9

I'll call it a Trade War, because I don't know that there is a more appropriate phrase.

Initially I understood the administration's goal was to stimulate US producers to be more productive, so as to grow the US economy. (build more steel plants etc, put more people to work) A goal that I sense few would complain about.

But lately the goal seems to be shifting to reducing trade deficits. Somehow a trade deficit is viewed as "bad". Although, (in my ignorance) I fail to understand why there is something evil about a trade deficit. (BTW, is a trade deficit synonymous with "ripping us off")

So what is the goal of the administration tariff hiking and counter hiking according to statements from the administration?

(File this under looking for "Trade Wars for Dummies") BTW. in cases there is any question - the "dummy" I'm referring to here is me!

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    I think approaching it as general macro economics and not the current instance or at least not focus on the specifics of a plan would be better to avoid speculation. Maybe "Why does trade balance (not) matter?" or "Who do trade barriers help?" and leave Trump out of it. – user9389 Jul 25 '18 at 18:07
5

The answers and comments have been focused on why any given country would launch a trade war as opposed to why the current US administration has launched a trade war. Though these align on many counts, it is important to consider the stated goals of the administration in taking these actions.

Trump has, since his campaign, championed 'Fair' trade, not free trade and has argued for the renegotiation of several trade deals. While its impossible to know the true motivations for any actions undertaken, Trump has appeared to be "waving the threat of punitive trade tariffs as a bargaining chip to force pro-America concessions from our trading partners." and has been putting these tariffs on items that are produced in the areas that voted him in - most of whom have lost some amount of business to international competition - for a two-birds-with-one-stone action. Reducing the trade deficit is a stated goal in both the tariffs themselves as well as the renegotiation of trade deals.

Whether or not this is a sound or feasible way of achieving these goals is outside the scope of this question if answerable at all. The question of whether a trade deficit is inherently bad is a better question for Econ.SE

  • As the OP, I did NOT ask about motivations, let me make that clear. I 'think' your answer is "Fair Trade" and "reduction of Trade Deficit". "Fair" trade is a rather subjective basis upon which to go to war, I don't know how to attach a metric to that goal. Since it can not be measured, how would the US know if they are achieving that goal. On the other front, deficits, that is clearly measurable. But is there any consensus that Trade deficits are somehow bad and worth going to battle over. – BobE Jul 26 '18 at 15:28
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    @BobE The "fair trade not free trade" is completely subjective, which is why it works as a rallying cry. Much like Bush's "mission accomplished", trade will probably be declared "fair" when Trump is up for reelection. There is a strong consensus among economists that trade deficits are not inherently bad and that protectionist measures like those being enacted are inherently bad. This has happened before in US history, look up the Smoot-Hawley Tariff Act – Gramatik Jul 26 '18 at 15:36
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    I would agree that the straight-forward question "are trade deficits inherently bad" is more appropriate for econ SE. However because trade deficits are being used to advance action being taken in US government policy and international affairs the question of "goals" is appropriate to politics SE. Thnx – BobE Jul 26 '18 at 15:39
3

Bad trade deficit

Mercantilist trade theory holds that the ultimate goal of trade is to increase the amount of money flowing towards you. As such, a trade deficit is bad because it has money flowing away from you.

An alternative explanation is that what is important is employment. If a country stops importing something and instead produces that product itself, presumably that will employ more of its citizens.

There are many criticisms of both views. I'll just mention two.

  • Mercantilism doesn't matter when your country prints the money it uses to buy imports. As such a country may produce as much money as it wants.

  • If employment is what matters, a country could just produce different goods (or services). Then it would have both the imported goods and the goods it produced, making it richer.

Regardless of whether trade deficits are actually bad, this is what most people mean when they say they are bad. Either they are taking our money without giving any back or that they are taking our jobs without offering replacements. Even if these claims are silly, they are still what people are claiming.

Trump goals

Donald Trump and other members of his administration have said that they want symmetrical free trade. So if the United States has low tariffs on goods coming from China or the European Union, then China or the EU should have low tariffs on goods coming from the US. They believe that the trade war will hurt the other countries or groups more than it hurts the US. Remember that under their theory, we trade to get money or jobs. Because the other side gets more money and jobs, they are more vulnerable to the trade war.

An alternative view would have it that we trade to get goods. Because the US imports more than it exports, it has more to lose than the places that have trade surpluses with it.

Right or wrong, the Trump administration has a set of beliefs about how international trade works. They are in fact trying to run the country much the way that they try to run companies. For companies of course treat money as equivalent or even superior to goods. There is little argument with this at the corporate level, as they can't print money of their own. Their chosen path is consistent with that set of beliefs. It is frequently criticized by people with a different set of beliefs (e.g. me).

