MR. Trump`s Trade War with China; a Transactional Approach to Solving a Structural Problem

Trade Wars with the World; Can Trump`s Approach Work

                         By

             Dr. Michael Sakbani

The Personae Trump

 Donald J. Trump was for more than three decades before running for President, a real estate tycoon in New York City, known for his hustle, hard drive and lack of scruples. He went bankrupt four times, lost his casinos and came back from financial disasters. For more than a decade, he became a TV personality with a very successful show called the “apprentice” where he relished firing job apprentices. The glamour of the show business led him to run beauty contests in and outside the USA. His adventures with women cost him two divorces, after which he encountered his present third wife, who was a fashion model. In between, he had several affairs with beautiful women which satisfied his libido as much as nourished his narcissism.

Mr. Trump`s ambitions led him into politics. He started as a New York city Democrat and when that proved nonpromising for him, he became Republican. To promote himself, he played brilliantly the TV media and kept himself in the news by all kinds of outrageous declarations and notorious public stands. His most infamous was advocating the “birther” controversy purporting that President Obama was not born in the US, and his declarations about the US being ripped off and raped by cheating China, because of spineless Presidents.

To add substance to his resumé, he hired Toni Schwartz to ghost- write for him his book “the Art of the Deal” where he claimed to be a consummate negotiator((Schwartz & Wikipedia)[i].

In 2012, he entertained running for President but recoiled when he found scant support among established Republicans. But in 2016, he seized upon the public discontent with Washington and the alienation of so many Americans and launched himself into primaries against 16 establishment Republicans. He berated all of them, thrashed their capacities, branded them with pejorative names and never debated them on their terms. He appealed to the frustration and anger of voters and promised to clean the swamps of Washington and follow a policy of America First. To the amazement of so many, he succeeded in capturing the nomination of his new party.

In his race for the White House, he ran against one of the best-known establishment figures, Hillary Clinton; ex-first lady, ex-New York Senator, ex Secretary of State, ex-prominent lawyer and ex Ivy-Leaguer. Hillary Clinton was a highly prepared candidate but an unattractive public persona and an awkward public speaker. She promised nothing new, did not take Trump seriously, and kept repeating generalities and sanctimonious platitudes. Instead of campaigning on policy issues which she buried in “Hillary.com”, she made Trump and his supporters the issue. Her campaign outspent Trump`s three to one but failed to communicate with the Democrats base in the rust belt states and failed to motivate traditional party voters. She lost the young, and white women voters (Sakbani,2016,”b”)[ii]  Although she got 3 million votes more than Trump, the US electoral college propelled Trump to victory by winning the three often democratic voting states of Pennsylvania, Michigan and Wisconsin by a combined total of 68,000 votes.

China in Trump`s focus

One of the first guests President Trump received was President Xi Jinping of China. He entertained him in his Florida residence and played Gulf with him in his Gulf course. Thereafter, he declared the guest as his friend and announced that they will negotiate a tremendous trade deal that satisfies both sides (BBC,7 April 2017)[iii]. A few months later, President Trump imposed 10 % and 25 % tariffs on aluminum and steel imports from many countries, including China. Fast in succession, he imposed tariffs on other imports from China. When China promised to retaliate, especially on imports from states which voted for President Trump, the President imposed 25% tariffs on $200 billion Chinese imports and declared that the US is ready to negotiate a reasonable balanced deal (Digital Journal, 9/ 24,2018)[iv]. Thus, he started his trade war with China.

This modus operandi is typical Trump. He puts his finger on a long-standing issue tapping accumulated anger and frustration. His first move is to throw his opponent off balance by being rough, crude and taciturn. He offers nothing and then calls for negotiations. Subsequently in this instance, he lost his way towards his end goal by his failure to follow an intelligent tactical collective coalition. This coalition-building is not what Trump knows. In real estate, a unilateral approach might be fruitful, but in international trade, only a coalition of states can bring China to stop its entrenched ways by closing down its alternatives.

China`s trade surpluses are inseparable from its growth tale. In 1979, Deng Xiaoping, the then Chinese supreme leader realized three things:
1.  The Chinese private sector cannot be ignored. It is a part of the Chinese psyche and a connecting social tissue to do and be in business. A few years ago, Chinese schoolchildren were asked in a survey about what profession they aspire to in the future. The vast majority answered : Millionaire.  Observation of the Chinese everywhere demonstrates clearly that they are motivated by personal gain and propelled by an innate need to prosper. Deng famously said whether a cat is black(capitalist) or white(communist) what matters is it's catching the mouse.

