A global trade war is possible

US President Donald Trump’s announced plan last week to raise steel tariffs to 25 percent and aluminium tariffs to 10 percent were designed to disrupt the trade in steel in which the US is the major importer.

This announcement has caused immediate and adverse reactions from steel supplier countries. The consequences of reactions to this heavy tariff measure is darkening the horizon for global trade and for the stock markets.

 “Steel and the production supply chain.” The US has become a large importer of steel. Over time, its domestic steel industry has lost its former competitive edge, hence declining in capacity and employment.

Ten countries supply 78 percent of US steel imports. The biggest supplier is Canada whose recent exports of steel are close to $6 billion per year. Other countries are substantial: Brazil, South Korea, Mexico, Turkey, Japan, Germany, Taiwan and India.

China is one of the direct exporters of steel to the US, though sometimes not as big as the other nine. However, China exports many goods with high steel content directly to the US than many of them.

Like energy, steel has a strong production linkage with many parts of the economy. Steel is a part of the raw material supply chain for many products.

Heavy tariffs to protect the domestic steel industry also imparts higher costs on production. In effect, the additional tariff serves as a tax on other domestic producers that use steel inputs as well as on consumers.

The Trump administration also invokes national security as an additional justification for protecting its steel industry. Such a justification also accepts the higher cost on “non-economic” grounds .

“Forebodings of a trade war.” The reaction of major countries that are likely to be hit by the high tariffs was swift for some countries.

To protect their interests, the aggrieved parties look for retaliations of the tit-for-tat variety to inflict similar damage.

The European Union almost immediately announced that it would act to target specific American exports to the EU: Harley Davidson motorcycle, Levi’s jeans, and bourbon whiskey.

In a further elaboration on trade issues with Europe, President Trump hints that European car imports into the US could be subjected to higher taxes. This has caused further concerns about European car exports to the US.

Canada spoke immediately, through Prime Minister Justin Trudeau, who said that such planned measures could have unacceptable implications on Canada so that they would have to defend their own industries.

Canada and Mexico (another supplier of steel) are the other partners of the US in the North American Free Trade Agreement (NAFTA). Depending on how steel in NAFTA would be treated, their reactions could be either mollified or badly bruised.

The potential impact of a renegotiated NAFTA would determine how important that trade agreement would be to the economic future of the signatories. Are they on the way toward lower expectations?

As if to anticipate all these reactions or to take the trade initiative in these matters, President Trump has twitted on March 2:  “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win….”

The US, in imposing high tariffs, could make short run gains from that action, but the long run impact is less certain. The subsequent long term outcomes depend on the counter-measures and adjustments that those affected would adopt in response.

A trade war, if it breaks out, is trade-reducing, therefore, its impact will be welfare-reducing for all involved. A trade war is to “beggar-thy-neighbor”, to inflict harm, not bestow benefit, on trade partners.

The reaction from the other major suppliers of steel to the US is muffled, although rumblings of disappointment are heard. This is because in general, these other countries are associated with the US as allies.

Yet each country maintains a unique trading profile with the US. Bilateral relations are likely to be adjusted, partly in response to the changing trading patterns. It would be expected that they would also adjust their bilateral trading relations to protect their own economies. Thus, they would also devise ways to retaliate and reduce the harm done to them directly.

There are always areas of flexibilities in bilateral trade. As in the case of the European Union response, retaliations could be in terms of those large purchases of agricultural products that the US exports (such as soy beans, oranges and fruits, meat and livestock, wheat, etc.) and industrial products that are of significance in the bilateral volumes of trade.

And then, there is the matter of holdings of US debt that these countries have. It is a mighty weapon that could inflict damage on the US economy, by friends and foe alike which hold US debt as assets.

“China’s reaction.”  Among the participants in this problem is China. The biggest trade rival of the US today is China. How is China reacting?

The signals are not clear, except that it is more restrained. Unlike the European Union’s retaliatory stance, China’s reaction is so far muffled.

China could play as an aggressive retaliator or as a passive trade partner that manages the changes in relationship.

In fact, China could hurt US exports by squeezing its imports of soybeans or airplanes, for instance. Or it could apply the pressure on American companies with big operations in China, such as Apple, Intel or other foreign companies with large activities in the country.

It could play either role. So, on the gravity or reality of a real trade warfare rests in part on the manner in which China reacts to these aggressive trade tactics that the US in trying to employ.

To match them tit-for-tat fully could escalate and produce a truly disastrous global trade war. To manage these matters and subdue them with calm tactics also could improve China’s standing as a reliable partner in trade.

“Impact on the Philippines.” As in all cases, I ask, what will be the impact of a global trade war on the Philippines? We are a small bystander, like a pawn.  Our export industries would be at the mercy of the intensity by which a global trade war imparts harm on other markets.

My email is: [email protected]. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/