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    "Mercantilism doesn't matter when your country prints the money it uses to buy imports. As such a country may produce as much money as it wants. " No it can't, that leads to inflation. Specifically if the US does it, it can hurt other countries too which peg their currency to the dollar, or actually use the dollar as their official currency as well. – Andy Jul 28 '18 at 15:54
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    @Andy If you give the money to someone else, then it doesn't count for domestic inflation. Or if another country sends the money back, then it does count for domestic inflation. I.e. trade deficits are themselves deflationary. Trade surpluses are inflationary. This is because inflation occurs when money divided among goods is increasing. A trade deficit increases the amount of goods (deflationary) and decreases the domestic money supply (deflationary). A surplus decreases the amount of goods (inflationary) and increases the domestic money supply (inflationary). – Brythan Jul 29 '18 at 2:56
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    Everything in your comment is wrong. Part of the value of currency is how much is in circulation. It does not matter where on the planet the bills exist, if there was 100 today and 1000 tomorrow, the value of the currency has lessened, and it will impact prices domestically. What you are advocating is exactly what Germany did between the world wars (print more money to increase exports), and it destroyed their economy. – Andy Jul 29 '18 at 14:35
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    @Andy I am not advocating printing more money to increase exports, as that is absurd. I am saying that increasing exports without increasing imports is bad. But if you can't be bothered to read even that much before commenting, I doubt that you will understand this either. Your view of inflation is naive, because it acts as if goods don't exist. I'm not advocating printing money; I'm saying that printing money is better than exporting because it is only inflationary because of the money. Exporting is also inflationary because of goods. – Brythan Jul 29 '18 at 19:03
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    Your view of inflation is incorrect, and its relation to exports is also incorrect. Printing money is NOT better because it only causes inflation. Increasing exports increases economic activity and wealth. Unless you want to claim that China would be better off just printing more of its currency instead of being the leading exporter? – Andy Jul 29 '18 at 20:16
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tldr: to bring China to the negotiating table while looking "tough" to much of the world.

While much has been made of the Canadian and European tariffs, they really are quite inconsequential. This is to the point that a lot of major media outlets began covering the great Canadian ketchup boycott(1)(I think it was ketchup anyways), which goes to show how little actually happened to the economies affected. The tariffs on China, while bigger, are still nothing to be concerned about taken as is.

With America's huge economy and a reliance on exporting to it, you would think that China would try to make sure that America doesn't get too pissed. However, this is far from the truth, as the protectionist and sometimes blatantly unfair Chinese policies show.(2)So what does America do? The natural answer is that it flexes its economic strength and raises tariffs. Of course, a trade deficit("stealing jobs from Americans!") is a much simpler soundbite, but it really isn't anything to worry about, and Trump probably knows that.

Whether China will bow down to pressure before Trump raises the heat is another thing.

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    Your tldr is accurate, but I think you underestimate the damage that the trade war can do/is doing to the US economy. It doesn't threaten the US economy as a whole as of yet, but the targeted Chinese tariffs have already forced Trump to take some drastic action in authorizing $12B to bail out farmers who are being hurt by it, which is just the beginning of the damage control. politics.stackexchange.com/questions/32462/… – Gramatik Jul 27 '18 at 15:27
  • @Gramatik , bailouts and temporary market downturns are already a way of life in modern-day American economics. What hasn't happened before(in the last 30 years at least) is an adversary that is threatening to overtake the U.S in technological dominance simply by unfair business practices and stealing information, both "legally" and illegally. – ChickenWingGeek Jul 28 '18 at 18:38
1

Although Trump didn't outright declare it as a "win"; the deal his administration struck with South Korea is probably indicative enough of the goals pursued. The Trump administration self-praised the deal as "visionary and innovative" and also as "a very productive understanding".

Under the revamped deal, each US carmaker will be allowed to export 50,000 vehicles per year to South Korea that meet American safety standards, up from 25,000 previously. Beyond that threshold, cars shipped from the United States will have to comply with South Korean safety rules, which American companies say put them at a disadvantage.

But analysts say the increased quota is unlikely to make much difference anytime soon. No US automaker sold more than 11,000 cars in South Korea last year. [...]

The revised deal also postpones the phasing out of a US tariff of 25% on pickup trucks from South Korea. It will now end in 2041 rather than 2021. Capital Economics says no Korean automaker exports pickup trucks to the US at the moment.

The agreement will limit South Korean steel exports to the United States. The cap will be set at 70% of what South Korea sends over in an average year now. After 70%, South Korea can't export more steel to the United States in any year.

Also

The United States also won a commitment that South Korea would open up its national drug reimbursement program to American companies, which previously have not been able to receive payments under the program.

And in return:

South Korea will not be subject to the broad 25% tariff that Trump has imposed on most other countries. He has granted temporary exemptions to several other US allies, including Canada, Mexico and the European Union.

South Korea will still be subject to the 10% tariff on aluminum that was imposed on most nations.

