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Thursday, October 18, 2018

A Visual Summary of the 2018 Trade Wars

Are Trade Wars really good and easy to win?

Shots have been fired again on both sides this week, but many are still in the dark regarding this Trade War. Why does it matter? How will it affect you? What is Trump trying to achieve? Trump’s tweets, confusing at the best of times, have not been much help in understanding this incredibly dense and convoluted subject.

For those of you who are more visual, this image summary provides a quick and easily understood overview of the matter, with all sources provided at the base. I’ve recapped and expanded on some of the main points below.

What are tariffs, and why do they matter?

Basically, tariffs are a tax applied to imports from other countries. The reasoning behind this is:

Higher taxes on incoming foreign products will make them more expensive and less likely to be imported means local products will seem cheaper in relation, making local business more competitive.

Traditionally, the US has been an advocate for free trade, but Trump is now using protectionism and tariffs.

In theory, it’s a way to support domestic production by restricting cheaper overseas competition. This is called protectionism.

Free trade is the other end of the spectrum. Free trade suggests that instead of trying to produce everything locally, countries should specialize in certain items and use those items to trade at a global level.

Traditionally, the US has been an advocate for free trade, but Trump is now using protectionism and tariffs to formulate his economic policy.

Why China?

Trump has also targeted Canada, Mexico, and the EU over the past few months, but China is the main focus of his tariffs for various reasons, with the two main arguments linked to the trade deficit and intellectual property.

Sounds great, but firstly, what is a trade deficit?

A trade deficit means one country imports more products than it exports to another country. For example, the US currently imports $504 billion worth of goods from China, while China only imports $130 billion worth of goods from the US.

Is this a bad thing? Trump seems to think so, tweeting in 2014:

As rousing as this sensationalistic tweet is, having a trade deficit doesn’t necessarily mean you are being “ripped off.” Yes, your country isn’t exporting as many goods, and some industries could suffer, such as US manufacturing jobs, which were losing out to cheaper, Chinese alternatives.

But remember how the basis of free trade is about specializing in certain areas? China dominates the manufacturing industry globally while the US has shifted in the past 100 years from exporting goods to mostly exporting services that include travel and tourism, financial services like banking, and environmental services.

Another silver lining from importing many goods is all that foreign competition. Competitiveness in the market will generally lead to more innovation from local suppliers, such as improvements in technology, design, or just superior quality products. This, in the long run, is better for the consumer, offering more brands, value, and choice.

Many Americans support the idea that the US should “get tough” on China for “stealing” intellectual property.

So that was motivation number one—balance out the trade deficit and consequently save local jobs. What about Trump’s second point? What does intellectual property have to do with trade?

American companies usually have to hand over proprietary technology as a condition of doing business with partners in China. The US believes this is an unfair practice, and many Americans support the idea that the US should “get tough” on China for “stealing” intellectual property.

Obviously, China having access to trade secrets, patents, and technological advancements takes away the US’s competitive edge in not just a commercial sense but also a military sense. Because of this, the matter can be technically deemed an issue of national security, which in turn can be used as a justification for Trump’s new protectionist agenda.

So, is the trade war a good idea?

Economists across the board seem to think mostly “No.”

Historically, trade wars and government measures that use tariffs as a way to boost domestic production have backfired. While tariffs may save some jobs in certain industries, there are many other industries that are now threatened because they rely on either global consumers or cheaper imports to operate.

The US is now experiencing retaliation from China, which has set in place their own tariffs, as have Canda, the EU, and Mexico.

The increase in cost associated with sourcing produce locally or paying an additional 10 to 25 percent in tariff costs is usually passed down to the consumer, making items generally more expensive.

Also, the US is now experiencing retaliation from China, which has set in place their own tariffs, as have Canda, the EU, and Mexico. As a result, many US companies or small businesses that export their products overseas are now suffering, particularly farmers.

Approximately one-fifth of US exports to China are agricultural products. Soybeans happen to be the largest single export to China, and the crop was a target of China’s when they chose which US products to impose their own tariffs on. Trump claims China is targeting farmers in an attempt to influence them ahead of the US midterm elections.

Now Trump is offering farmers aid packages to reduce the effects of lost sales and has been construed as favoritism. It’s unclear what the lasting effect on the industry will be.

There seems to be no sign of this Trade War slowing down, either. Last Monday, both sides put a second round of tariffs in place. The Trump administration implemented an additional 10 percent on $200 billion worth of Chinese imports (which will jump to 25 percent on the 1st of January 2019), while China imposed up to 10 percent on $60 billion worth of US imports, covering around 5,000 products.

Trump is even threatening to add $267 billion worth of further tariffs. If it reaches that point, it would basically be covering everything China exports to the US.

So, what will happen now?

It’s hard to predict accurately, but there’s certain to be many further ramifications from this, both economically and politically. The new tariffs cover so many products that there’s guaranteed to be more price increases, potential company relocations, new trade agreements with other countries, and rising tensions between nations.

So, are Trade Wars really easy to win? The jury is still out on that one because no one really knows what “winning” this Trade War would actually look like.

  • Demi Barclay is a marketing and research officer for Trade Machines.