2. Deng was also convinced that the Communist Party cannot control China without delivering economic prosperity; economic growth was the tool of political control of his vast country.

3. It was also clear to him that the Soviet model has failed because, among other things, it ignored the market and its pricing mechanism.

Growth theorist like Simon Kuznets, Moses Abramowitz, Edward F. Denison and Robert Solow found out that to grow you need the following things:

A.   Labor and capital supply,

B.   Increase in total factor productivity, which their research demonstrated it explains i.e. accounts for 2/3 of the GDP growth. That implies that access to technology is critical and its mastery must be a priority. All growth theorists attributed in varying degrees total factor productivity to several related factors, namely, B.1.education and vocational training; B.2.organized managerial and industrial setup,  B.3 marketing and distribution know-how and B.4 good infrastructure and stable law and order.(Denison ,1967)[v].

     China got its labor supply from the underemployed Chinese agriculture. Millions of Chinese have been willing to leave the rural areas to the Eastern provinces for low-paying industrial jobs, which, in their eyes, are much preferable to their subsistence rural jobs. This vast movement of labor hardly affected agricultural production levels. As to capital, financing came from the high Chinese domestic savings and, significantly, from the Chinese overseas immigrants`savings which flawed into two channels: the formal market of Hongkong and the informal personal market. In this context, it should be remembered that China with $68 billion, is after India, the second biggest receiver of remittances in the world, This was the true meaning of the one country two systems voiced out at the time of Hongkong return to China. But even that was not sufficient for the high growth required to transform the country. If one takes an average capital-output ratio of 3 to 1, generating high growth reaching into the upper single digits, would require savings in the range of 35- 36 percent of the GNP per year, a hardly realistic saving level. Consequently, China opened the door, under certain conditions, for Foreign Direct Investment (FDI). These conditions involved forcing foreign investors to surrender without compensation, their technology in return for doing business in the enormous Chinese domestic market, and choosing the type of FDI wanted by China. The profit lure proved irresistible to the capitalist firms which flocked-in “en mass”.

B.1. Education and vocational training were obtained from everywhere. The Chinese government sent tens of thousands of students to western universities and technical colleges. And FDI played a role as well.

 B.2.The Chinese Government set up numerous state enterprises with privileged market controls and endowed them with lavish subsidies and all kinds of help as a part of its industrial policy model. In addition, private enterprises were all required to accept government appointed representatives on their managing boards, thereby keeping them in line.
 B. 3 China invested massively in infrastructure; some cities were built from scratch in the last 20 years. A bird-eye view of some highways recalls areal views of L.A. in California.

   B.4. FDI firms and indigenous Chinese innovations completed this list of prerequisites.

  

      With this massive collective effort, China embarked as of 1980 on the greatest growth of income (GDP) in all recorded economic history. To appreciate what, for example, a 10% annual GDP growth means, economists use the so-called “68-year rule”. It takes 68 years for the GDP to double if the economy records a real growth of 1 %. Therefore, China which has registered an average real growth of its GDP since 1985 of 9.1%, has doubled its real income in 68/ 9.1= 7.5 years (CEIC, 2019)[vi]. In concrete terms, this means that an average Chinese in his/ her sixties working and living in the industrial provinces has seen his/ her income doubles almost five times over the last forty years. The policy of one child per family adds to that by a parallel increase in the GDP per capita. 

This explosion of growth carried with it a tremendous expansion in the Chinese product base. China became a world factory producing every possible good. The natural outlet was the foreign import markets, especially in the US and Europe. In just a few years, China became a surplus trade balance addict.

A     A Statistical Picture of China`s Balance of Payment Surplus With the World
                                         Table 1

BALANCE OF TRADE AND SERVICES OF CHINA OVER 1997-2017 WITH USA.

Year	China	United States
	Trade in goods & Services	Trade in goods and services
1997	42.824	-108.288
1998	43.837	-160.13
1999	30.641	-258.619
2000	28.873	-372.522
2001	28.084	-361.516
2002	37.383	-418.956
2003	35.821	-493.893
2004	51.174	-609.884
2005	124.626	-714.252
2006	208.918	-761.715
2007	308.036	-705.372
2008	348.832	-708.728
2009	220.13	-383.778
2010	223.023	-494.659
2011	181.903	-548.629
2012	231.844	-536.773
2013	235.379	-461.875
2014	221.299	-490.179
2015	357.87	-500.354
2016	249.913	-500.561
2017	0	0
Source:	IMF

                                                    Table 2

BALANCE OF TRADE AND SERVICES OF CHINA OVER 1997-2017 WITH EU.