And something less clear what exactly it entails:

South Korea won certain “procedural guarantees” regarding the administration of U.S. anti-dumping laws and import duties meant to counteract subsidies.

So it looks like "winning" means getting market access concessions in return (mostly) for granting exceptions from some of the newly imposed tariffs and perhaps some promises of less aggressive enforcement of US regulations on foreign companies. N.B. these concessions look like something Trump could reasonably sell to his electoral base as having achieved a (more) "'fair' trade" with South Korea. Trump has personally commented on the deal with South Korea along those lines:

"Just this week we secured a wonderful deal with South Korea, we were in a deal that was a horror show," Trump said. "It was going to produce 200,000 jobs and it did, for them. That was a Hillary Clinton special, I hate to say. ... So we've redone it and that's going to level the playing field on steel and cars and truck coming into this country."

In contrast to these the "soy bean concession" Trump got from the Junker/EU (a promise by the latter to buy more) sounded a bit less concrete; as discussed in a question here.

-2

The essence of a trade deficit is that exports are less than imports from the point of view of a country with a trade deficit. This is traditionally seen as undesirable because in effect the market for that country's goods is smaller than its trading partner and therefore lower demand is lower return

You can examine this by examining the country of "You". As a grown human you regularly trade your only resource (your labor) to an employer for the employer's resource (cash). You take your paycheck and buy everything that enables your to produce more labor. In that case there is no trade deficit since "cash" can be converted to anything you want.

A labor trade deficit can illustrated by the use of the company store. Many large employers would use the company store and company housing as a form of causing a trade deficit with the labor. That is instead of trading you cash for labor, they would give you credit at the company store, housing and a little cash. This had the effect of trading something that had a value disparity between the two parties. For example if housing costs $500 to a normal laborer that gets a paycheck it actually costs less to the provider. So the company provides $500 of value to the employee which cost the company less. Additionally the laborer cannot covert that $500 of value to anything else (such as living in a smaller home, or even building your own home and saving the rest).

To tie this to a country's economy it can be argued that if a country can produce a resource for less cost than another, that country can sell that resource for less than other countries. The other countries have no choice but to buy that resource and not produce it themselves.

Here is where there are two schools of thought on why this is not desirable.

Trade Deficits don't matter

If a country can buy enough of a resource from another country doesn't that already mean that that country is rich enough to afford it?

Trade Deficits are bad

The costs of a resource is now double for me since I have to buy the resource and I miss out on the opportunity cost of not producing it myself.

These two statements are oversimplifications of course, there are more social issues associated with not producing a resource such as large unemployment of the blue collar class, large disparity between the classes and military strategic issues (If there is a war, I can't produce a resource since there is no one with the knowledge of how to produce that resource)

On the other hand, the trade deficit country, because of technology, can dismiss all these issues, for example, blue collar workers can be re-educated to other trades, everyone benefits from lower prices, and the world is smaller because of technology so if there is a war I can buy whatever resource I want from any place in the globe because I have huge cargo jets.

My opinion is that human nature cannot be change by technology, people vote with their gut, so unemployment makes people feel bad and showing that what they chose as a career is obsolete by retraining also causes bad feelings, technology can fail, often in a catastrophic cascading event.

Business men like Trump know that markets also run on feelings. Only by destabilizing the status quo can there be a chance of changing those feelings. It is a gamble with no assured winners. It goes against good politics. However, remember "Too Big To Fail", that worked for him before. What I mean is that we are China's biggest customer, will that give us enough leverage?

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    Appreciate your effort, but just to be clear is your answer (in a nutshell) the goal is "destabilizing the status quo" for political advantage. That the trade deficit rationale for trade wars is just cover for that ultimate goal of (domestic) political advantage (or manipulation)? – BobE Jul 26 '18 at 16:00
  • Will that give us enough leverage...to do what? Not sure the actually addresses what the intent is (not there is one, of course). – user1530 Jul 26 '18 at 21:03
  • @blip I'm surprised that this is not obvious. What is desired is that US resources have more demand than foreign resources, for example steel, because of the lower cost of labor in china and manipulation of currency, it is cheaper than US steel in the world market. By leveraging the need that the US is a big client of manufactured goods the US can enforce a tariff on china steel while china will not impose a similar tariff on US steel. – Frank Cedeno Jul 27 '18 at 11:11
  • While the US is China's biggest customer, it's by no means a 'too big to fail scenario'. Note that only 19% of Chinese exports are destined for the US. On the other hand, China owns over 1.18 trillion$ in US national debt. So it sure doesn't want to see it fail yet. That might change over time as we see China expand its horizon towards Africa and South America and not having to care about the small fraction of export that goes to the US. And keep in mind, a break in trade will probably hurt the US more than it hurts China. – JJJ Jul 30 '18 at 21:18

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