US trade policy is bad economics

President Trump's Make America Great Again Mark 2 policies are unlikely to raise living standards for Americans. We have already seen the hit to the US stock markets, with more than $4 trillion in value disappearing in the last two months, especially impacting some of his wealthiest supporters.

Earlier this week, we saw economic growth predictions in major economies revised downwards by the OECD as a result of higher trade barriers and the policy uncertainty around their implementation.

How does this make Americans better off? It does not, as these people were not being taken advantage off by other countries running a trade surplus with the US. On the contrary, a country running a large trade deficit is increasing its real living standards by importing and consuming more goods and services than it produces net of exports, thus Americans enjoy a higher standard of living.

Of course, not every country can do that as for every deficit there has to be a surplus in a zero-sum game. Deficits are a problem financially if persisting in a country that lacks foreign exchange reserves. However, the US produces the main international currency and does not have that limitation – it can run deficits on an ongoing basis and regularly has. If we add to that the benefits of affordable, well-made goods from China and other lower production cost economies Americans enjoy, we can see how tariffs on imports will hurt US consumers.

Trump's much touted example is the imbalance in trade in the automobile industry between the European Union and the US - they don't import enough American cars. Having lived and worked in the US, I recall that many of my American friends preferred to buy foreign brand cars with high reliability ratings and good fuel economy with most made in the US of course. Why should they be surprised if European counterparts also like these types of cars, which are already produced in Europe? Europeans are not going to pay the transport costs of similar cars from the US.

Add to that, Ford produces in Germany for the local market as does Trump's new favourite, Tesla. Musk's Telsa also has a wholly foreign-owned factory in Shanghai. Those American companies get back profits to the invisibles account of the US balance of payments. This isn't the "unfair” EU cheating on trade in cars, but consumers exercising their free choice in the market - many traditional US cars are too big or too fuel hungry for European conditions.

There is merit in re-shoring manufacturing to the US to create jobs, but it should not done be by encouraging less efficient production sheltered behind a high tariff wall. US consumers should not have to pay more for a similar or even less reliable product. It would be better to let market forces work this out through the growing use of AI and robotics, which reduces the labour cost advantages of US companies producing overseas. Then we get efficient production coming to the US that benefits Americans.

A final problem with Trump's use of tariffs is that they are political bargaining chips to achieve other ends. If trading partners can sort out the issues Trump alleges or if they can find ways of encouraging the import of American products, there would be one logical outcome - Trump then reverses these tariffs as part of "the deal”. Why would any sensible company invest more in US in that scenario without certainty of ongoing tariff protection? The reality is nobody wins and these trade wars must be wound down.

Colin Speakman is an economist from the UK and an international educator specializing in China. The opinions expressed here are those of the writer and do not necessarily represent the views of China Daily and China Daily website.

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