                              Table 3
BALANCE OF TRADE AND SERVICES OF CHINA OVER 1997-2017 WITH ASIA.

Year	China	Asia
	Trade in goods & Services	Trade in goods and services
1997	42.824	77.82
1998	43.837	183.636
1999	30.641	193.126
2000	28.873	231.495
2001	28.084	164.704
2002	37.383	191.845
2003	35.821	252.495
2004	51.174	333.43
2005	124.626	444.199
2006	208.918	587.231
2007	308.036	685.145
2008	348.832	715.517
2009	220.13	467.611
2010	223.023	597.897
2011	181.903	668.509
2012	231.844	592.131
2013	235.379	574.503
2014	221.299	557.771
2015	357.87	525.01
2016	249.913	463.246
2017	0	443.578
Source: IMF

                                        Table 4 
Balance OF TRADE AND SERVICES OF CHINA OVER 1997-2017 WITH LATIN

                                                         AMERICA.

   

Year	China	Latin America
	Trade in goods & Services	Trade in goods and services
1997	42.824	-32.94
1998	43.837	-55.171
1999	30.641	-23.943
2000	28.873	-15.83
2001	28.084	-24.048
2002	37.383	8.225
2003	35.821	31.312
2004	51.174	46.425
2005	124.626	64.404
2006	208.918	80.796
2007	308.036	42.214
2008	348.832	5.832
2009	220.13	14.486
2010	223.023	-7.048
2011	181.903	-2.519
2012	231.844	-33.201
2013	235.379	-76.453
2014	221.299	-93.454
2015	357.87	-109.074
2016	249.913	-39.294
2017	0	-25.006
Source: IMF

Summary

·       The balance of trade shows surplus with the US in every year.

·       Surplus with Latin America all years. 

·       Surplus with Europe in all years except 2001, and 2013-2014.

·       Deficit with Asia all years.

·       The merchandise account is where China`s trading muscle is the strongest.

                        Table 5

    BALANCE ON CURRENT ACCOUNT OF CHINA OVER 1997-2017 WITH USA.

(Billions of U.S. dollars)
China with USA
Year	China	United States
1997	36.963	-140.72
1998	31.471	-215.066
1999	21.114	-288.361
2000	20.432	-403.451
2001	17.405	-389.686
2002	35.422	-450.794
2003	43.052	-518.751
2004	68.941	-631.593
2005	132.378	-745.233
2006	231.843	-805.963
2007	353.183	-711.036
2008	420.569	-681.39
2009	243.257	-372.522
2010	237.81	-431.266
2011	136.097	-445.663
2012	215.392	-426.833
2013	148.204	-348.801
2014	236.047	-365.199
2015	304.164	-407.765
2016	202.203	-432.874
2017	164.887	-449.141

                                Table 6

·       BALANCE ON CURRENT ACCOUNT OF CHINA OVER 1997-2017 WITH EU.

(Billions of U.S. dollars)
China with Europe
Year	China	EU
1997	36.963	99.962
1998	31.471	53.542
1999	21.114	-2.972
2000	20.432	-64.901
2001	17.405	-18.314
2002	35.422	15.85
2003	43.052	5.507
2004	68.941	59.345
2005	132.378	-3.535
2006	231.843	-42.629
2007	353.183	-116.975
2008	420.569	-263.272
2009	243.257	-28.527
2010	237.81	-9.385
2011	136.097	76.954
2012	215.392	206.568
2013	148.204	287.057
2014	236.047	304.405
2015	304.164	310.758
2016	202.203	324.939
2017	164.887	433.257
Source: IMF

   

                       

                      

                                                  Table 7

BALANCE ON CURRENT ACCOUNT OF CHINA OVER 1997-2017 WITH ASIA.

