Trade Wars of the United States

In the past few months, President Donald Trump has authorised a series of protectionist measures, the likes of which have not been seen in the post-war decades. The first salvo was fired in early March 2018, with the imposition of tariffs on imports of steel and aluminium from all countries except its immediate neighbours, Canada and Mexico. The President of the United States (US) then turned his attention to China, announcing that relatively high tariffs would be imposed to counter, what he perceived was “unfair” trade practised by the second largest economy. Both acts of protectionism were promptly responded to by the targeted countries, resulting in a virtual trade war between several major economies. In particular, China adopted a tit-for-tat strategy, escalating the conflict. Over the past two months, the two countries have raised tariffs on $100 billion worth of bilateral trade, and both have threatened to expand the net much wider.

 

The trade conflagration seems to be particularly ill-timed. Over the past several months, major economies, including that of the US, have seen sustained growth, which has not happened since the economic recession of 2008. In this distinctly upbeat mood, not many would have anticipated these conflicts, less so the intensity of trade retaliation that is on view. But, now that the initial rounds of trade retaliation have played themselves out, there is a need to consider carefully, the implications of the actions that have already been taken and also those that are likely in the months ahead. While a trade war between the US and China would have an adverse impact on global economy, the unilateral actions taken by the two countries bypassing the rules-based multilateral system under the World Trade Organization (WTO), could have a far serious impact on global economic governance.

 

This article will put in perspective President Trump’s protectionist policies. We will argue that the US President is diverting the attention from the structural problems in the world’s largest economy which have caused its trade imbalances by blocking imports from the major economies. We will first examine whether the US trade administration has adequate justification to target its partner countries. This question has added relevance since President Trump had drawn a link between imports by the US and the decline in its manufacturing sector, which has, in turn, resulted in job losses.

 

 

In order to assess whether US trade protectionism is justified, we will have to take a somewhat long-term view regarding the external payments situation of the US. Figure 1 provides a summary of the external sector of the country from just before the breakdown of the Bretton Woods System in 1971.

 

 

The figure shows that except a very few exceptions, the current account was negative, largely on account of the deficit in goods trade. From the late 1980s, the services sector of the country entered into positive territory and the surplus kept increasing, but this increase was unable to make any dent in the rapidly deteriorating goods trade imbalance.

 

The key aspect of the goods trade deficit was that a noticeable increase first appeared in the 1980s, which kept growing through the decade. After a small improvement in the initial years of the 1990s, deficit deteriorated after the mid- 1990s, and at a rapid rate since the early years of the new millennium, which also coincides with China’s joining the WTO. This is where the US administration finds a justification for blaming China, namely that China took advantage of the “permanent normal trade relations” (PNTR) to increase its penetration into the US market. 1

 

Figure 2 provides the trends in the trade account of the US and China using the data provided by the United States Census Bureau (USCB) of the US Department of Commerce.