Last week President Donald Trump, at a joint press conference with the European Union’s senior trade representative, Jean-Claude Juncker, announced a trade deal with the EU.
“This was a very big day for free and fair trade, Trump said. “We agreed today ... to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. We will also work to reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soy beans. ... The EU will begin almost immediately to buy a lot of soy beans from our farmers .... The EU also wants to import more liquefied natural gas from the U.S. .... They will be a massive buyer.”
What the president said was confirmed by Juncker: “I had an intention to make a deal today, and we made a deal today.”
So, is the president a free-trader or a protectionist?
Trump has taken on two issues, the U.S. trade deficit, and tariffs. The issues are related, but distinct.
Here’s a simple illustration of a trade deficit:
A sells Chevy automobiles. B sells snowblowers. B buys a Chevy from A and pays $30,000. A buys a snowblower from B at a price of $500. B has a trade deficit of $29,500. A has a trade surplus of $29,500.
Kimberly Amadeo of balance.com writes, “The United States ... [total] deficit in goods and services was $566 billion in 2017. Imports were $2.895 trillion and exports were only $2.329 trillion. The U.S. trade deficit in goods [excluding services] was $810 billion. The United States exported $1.551 trillion in goods. The biggest categories were commercial aircraft, automobiles, and food. It imported $2.361 trillion. The largest categories were automobiles, petroleum, and cell phones.”
The U.S. has its largest trade deficit with China. We import about $505 billion worth of goods from China. China imports about $130 billion worth of goods from us. The U.S. deficit is therefore about $375 billion. China’s trade surplus is $375 billion.
There is some good, and some bad in that relationship. The relationship is good for American consumers. They might be able to buy an American-made TV for $500. They, however, may be able to buy a comparable Chinese-made TV for $400.
But the relationship is bad for U.S. workers. If American consumers are buying enough Chinese-made TVs, American TV manufactures may go out of business for lack of sales, or relocate their businesses to China, or Mexico where labor is cheaper and where they can build TVs for the American market to compete with Chinese imports.
Furthermore, buying all our manufactured goods from foreign countries may be very bad in the case of a national emergency.
We won WWII largely because our auto manufactures adjusted their assembly lines to build planes, ships and tanks. If there are no American manufacturers, that won’t be possible in the case of the next national emergency.
That situation is exacerbated when the foreign country imposes a tariff on U.S. goods entering their country. If a Canadian consumer can buy a gallon of U.S. milk imported into Canada at $2 per gallon, he may not be able to afford buying that same gallon of milk if a 200 percent Canadian tariff raises the price of that milk to $6 a gallon.
The U.S. dairy farmer gets no benefit from the $4 added to the price of his milk by the tariff. And worse, if the price of milk is $6 rather than $2, the U.S. dairy farmer will sell less milk to Canada. It’s the Canadian dairy farmer who benefits. He can sell his milk at $5.90 per gallon, and beat the $6 price of U.S. milk.
The agreement with the EU demonstrates that when the president says, “I want free trade, not tariffs,” he means it.
For the president, U.S. tariffs are a tool to force the reduction of foreign tariffs. He wants free trade; reciprocal trade.
If a trade war develops, China, by raising tariffs, can keep $130 billion of U.S. exports out of China. We can keep $505 billion of Chinese exports out of the U.S.
If that happens, U.S. consumers will pay a little more for U.S. goods. U.S. manufacturers will find it easier to compete.
U.S. exporters will be hurt, unless our government protects them during the war. (U.S. farmers export about $12.4 billion of soybeans to China.)
China’s economy will face depression.
Posted: QCOline.com Aug. 2, 2018
Copyright 2018, John Donald O'Shea
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