(Billions of U.S. dollars)
China with Asia
Year	China	Asia (Excl:China)
1997	36.963	141.741
1998	31.471	362.134
1999	21.114	359.316
2000	20.432	406.58
2001	17.405	344.927
2002	35.422	414.216
2003	43.052	544.154
2004	68.941	609.478
2005	132.378	679.745
2006	231.843	899.439
2007	353.183	1084.208
2008	420.569	998.716
2009	243.257	782.454
2010	237.81	951.779
2011	136.097	805.757
2012	215.392	638.452
2013	148.204	663.198
2014	236.047	799.776
2015	304.164	820.588
2016	202.203	883.089
2017	164.887	831.152
Source: I

   

                        

                                Table 8

Balance on Current Account of China over 1997-2017 with Latin America

(Billions of U.S. dollars)
China with Latin America
Year	China	Latin America
1997	36.963	-65.873
1998	31.471	-89.528
1999	21.114	-55.538
2000	20.432	-47.399
2001	17.405	-52.284
2002	35.422	-15.442
2003	43.052	11.827
2004	68.941	23.426
2005	132.378	35.053
2006	231.843	51.04
2007	353.183	8.858
2008	420.569	-37.44
2009	243.257	-32.004
2010	237.81	-95.996
2011	136.097	-111.615
2012	215.392	-136.676
2013	148.204	-163.44
2014	236.047	-184.921
2015	304.164	-173.338
2016	202.203	-94.958
2017	164.887	-82.125
Source: IMF

Summary of the statistics of the current account :::    

·         Unilateral transfers are also important; more Chinese work abroad than foreigners work in China. The country is the second-largest receiver of remittances in the world.

·        -        China had a surplus with the US every year under study

·        -        China had a surplus with Europe all years till 2012.

·        -        China had a surplus with Latin America all years

·        -        China had a deficit with Asia all years.

The statistical picture presented above plainly shows that China has succeeded in becoming the World production factory. In this regard, it is obvious that the world cannot have two Chinas at the same time; there simply is no room for such volumes of exports by more than one country; in every six dollars of the world’s exports, one dollar has gone to China. Today, China exports every conceivable type of good: household equipment, children toys, and wherewithal, tools and machines, chemicals, heavy industrial equipment, locomotives, and autos, engineering products, an increasing number of digital products, and as of late, high speed 5 G data transfer devices and a new green technology endogenously developed.

                                         Table 9

PERCENTAGE OF CHINA IN THE EXPORTS OF GOODS IN WORLD EXPORTS: 2007-2017.

Year	Amount	Percentage
2007	1,553.93	11.16
2008	1,774.06	11.03
2009	1,513.70	12.22
2010	1,941.71	12.81
2011	2,226.73	12.34
2012	2,308.21	12.78
2013	2,405.96	13.05
2014	2,536.84	13.73
2015	2,448.55	15.15
2016	2,235.96	14.28
2017	2,346.10	14.55
Source: WITS

The question legitimately arises : was China`s success in running persistent surpluses due only to its export production base and low prices or there were as well restrictive trade practices and exploitation of the world trading system. The record shows that China has various restrictions on imports in the forms of quotas, tariffs and non-tariffs barriers. For example, cloths imports are virtually banned. Food products are subject to a massive amount of regulations restrictions imposed by the Chinese Food and Drug Administration. There are quotas on 40 categories of goods. On South Korea alone, there are 26 quotas (Economic help, 2019)[vii]. Moreover, political considerations, as in the case of South Korea, are involved in the treatments of various countries. It should be added, however, that there has been a gradual reduction of barriers in the last five years.

Illicit industrial spying on digital technology and copyright theft of entertainment products are widely practiced by China (Intrepid sourcing, 2018) [viii]. The country has lax environmental standards that confer a competitive cost edge. Coupled with low wag for migrant underemployed workers from rural China and a fixed Yuan exchange rate for at least ten years, it is evident that the country does not play a straight game.

A very important development is that China has become, an important supplier in the international production chains, (International Supply Chain). Very few industries can now do without China`s intermediary product exports. This is ,of course, a result of global firms' choices to locate a part of their supply chain in low-cost places.

 China in the WTO System

China joined the World Trade Organization (WTO) on 11/12/2001. It was already a powerful trading country. Ever since it has benefited from market access enshrined in the WTO trade system. WTO covers 90% of world trade and has membership with 85% of the world`s population; It applies the same rules of access on all.(Wikipedia, 2019) [ix]. The WTO system assumes a level playing field for all members with provisions for settling trade disputes. No barriers are admitted since the close of the Uruguay Round of negotiations in 1995. This means traders, such as global firms would access free of impediments all markets for products internationally produced anywhere (international supply chain). The most favored nation clause taken over from the GATT would generalize to all members any advantages given to any country.

