EU threat on auto tariffs

July 31, 2019

https://www.reuters.com/article/us-usa-trade-eu/eu-redoubles-threat-to-retaliate-if-us-raises-auto-tariffs-idUSKCN1UH1N5

The above-linked report was published a few days ago, but I can’t let it pass without comment.  It’s reported that the EU is threatening to retaliate with tariffs of its own if Trump were to push ahead with tariffs on EU auto imports.

“We will not negotiate under WTO illegal action. Nor will we go down the road of managed trade,” she (Sabine Weyend, the EU’s director general of trade) said.

If Washington pushed ahead with its threat to raise auto tariffs to 25%, Brussels would respond with tariffs of its own, resulting in a “lose-lose” situation for all involved, she said.

This is exactly the same approach taken by China, and the EU should consider how well that’s working out for them.  And the EU is in a far weaker position than China.  Unlike China, who supplies electronics and other consumer products for which new supply chains will have to be re-established in the U.S., the EU competes with the U.S. in products that are still manufactured here, like autos and parts.  A full one third of our trade deficit with the EU – approximately $43 billion – is in autos.  If tariffs make such EU imports more expensive, American consumers can instantly and painlessly switch to American brands.  The same is true for pharmaceuticals, chemicals, plastics and virtually everything else imported from the EU.  We don’t need their imports – we have it all right here.

The notion that a tit-for-tat tariff battle with the EU would be a “lose-lose” situation is laughable.  When you’re already losing, as the U.S. is with a $150 billion/year trade deficit with the EU, the only possible outcome for the U.S. – even if a balance of trade with the EU were reached through a total cessation of trade with them – would be a $150 billion boost to the U.S. economy, a huge win by any measure.

If the EU wants to avoid the loss it’d suffer, it’d be better for them to boost their domestic consumption instead of relying on manufacturing for export – the same remedy that experts have recommended for China.  Of course, with a population density nearly the same as China, they face the same problem:  per capita consumption that’s depressed by over-crowding.

Trump is continuing his “slow turkey” approach to restoring a balance of trade through the use of tariffs.  It won’t be long before he levies the long-promised 25% tariffs on the remaining half of Chinese imports.  I suspect that the EU will then be his next target.


“Slow-Turkey” Trade Policy

July 8, 2019

Like the animated “slow turkey” we’ve all seen on the TV ads for a quit-smoking medication, Trump’s trade policy is also taking the “slow turkey” approach.

As announced by the Commerce Department on Wednesday, the trade deficit jumped back up in May to $55.2 billion from $51.2 billion in April, but this was still below the peak of $60.8 billion in December.  (Here’s the full release from the Commerce Department:  https://www.bea.gov/system/files/2019-07/trad0519.pdf.)

More importantly, the deficit in manufactured goods also rebounded in May to $71.1 billion, up from $67.9 billion in April.  It too, however, was below the all-time record of $76.5 billion set in December.  Here’s a chart of the deficit in manufactured goods:  Manf’d Goods Balance of Trade.

Based upon these figures, it’s difficult to see that Trump’s policy of using tariffs to bring manufacturing jobs back to the U.S. is having any effect.  Look more closely, though, and you’ll find that things are starting to happen.  The deficit with China rose again in May, but to “only” $30.2 billion, from $26.9 billion in April and $20.7 billion in March.  But this rise follows a seasonal pattern.  The fact is that the deficit with China has been down from the same month in 2018 every single month so far this year.  The year-to-date deficit with China is $137.1 billion through May, compared to $152.2 billion for the same period in 2018.  And let’s not forget that the U.S. is now collecting a lot of revenue from half of Chinese imports – approximately $5 billion in May – an annualized rate of $60 billion.  If and when Trump imposes a 25% tariff on the other half of Chinese imports, that revenue figure will double to $120 billion per year and will further cut our deficit with China.

Yes, China is retaliating with tariffs of their own, and exports to China have dropped slightly, but imports from China have fallen much more – the net result being a lower trade deficit, which is a boost to the U.S. economy.  What about the stories about how bad America’s farmers are being hurt by this trade war?  Baloney.  Look at page 19 of the report.  Exports of “foods, feeds, and beverages” year-to-date is running almost dead even with last year.  Exports of soybeans, which get so much attention, are running 7% ahead of last year.  And overall exports are up by $2 billion from last year.

Recently, Trump announced in the wake of his G20 meeting with Red China’s dictator Xi that he is holding off the implementation of the 25% tariff on the remainder of Chinese imports that he has threatened, pending a new round of trade negotiations with China.  We can see a pattern emerging in Trump’s style of trade policy.  He’s all warm and fuzzy when meeting with global leaders like Xi, then takes the tough action when the lower-level negotiations don’t measure up.  Maybe it’s a smart approach, effectively inoculating the business world against the Chicken Little, “the sky is falling” dire warnings of trade war consequences.  The unfounded fears dissipate when the trade war is rolled out slowly and nothing bad happens.  The free trade fear mongers are losing credibility.  Each new round of tariffs gets more of a ho-hum response.

Who’s been the biggest beneficiary of the tariffs on China so far?  Mexico.  While the trade deficit with others like Germany and Japan is either stagnant or declining (South Korea), the deficit with Mexico is growing rapidly as manufacturers who have been leaving China in droves (a few examples of which are reported here:  https://www.reuters.com/article/us-china-strategy-tech/hp-dell-other-tech-firms-plan-to-shift-production-out-of-china-nikkei-idUSKCN1TY14G) look for their next best (low cost) solution.  Some manufacturing is coming back to the U.S., but a lot is going to Mexico.

Under current NAFTA (North American Free Trade Agreement) rules, that may look like a smart move.  But that landscape is changing too – in “slow turkey” fashion.  A new agreement has been negotiated and is pending approval by Congress, and Trump has repeatedly threatened tariffs on Mexico imports, most recently in his effort to force Mexico to take a tougher stand against Central American immigrants.  Those companies moving to Mexico now may be throwing good money after bad and regret not facing the inevitable – that America’s tolerance of perpetual, huge trade imbalances has reached the end of the line.

This “slow turkey” approach to trade policy is frustrating for a “cold turkey” like me.  The “cold turkey” approach would already be yielding bigger benefits for American workers.  But I’ll concede that a “slow turkey” approach may be more sustainable in an environment where free trade globalists still command the attention of the media and are influential in what happens in global stock markets.  The benefits for workers may not be sustainable if investors are taking it on the chin.

It looks like the “slow turkey” approach is just beginning to show positive results.  The American economy, including the manufacturing sector, is doing well while others are faltering.  If this approach de-fangs the critics as their trade war hysteria falls flat, and the political climate becomes favorable for an 8-year “slow turkey” transformation of trade policy instead of a 4-year “cold turkey” that ultimately yields nothing more than a lame duck dead turkey, then I’m all for it.