making the industry vulnerable to Mexican tariffs.

Countries that import U.S. pig meat

The tariffs – like those on Kentucky bourbon and motorcycles – seem intended to hit key members of Congress where they live – namely, Senate Majority Leader Mitch McConnell of Kentucky and Speaker of the House Paul Ryan of Wisconsin, the home of Harley-Davidson.

Disruption to U.S. – Canada trade could also affect cross-border supply chains that have grown during the NAFTA era. The automotive industry is particularly vulnerable in this regard.

Although the EU hasn’t pulled the trigger on its own tariffs – yet – it recently opened a case at the World Trade Organization, arguing Trump’s tariffs can’t be justified on national security grounds and are no more than “pure protectionism.” A negative judgment at the WTO could result in the U.S. having to compensate aggrieved foreign producers or face broader retaliatory measures.

American consumers will also feel pain

While the purpose of Trump’s tariffs is to shift U.S. steel consumption away from foreign producers and towards domestic producers, Americans will share some of the pain as well. For example, if automakers have to pay more for the steel used in cars, you’ll see that effect when you visit your local dealer. One estimate put it at an additional $175 per vehicle.

Higher prices for things that require steel or aluminum like cars, planes, construction and appliances can slow the rest of the economy. When President Bush tried a similar tariff in 2001, it was estimated that it cost American consumers $400,000 for each domestic steel job saved.

The ConversationThe reaction of the EU, Canada and Mexico raises the possibility the U.S. is facing down a full-blown trade war – even as it does the same with China. Whether tensions can be turned down before serious harm is done remains to be seen.

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Related Articles From the munKNEE Vault:

1. WTF – Why Tariffs For Canada?

It continues to be baffling beyond words how Canada has ended up being among the Trump administration’s “most wanted” trade villains. In a client note, Doug Porter, the chief economist at the Bank of Montreal, set aside his usual analysis for a “rant” that pretty much demolished the argument that Canada is the trade villain Trump makes us out to be.

2. Canada Slapping Tariffs On $12.8B Of US Goods — Here Are the States That Stand To Lose the Most

Canada isn’t taking President Donald Trump’s decision to hit the country with steel and aluminum tariffs lying down. Prime Minister Justin Trudeau announced that Canada will impose retaliatory tariffs on $12.8 billion worth of US goods in response to Trump’s metals tariffs effective July 1 and will stay in place until the US removes the steel and aluminum restrictions. . The biggest losers from the US-Canada trade fight are industrial states in the Midwest.

3. Tariffs: What Are They & How Do They Impact the Economy & Your Investments?

President Trump recently announced new tariffs on imports of steel and aluminum, in a move that got mixed reviews from business and political leaders. The new tariffs would increase levies on aluminum by 10% and steel by 25%. There is much debate about the sensibility of these tariffs, but rather than wade into that morass, let’s examine what tariffs are and how they impact the economy and your investments.

4. Imposing Tariffs to Remedy U.S. Trade Deficit: Trump’s Instincts Valid BUT

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One comment

  1. OMG I can only smirk at the naivety of the question as if the US has not been in a trade war. Well let me tell you the big lie or the big truth which no one wants to acknowledge.

    1) Europe has been in a trade war with the US since WWII. The difference is that the US accepted its role with the Marshall Plan to rebuild Europe particularly with Stalin walling off Berlin so we gave Europe preferential trade afterward so it could continue rebuilding, so that it could pay for its 2% NATO defense obligation (which they renigged) and so Europe would acquiesce to US postwar leadership. Do you think Europe never devalued their currency to stimulate their economy and improve their exports?
    2) The US was in a trade war with Japan post WWII for the same reason as Europe. The US accepted its role to rebuild Japan especially since the US needed a strong Japan as we fought the Korean War and China coming in on the side of North Korea. There was a time when Japan was refusing to honor US patents (particularly semiconductor patents), manipulating its currency, buying US property and businesses as it expanded its US market share and closed US businesses that couldn’t compete. In some cases the US could compete but Japanese companies would send the wrong tools or bad product purposely so they could close the US supplier and open a Japanese Supplier.
    3) South Korea rebuilt itself off the Japanese model almost by blue print as South Korea used the Vietnam war to rebuild its economy.
    4) Then came the king of manipulators: China. China not being a US ally did things that even Japan did not do competing with the US (currency manipulation, 50% Chinese ownership, technology transfers, offshoring jobs and entire US industries to China, using US colleges to steal US research technology, etc)

    THIS IS THE WAY THE GAME HAS BEEN PLAYED AND THE US ENABLED THE FOREIGN TRADE PRACTICES WITH THE US BECAUSE THE US WAS WEALTHY ENOUGH AND BECAUSE THE US WAS USING US TRADE, DEVELOPMENT AND JOBS TO ENFORCE US HEGEMONY AROUND THE WORLD.

    NOW WE FINALLY HAVE A PRESIDENT WHO IS LOOKING AT TRADE AND SAYING ITS NOT FAIR AND WILLING TO END ALL THE SWEETHEART DEALS THAT THE US PREVIOUSLY LOOKING THE OTHER WAY AND PRETENDED THEY DIDNT EXIST. WE FINALLY HAVE A PRESIDENT THAT ISNT WILLING TO TRADE JOBS OR FINANCIAL AID FOR OTHER NATIONS TO ACCEPT OUR FOREIGN POLICY. WE FINALLY HAVE A PRESIDENT THAT IS OF THE OPINION THAT WE HAVE ACTUALLY BEEN IN A TRADE WAR SINCE WWII AND WE ARE JUST STARTING TO PAY ATTENTION TO IT BECAUSE WE CANT AFFORD THE ROLE OF WORLD LEADER….THE US IS NOT WEALTHY ANYMORE…THE US IS NOT A PRODUCER ANYMORE…THE US MUST TAKE NOTE THAT AFTER ALMOST 80 YEARS SINCE THE END OF WWII THE REST OF THE WORLD HAS CAUGHT UP TO THE WEST…PARTICULARLY IN ASIA.