      The question arises are all countries of equal trading capacity and inversely of equal retaliatory power? Obviously, the answer is negative. Another set of questions is that developing countries might need to protect their infant industries, those of strategic national importance, such as in food and basic medicine. Agricultural barriers such as exists in the EU and subsidies under the European CAP and the US agricultural subsidies are tolerated (they existed prior to the end of the Uruguay Round) while the developing countries are not permitted such protectionism.  The capacity of developing countries to negotiate in the WTO is very limited for all but the large countries, which may have the qualified personnel to do so effectively

The WTO system has been in place for some 24 years. Over this period, it has shown many shortcomings. Hence reform is definitely needed. The first issue is that the WTO system has very little to say about the environment and labor standards. From a developing country perspective, its rules on TRIPS are asymmetrical. Its dispute settlement system does not cover dealing with persistent surpluses. The developing countries are barred from raising barriers to secure their food needs or public health needs. And the process takes years to bear results (Khor & UNCTAD, 2016)[x] .  

The Particular Problem of the USA

                    Table 10

         BALANCE OF TRADE OF CHINA WITH THE USA IN 2017

        (Billions of U.S. dollars)             

   Year          Exports        Imports        Balance

  2017        505.470          129.894        376.576

          The large and persistent surplus of China with the US, has been for years a tempting target for politicians like Mr. Trump, to advocate drastic confrontation with it. Indeed, the relationship is unbalanced. Mr. Trump started by imposing 10 and 25 percent tariffs on aluminum and steel and went after that to imposing another 25% on $200 billion worth of imports from China effective as of 2 March, 2019. However, this deadline was suspended as the US-China negotiations started in February.

The heart of the matter is that The US faces a structural economic problem with China. For a start, the US has a limited export-product base as opposed to China`s diverse one. The US is competitive in armaments, aircraft (the B. 737 notwithstanding), agriculture, entertainment, energy, and digital industry. The old manufacturing industry lost out quite a bit to lower-wage countries such as Mexico and China, both of whom have unrestricted entry to the US market. Minimum wage levels, environmental standards, and, social protection standards are higher in the US than in Mexico or China. This affords China and Mexico lower cost advantages, so tempting to business firms only interested in their profit line.

          The WTO system and free global trade advocacy are based on Ricardo`s theory of Comparative Advantages (CA). This theory is a labor based one with fixed proportion technology (Leontief `s input-output). CA assumes free access to technology and the ability of labor to switch to higher value-added industries. Finally, CA was articulated for a closed economy without service exports. For all those reasons it is easily violated in our time. In particular, the technological access presupposed in the comparative advantage theory does not apply, because the US`and other global firms are willing to use their technologies outside their country. Globalization has freed firms from loyalty to the country of the headquarters to loyalty to their balance sheets and stockholders- equity value (Sakbani”a”, 2016)[xi].

Modern labor-saving technology much more than trade imbalances has mightily contributed to the US structural unemployment in the industrial states. Technology has become capital and knowledge-intensive. Robots and soon artificial intelligence, are replacing labor. They are also boosting the capitalist owners' share in income distribution to much higher than the econometric literature has shown up from 1907 to the mid-eighties (Solow 1976; Denison, 1967)[xii]. It is no longer true that the share of capital is stable and roughly around 27% of the GDP. The technology owning claimant is now getting a much higher share. In the words of investment billionaire Wilbur Ross, the current Trump`s Secretary of  Commerce, robots do not come late to work, do not get sick, and will have no maternity leaves. It was supposed in the theory that labor would be retrained and retooled for higher value-added jobs. But both business and the US government did not initiate sufficient programs. Besides being costly to retrain labor, the workers in most cases do not have the educational background to move to the higher technology in the digital age. Most older workers have limited educational attainments and short payoff time for costly retraining. Nonetheless, the US compares poorly with other industrial powers. The US spends less than half of what Germany spends on retraining unemployed workers despite having close to 4 times Germany`s population. The consequences of all such unrestricted trade are the hollowing out of the US industrial belt in favor of lower-cost China, Mexico, and others.

President Trump Acts

To circumvent the WTO rules, the President used national security to justify imposing tariffs (on aluminum and steel) on partners, often allies and friends: Canada, Australia, and countries in Europe. It is worth remembering that the US had a current account surplus with some of these countries. But, as has become his trademark, the President lied his way through.  
Mr. Trump approach to trade is bilateral, i.e., each transaction should be balanced by a counterpart; this is how bilateral trade is fare and reciprocal. But according to economic theory, trade should be balanced multilaterally. Trump thinks multilateralism is crowded many. As it was stated above, the effective strategy to face China is to build a coalition against it. But America first would rule that out.

