Trade wars: Careful you don’t leave no one to play with
Tit-for-tat battles can have enormous consequences
Whenever a fight broke out on the playground at school (and there were many), the teachers who broke it up always wanted to know who started it, and that’s who got punished. The truth is that the boy who threw the first fist was, more often than not, the “less guilty” of the two. The cause of the fight usually started way before the bell went for long break. Besides, the first rule of survival in schoolboy fighting is “hit first, hit hard”. So who started the fight that may lead to a global trade war? China did.
It is a complex, tricky business, this business of trade tariffs. In fact anything which seeks to interfere with free market forces becomes difficult to manage precisely because the drivers of fair value are set aside in favour of sovereign (sometimes personal) protectionism.
Sovereignty, and the rights it endows on its leaders, can have enormous knock-on effects and unintended consequences. Inevitably, protectionism degenerates into a tit-for-tat war of egos and causes that often strays from the original intention.
No sustainable ecosystem can be characterised by, or even tolerate, independent bubbles of unilateral authority that can behave independently of the natural forces that bind and guide them, at will, selectively or randomly, at the insistence of one individual, surely?But it happens. Trump, as is his reckless wont, simply blurts out that he will impose a 25% import tax on steel imports and a 10% import tax on aluminium imports. Every tariff makes somebody happy and Trump has certainly gained some supporters in the steel mills of Illinois who welcome the prospect of getting back to work, but ...
The trouble is that economic nationalisation cannot be practised in isolation – there is always a backlash. In this case it’ll be global, given the nature of the products, and it started out treating friend and foe alike. I’m guessing that the target of Trump’s ire is China. The fact is that traditional allies, such as Canada, UK, Brazil and Mexico (big suppliers of steel to the US), will bear the brunt of it. The implications for these players and other steel-related industries in Europe go far beyond acceptable collateral damage, driving Trump to already start about talking exemptions.
At stake is a far bigger game – the superpower league. Steel and aluminium aren’t exactly the pillars of trade between US and China.
As part of a (very successful) determined, longterm strategy, the state in China has come to the assistance of its own exporting industries. That is entirely different from dumping, when products are sold in the importing country at below the price in the exporting country in which they are manufactured. Both strategies seek to gain footholds, or increase market share, in the target foreign country at the expense of its local players. Dumping is generally accepted as an unfair trade practice.There is, of course, a difference between natural advantage and purposeful assistance. It is common cause that “natural” trade develops between countries with different natural resource and skills environments. The law of supply and demand will determine the fair price at which excesses and shortages trade, and where the market will clear.
Sport is no different. Natural talent (or even physical attributes like height, in high jump, or weight in wrestling) results in a competitive advantage, difficult to beat. But what if you wanted to win at any cost, like China does? That’s when you start taking steroids, and whatever other performance enhancing drugs you may need to win. China has selected certain of its industries for steroid programmes and they’re starting to win, big. But is it fair?
It’s not fair. In sport there are governing bodies that make (and enforce) rules to ensure a level playing field. You get disqualified if you break the rules. In the game of global trade there are many bilateral (or broader) trade agreements that seek to regulate a fair game between often not “equal” players, to mutual benefit. Such agreements may well be the hidden agenda behind specific tariff wars, as I suspect the North American Free Trade Agreement is, at least in part, now.
The right of sovereignty prevails, as it probably should. The cost of international capital, and other broader necessities for continued economic survival, often sort out less fundamental spats.
World leaders are however charged with being more responsible when they exercise such rights, lest they end up on the playground with nobody to play with, let alone fight.