All Commentary
Wednesday, April 5, 2017

Trade Wars Make Casualties of Us All

Should we punish Fred because Peter robs Paul?

Military warfare is not the only kind of warfare that causes injury to innocent bystanders. The same inescapably happens in the economic wars waged by governments. But in economic warfare, the apparent victims of “collateral damage” are often, in fact, targeted victims themselves.

On March 29, 2017, The Wall Street Journal ran a story highlighting the Trump Administration’s likely intention of getting tough in trade talks about American beef sales to the European Union.  Being more concerned with the “natural” than with the United States, the European Union long ago imposed trade restrictions on imports of American beef that had been raised using artificial hormones.

“America” and “Europe” do not exist as living, breathing entities.

This decades-long dispute was adjudicated by the World Trade Organization in 2008. The WTO said that the EU lacked the authority to impose such restrictions on U.S. and Canadian imports and that the latter two countries could impose retaliatory import duties on EU products until the European Union lifted its prohibition on North American beef imports.

A deal was made in 2009, the WSJ reports, under which the EU would allow a larger import quota of hormone-free US beef, but the restriction on hormone-treated beef remained basically in effect. The US, therefore, retained a series of retaliatory tariffs on EU products equal to a market value of $38 million, although the WTO ruling would have allowed the US could raise that tariff barrier to a market value of $116.8 million.

The US has been reluctant to do so, but American beef growers are complaining that the EU regulators have dragged their feet on even allowing the agreed-upon greater amount of hormone-free beef.

Enter the Trump Administration. Having declared his intention of getting tough on US trade deals, Donald Trump’s government is threatening to impose these additional import taxes on EU goods, so America gets a better deal in our trade relationship with Europe.

The problem is, “America” and “Europe” do not exist as living, breathing entities. They are shorthands for all the individual consumers and producers who happen to live and work in the areas of the globe that are purportedly under the respective jurisdictions of the United States and the European Union governments.

Military Warfare and Collateral Damage

In America’s wars in the Middle East, the US government declares that the Islamic State and Al-Qaeda are its military targets. But, again, neither represents an actual entity. These two religious and terrorist organizations are composed of individual human beings, from the top leadership to the fanatical foot soldiers who undertake those ghastly attacks on various groups of people.

These individuals move among the rest of the society. As a result, targeting members of the Islamic State or Al-Qaeda, even with the most precise weaponry, runs a high risk of injuring or killing civilians who have nothing to do with the claimed target.

Referring to such victims as “collateral damage” doesn’t reduce the human cost, but, at least in principle, reducing harm to bystanders is a stated goal.

When the Bystanders Become the Targets

In economic warfare, however, there is an important difference. In virtually every instance of retaliatory trade warfare, the targets are innocent bystanders having nothing to do with the original trade dispute.

The economic warfare initiated by French beef interests ends up harming many of their fellow Europeans.

Suppose that in France a group of domestic beef ranchers organize themselves to pressure the government in Paris to use its influence over the EU regulators in Brussels to impose a restriction on imported American beef. Needing a more lofty rationale than mere special-interest begging, they join forces with touchy-feely environmentalists who claim that cattle raised using certain hormones are more likely to cause cancer in human consumers (a claim that the WTO rejected as not scientifically proven).

Who are the victims of this act of economic warfare? Certainly, American beef exporters lose sales, market share, and profits in the European Union. But the burden also falls upon all those European consumers who would have been interested in buying American beef because they considered the quality and/or price to be more attractive than the European-raised alternative. Their choices as a consumer have been narrowed and they will almost certainly end up paying more for beef as a result.

Another group of victims consists of the European supply-chain participants who assist in the importation, packaging, transportation, final sale of American-raised beef. At least a part of their business and perhaps all of it is ruined in the name of profits and paybacks for the well-connected.

Thus, the economic warfare initiated by French beef interests ends up harming many of their fellow Europeans in the name of defeating their American rivals. But the story does not end there. Suppose that the United States government decides to retaliate, as the WSJ reports that the Trump Administration is thinking of doing in this case. Who will be the victims of Trump’s counter-attack?

The “Bystanders” in Economic Retaliation

According to the WSJ, the planned targets of U.S. import restrictions will be Perrier mineral water, French Roquefort cheese, Italian Vesper motor scooters, and some Swedish-made dirt bikes. In other words, the targets for America’s economic warfare retaliation are producers of goods having nothing to do with French cattle ranchers or anti-GMO activists.

The innocent bystanders are the target, precisely because there is no way to aim at French beef producers if they do not sell any of their meat in the United States; nor can the anti-GMO activists be easily targeted either, especially if they don’t actively work to spread their message in the United States – no “severe visa vetting” will work here!

All of the European producers targeted for trade retaliation by the Trump Administration would be intentionally punished with lost sales, reduced market share, and reduced profits because of the interventionist lobbying efforts of beef producers in the halls of European political power.

Virtually every sector of the American exports will be negatively affected in the name of redress for American beef ranchers.

Furthermore, those American consumers who wish to purchase these targetted European products will be part of the “collateral” damage, denied the ability to purchase these products and at prices not manipulated by the United States government. Their standard of living will be reduced. Every participant in the American supply-chain who brings those European products to market will also likely suffer reduced profits.

Let’s not forget that the European producers of Perrier, Roquefort cheese, and scooters and dirt bikes will have a reduced ability to buy American exports. Thus, virtually every sector of the American exports will be negatively affected in the name of redress for American beef ranchers.

Punishing Fred Because Peter Robs Paul

Another way of thinking about this might be the following. Suppose that you hear about a Frenchman named Peter who bullying Paul, an American visiting Paris. You tell Peter that if he does not stop his bad behavior toward Paul, you will step in. When Peter continues his bullying and beating of poor Paul, you say, “I warned you,” and you start hitting a Frenchmen named Fred visiting New York City plus an American named Frank who maybe has occasionally met Peter, but both of whom have nothing to do with whatever may be the problem between Peter or Paul. You then say to Peter, “I told you I was serious, and I’ll keep hitting Fred and Frank, and maybe even someone else if you don’t stop beating up on Paul.”

First, there no guarantee that Peter is going to be moved to stop his beating up of Paul because of your hitting of Fred and Frank, especially if Peter views himself as better off by hitting Paul. And, secondly, you’ve now inflicted harm on two innocent bystanders who had nothing to do with the original problem.

Fred and Frank are unwillingly drawn into the dispute and victimized because of someone else’s unfortunate situation. This merely extends the pain to an enlarged circle of people in the society. Fred and Frank may be able to honestly say, now, to Paul, “I feel your pain,” but that does nothing for poor Paul.

Long ago, in 1896, the British economist, Henry Dunning MacLeod, colorfully explained the effects from introducing retaliatory tariffs on a country that has imposed trade restrictions on one’s own nation’s goods. He said:

“By the method of retaliatory duties, when the Frenchmen smites us on one cheek, we immediately hit ourselves an extremely hard slap on the other. The Frenchmen, by his duties, does us an injury, and we, by retaliating, immediately do ourselves a great deal more.”

If this sequence of trade retaliatory events were to continue with one counter-trade restriction after another, economic warfare then threatens a downward spiral with reduced trade among nations, falling profits and employments in export and import sectors, and declining standards of living in all countries following this wealth-destroying path.

Yet, this is precisely the path that the Trump Administration seems intent on following. The “beef war” between the United States and the European Union could be the opening shots in a series of conflicts in which U.S. government pulls out economic weapons to inflict pain on a widening circle of innocent bystanders in the name of a misconceived notion of how to make America “great.”

  • Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.