For two months now (late April 2019), there have been negotiations with China. What can China offer in these negotiations?

•   Increased energy imports from the US,

•   Increased agricultural imports,

•    Imports some more aircraft (notwithstanding the Boeing 737)

•     Redirection of some industrial exports to other countries.

But, in a 4 to 1 trade matrix, this will not solve the long-standing disequilibrium. 
It might be interesting to ask can China import more than the above item over time?
It is doubtful. The US might not have the products that China might want. Now-a-day, China is spending vast amounts on developing green technology, on developing artificial intelligence, on fast transfer systems for the G 5 devices and on digital technology, whereas President Trump wants to go back to coal. The question arises, however, can the US economy, which is dynamic, flexible and innovative recapture its export prowess in the digital future? That depends on many factors which Mr. Trump is disinterested in. One such factor is retaining skilled immigrants from outside Europe. Fifty percent of the PhD.graduates of  US`universities in science and mathematics in recent years are born outside the US. Another problem is the disrespect of science shown in the denial of climate change and the lost investment opportunity entailed therein. Mr. Trump believes that reducing the costs of industry and having jobs even in lower technology are choices he prefers under his America first slogan. This is a static budgetary approach rather than one where the return on investment determines capital allocation. So, the answer is at this point uncertain. 

                                      Table 11

CHINA`S EXPENDITURE ON GREEN TECHNOLOGY AND OTHER R & D

Years  (China`s green tech & R&D)       $ expenditure in billions

1997                                                                            0.639

1998                                                                            0.647

1999                                                                            0.75

2000                                                                            0.893

2001                                                                            0.94

2002                                                                            1.058

2003                                                                            1.120

2004                                                                            1.215

2005                                                                            1.308

2006                                                                            1.369

2007                                                                            1.373

2008                                                                            1.445

2009                                                                            1.662

2010                                                                            1.710

2011                                                                            1.775

2012                                                                            1.906

2013                                                                            1.990

2014                                                                            2.021

2015                                                                            2.056

2016                                                                            2.107

2017                                                                            2.1

2018                                                                            2.108

Sources: World Bank, OECD,

The US negotiating demands face China with an existential challenge: a change in its system; giving up subsidies; abandoning industrial policies; no longer obedient deficit-ridden State Enterprises and obedient private enterprises. and above all opening up its economy. On the other hand, China faces the US with a formidable political and economic challenge. It has been for long assumed that as China prospers, it would become more liberal and freer of controls. This is why the US supported its application for the WTO. Nothing of the sort is happening. Under President XI, China is becoming more autocratic and more controlled ( Rodrik, 2018 )[xiii]. Moreover, the command economy of China seems to be more efficient in execution than any other command economy we have seen.

CONSEQUENCES BEYOND TRADE

The fourth quarter of 2018 began to show the impact of the trade war with China on the financial markets. In October and December, 2018, the financial markets everywhere took a severe beating as a consequence of trade uncertainty.  These losses were partially reversed in January and February 2019 as negotiations with China were said to progress. To be sure, the prospects of interest rate rises and the inversion of the yield curve in the US had something to do with that. However, China`s future growth has been hovering behind the scene. The IMF, the OECD, and J.P. Morgan, all estimated that interest rates will move up over one year by 0. 8% ( Image Economy et al. 2019) [xiv] But the US Fed., given the state of the Business cycle, did not oblige.

Trade war undermines growth ; 
Christine  Laggard the Managing Director of the IMF said in Davos on 22/1/2019, that because of trade tensions, the IMF has shaved down the estimated world income growth from 3.7% to 3. 5%. Two months later, the IMF came down further to 3.3% once again citing trade tensions. In its press release of April 2019, WTO stated the following: “World trade will continue to face strong headwinds in 2019 and 2020 after growing more slowly than expected in 2018 due to rising trade tensions and increased economic uncertainty. WTO economists expect merchandise trade volume growth to fall to 2.6% in 2019 down from 3.0% in 2018. Trade growth could then rebound to 3.0% in 2020; however, this is dependent on an easing of trade tensions “(WTO, 2019)[xv].The impact of trade tensions on growth is not only through the multiplier impact on income , but runs also through the impact of uncertainty on investment and in particular on FDI. 

