About That Trade Tariffs – Episode 2

By | March 12, 2018

In our recent post named “About that trade tariff – (And another example of MSM’s bias coverage)”, we pulled data from World Trade Organization (not some economist from Goldman Sachs or Harvard), where data shows strong discrepancies of import tariffs applied to various categories of products between China and US (Below is an screenshot on the top products and you can download the full comparison file in excel format here). From that level of tariff discrepancy, you can’t tell this is the comparison between countries with #1 and #2 gross domestic production in the world.

Since then we have searching online for a strong rebuttal directly against our data, and there was none. Almost all speakers (economists of various Wall Street banks, economists from Federal Reserve and economists from Harvard or Yale) are all probably speaking from their memory on what was right and what may be happening. Tons of articles you saw from Wall Street Journal, CNBC or any traditional main stream news outlets are screaming from the bottom of their lungs on how wrong President Trump is to impose the tariffs, an extremely one-sided argument phenomenon that makes me wonder if I am in China or EU reading their local papers.

Let’s set a few things straight.

Is global trade a good thing? Yes, if it is fairly arranged.

Absolutely yes, if it is fairly arranged between two countries. A trade is an exchange happening between two parties: Party A using one type of goods to exchange with certain goods from Party B. This is probably one of the most basic economic activities (and oldest one) in human history. In various forms of economies, you can find example of great trade (many times necessary) examples. Certain party (person, family, tribe, society or country) may have great resources on something (resources here can be natural resource or human resources or technology resources), but they may be lacking something else (food, water or something similar). Then a trade happens, and both party get what they wanted.

In an ideal situation, trade between two countries are balanced: The amount of product 1 (or group of products) bought by Country A from Country B is approximately the same as the amount of product 2 (or groups of products) bought by Country B from Country A.

When does global trade go bad? If a persistent trade deficit exist, there is something we need to look into.

If a trade deficit exists between Country A and Country B, two things may be the reason:

  1. Country A’s productivity is higher than Country B across most of the products, therefore Country A exports to country B more in general. Remember, productivity is the amount of goods that can be produced per unit of resources. If Country A has higher productivity, its goods are produced by smaller amount of resources than Country B, therefore the price is lower than same amount of such goods produced by Country B. A example would be Germany. Germany has probably the strongest manufacturing productivity in the world, therefore it runs one of the highly trade surplus against most of the countries trading with them and such surplus is much deserved because it is not from having higher import tariffs.
  2. Another reason is that Country A charges much higher tariffs against imported products from Country B, so the citizens and companies in Country A are discouraged from purchasing products produced by Country B, not because Country B spends more resources so the prices are higher, but because Country A adds a tariff to the price to make such products from Country B less competitive on the shelf.

In the reason #2, we will claim that such Global trade relationship is not fair and equitable, if both Country A and Country B are at similar stages of economic development.

Are there exceptions to the global trade relationship described as not fair? Of course, there are exceptions. If Country A is a developing country that needs access to global market but at the same time, avoid more advanced economies crushing its essential domestic industries.  

When China joined WTO in 2001, it was not as developed as today. Its GDP was only $1 trillion USD dollar when US had a GDP of $10 trillion. China was roughly #6 or #7 in terms of economies that produce most gross domestic products. Because of opening its market for global trade, it runs some serious risks of destroying its domestic industries and creating extremely unbalanced development of its economy. As a result, WTO accepted the tariffs China had in place then: 65% to imported wheats (US charges 2.8% tariff) and rice(US charges 11.2% tariff), 25% to Motor Cars (US charges 2.5% tariff), 42% to Motorcycles (US charges 0.5% tariff), 10% on all Steel products (US charged 0% before President Trump’s tariff plan), 8% on all Aluminum products (US charges 3.5% before President Trump’s tariff plan).

Shall we still accept this arrangement?

Fast forward from 2001 to 2017, the situation has changed significantly: China is now the second largest economy. In 2017, China’s trade surplus against US was $375 billion. From 10 years from 2008 to 2017, cumulative trade deficit with China was $3.1 trillion, almost 15.7% of US GDP in 2017 (source: Census Bureau). And such trade surplus is not because China runs an economy as efficient as Germany, but because China enjoys the protective tariffs mentioned above.

Trillions of trades surplus has created tremendous wealth for the exporting country and tremendous debt to the importing country. Indeed, China is the largest holder of US Treasuries now and it has a foreign exchange reserve of over $3 trillion in US dollar denominated assets and assets denominated in other currencies. Such surplus, or foreign reserve, will soon in term to be used to purchase not treasuries but stocks of US companies, real estate in US and ownership of private businesses. Slowly the trade surplus with China will require selling more US assets to finance such purchase. Maybe one day the future generation of US citizens will live in a country that is significantly owned by another country, who was the trading partner accumulated huge trade surplus against US over the past decades. That happens when US is one of the most productive countries in the world. Is it the right thing to do? Are you still blindly supporting anything with “global trade” in its name if you are a patriotic US Citizen?

How can we change this arrangement?

This is the tough part. It is always “the bad guy” to take away the party punch bowl, or to take money away from the receiving ends. Even the relationship is imbalanced, and it was a kind gesture in the first place. However, the leverage is in the hands of party who pays more money. If you are having a trade deficit against another country, you are paying more than you are receiving. As a result, if you suggest that you want to incur less the deficit with the other party, he/she wont like it, but half the deficit is better than a trade war which risks the entire amount they are enjoying.

Therefore, if things are managed carefully (US should not show arrogance in such negotiations), to any countries that are running a surplus against US, a smaller surplus is a lot better than no surplus at all.

We believe there will NOT be any trade war from this recent tariff change. Period.

For whoever criticizing President Trump’s plan, if it is due to ignorance, please do some work to gain knowledge. If it is from other agenda (some foreign clients that your firm is dealing with or some export companies you are running), ask your conscience if you are American. Do you want your kids to work in foreign owned companies on American soil when they grow up? Do you want such economy colony to happen?

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