There has been lots of talk of the danger of “trade wars” in
newspapers in recent months. The Trade War Alarmists are likely wrong.
Trade wars have rarely, if ever, happened in history. Ian
Fletcher, author of Free Trade Doesn’t Work, described
the mysterious, mythical non-existence of historical trade wars in his book and
in a recent article
in the Huffington Post. As Fletcher points out, despite free traders’ efforts
to mangle the historical record and attribute the Great Depression to the
tariffs of the Smoot-Hawley Act, economists from Milton Friedman to Ben
Bernanke are agreed that the Great Depression was caused by financial and
monetary developments, with trade and currency playing only a minor role.
Indeed, the U.S. relied on protectionist policies in the crucial period of its
industrial revolution from 1865 to 1929. “All four presidents on Mount Rushmore
were protectionist,” Fletcher writes.
Yet even if a trade war materialized, the US would easily
win. Since the 1970s, the U.S. economy has been like those old college friends
in the movie who go to Las Vegas to spend millions of dollars they don’t have.
We’ve run trade deficits for 41 years, and funded it all by selling bonds, real
estate and other assets to foreigners.
As an economy, our drug of choice is overspending. We spend more than we
produce and every time recession looms, the Fed or the government pulls another
lever to make sure we can spend some more. Now the benefit of this sad state of
affairs is the U.S. has become the consumer of choice for production (and
overproduction) everywhere else in the world.
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Check out this article and more like it on the CPA website. here.
Overdependence on the U.S. consumer means that most other
nations have far more to lose from a trade war than we do. As Commerce
Secretary Wilbur Ross pointed out in his confirmation hearing testimony, China
is America’s vendor. We have the power of being their largest customer. Globally,
our “edge” is $502 billion annually, i.e. the value of last year’s trade
deficit. That’s how much more we spend on foreign goods and services than
foreigners spend on ours.
Other countries rely upon the US for export revenue much
more than we rely upon them. Figure 1
compares U.S. trade dependence between the U.S. and our top five trading counterparties.
Our two NAFTA neighbors, Canada and Mexico, rely on us for exports worth more
than 20% of their GDP! We rely on them to take exports worth less than 2% of
our GDP. Any effort by the U.S.
government to restrict trade to those two countries could have a far larger impact
on their economies than ours.
The dependence of China (our largest trading partner),
Japan, and Germany, on our consumer market is five to ten times greater than
our exposure to theirs. In a game of chicken, we should be glad we are us and
not them.
The list goes on. You can see in Figure 2 that in each case,
those countries’ dependence on the American market runs some five to 40 times
greater than our dependence on them. All these countries have a large incentive
to avoid a trade war and instead seek peaceful discussions as the U.S. moves to
reduce its trade deficit.
Let’s assume US officials sit down with their national
representatives and say, “We are going to eliminate our trade deficit over a
period of years. We will use a range of
tools to reduce our deficit, including tariffs, more aggressive legal actions
at the WTO, or new currency regimes to address undervalued national currencies.
This goal is not negotiable but the means of achieving it are.” They have every
incentive to negotiate a friendly and peaceful solution that achieves our goals
while giving them time to rebalance their over reliance upon our market.
They will know that even were all these actions implemented,
the U.S. would still be a large
consumer of their products. Can anybody doubt that if all these trade measures
were effectively implemented, the U.S. would still be a huge consumer of made-in-China iPhones, made-in-Germany
Mercedes, and made-in-Japan machine tools? Of course we would. And our trading
partners understand that.
The lesson of history is that wars don’t happen when both
sides understand who would win. Wars do
happen when both sides think (or are deluded to think) that they can easily
beat the other. Think of 1914, 1939, or Vietnam. But in this case, anybody can
see who would win.
We’ve paid a huge price for our addiction to trade deficits
in terms of industrial decline. But since those countries are now dependent on
us, we can use that fact as leverage. It’s not only diplomatic fair game to
exploit it; it’s also the obligation our elected officials have to the voters,
their children and their grandchildren who want a prosperous future.
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