The trade tensions with China comes at a time when China is facing a secular slow down in its income growth, which would affect adversely its imports from other countries.  As the supply of underemployed labor dries up and Chinese workers age and require old people services, the GDP growth should decline over the coming years, from the current 6.4 %  to a lower pace in the range of 5 % per year. This slow down would place downward multiplier pressures on the income of the exporters to China.

 The industrial countries have been enormously helped by cheap Chinese imports in controlling inflation over the last 25 years. A trade war with China, by raising the international prices of imports, would promote inflation. Image Economy estimated that US inflation will rise from the current levels of 2 % to 4.1 % in 2022 (Image, 2019)[xvi]. While trade represents 27% of the US` GDP and 37% of China`s, it is much higher in Germany at 87%, in Mexico at 78% and in Canada at 64%. The rest of  Europe is in the same league (ibid,)[xvii]. Consequently, the adverse effects will be larger on all the macro variables in China, Europe, Canada and Mexico.

President Trump has expressed his love of tariffs on numerous occasions. He touted the billions of dollars they bring to the US Treasury. He also has been using tariffs as a political weapon for purposes that have nothing to do with trade as he did with Turkey and plans to do with Mexico to stem Central American illegal asylum seekers.  This weaponization of tariffs is a dangerous precedent and a threat to multilateral trade. Tariffs are taxes on consumers. Not only they raise consumption bills but they also reduce consumer welfare by cutting down on the variety of goods on offer. The Treasury gains will be offset by all kinds of subsidies and alleviation measures that politics might require. President Trump has gone around the agricultural states promising $ 16 billion of such alleviation. 
In an article by Thomas Franck, he cites a new study by economists at the NY Fed, and the universities of Columbia and Princeton showing that by November 2018, Trump`s tariffs had reduced income at the rate of $1.4 billion per month. The study estimated the cost of the Trump tariffs to consumers was at $ 6.9 billion in 2018. Furthermore, the study says that the entire tariff increases were passed through to prices. According to the study, the figure cited above assumes that there will be revenue compensation as the President promised farmers. However, no action had been taken up to the time of the study`s publication. In the event, the true cost was $12.3 billion( Franck, 2019)[xviii]

Geneva , 29 May, 2019.

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                                          NOTES

I am grateful to Dr. Ayda Sakbani for her generous help in the statistical compilations and in organizing my presentation.

 

[i] Toni Schwartz appeared on so many TV and media outlets detailing his ghost writing of Trump`s book. This is confirmed by Wikipedia. No denial was voiced out by Mr. Trump or his aids.

[ii] Michael Sakbani “b”, Trump The President That Was Not To Be, in www.michaelsakbani.blogspot.com, November, 2016.

[iii] Heather Scott et al, Digital Journal, September, 24,2018.

[iv] Edward F. Denison, Accounting for United States Economic Growth 1929-1969. Washington D.C 1967; see also Robert Solow, The Neo classical Trade Theory, 1978.

[v] Robert Solow,  The Nobel Prize Lecture, 8/12/1987. ; idem, “A Contribution to the Theory of Growth”, 1, vol. 70,no.1,1965; see also Edward F. Denison, Op.Cit.

[vi] www.CEICdata.com, consulted on23/4/2019.

[vii] www.EconomicsHelp.Org/blog/4/trade, Criticism of WTO

[viii] Martin Khor, ed. WTO, Wikipedia, consulted on 24/4/2019. See also, China Import Quotas and Other Specific Restrictions, in, www.intrepidsourcing.com

[ix] Michael Sakbani”a”, Free Trade in the Age of Economic Discontent; Comparative Advantage Under Globalization, in www.michaelsakbani.blogspot.com, September, 2016.

[x] Khor, Op. Cit., on TRIPS.

[xi] Dani Rodrik & S. Mukand,The Political Economy of Liberal Democracy , in economics for inclusive prosperity, Harvard University, JFK school of government, 2019. IDEM, Will China Rule The World, Business Standard, 1/12/2013

[xii]  Image Economy et al,2019. Consulted on 21/4/2019.

[xiii] Thomas franck,www.cnbc.com, March 26, 2019, consulted on 22/4/2019.

[xv] WTO, Press Release, April ,2019

[xvi] Image, Op. Cit.2019

[xvii] Ibid.

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posted by Michael Sakbani | 3:24 AM | 0 comments