The art of (trade) war
Endowus Insights

The art of (trade) war

Updated
December 2, 2021
published
April 27, 2018
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"Very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?"
  • Adam Smith (The Wealth of Nations, 1776)

We live in a topsy turvy world surrounded by the cacophony of trade wars. The poster child of free trade is seeking tariffs while a historically protectionist country wants to fight them. So what does a trade war actually mean? It's when countries impose restrictions on other countries in order to harm each other's trade. It's nothing new - trade wars have gone on pretty much since there's been trade. In 1689, British King William of Orange imposed steep tariffs on French wine. Sometime in the next century, Adam Smith noted that the biggest beneficiary of the tariffs were smugglers, and that if the tariffs were effective than Scotland would have started making its own wine.

Trump declared that trade wars are "good, and easy to win," and that China's trade surplus with the US was "the largest deficit in the history of the world" and "out of control." He is unfortunately misinformed. He showed his intellect in the subject with his opening move in early March, a steel tariff on China: according to the USA's department of commerce (as of March 2017), Singapore imports more steel from China than the US; the US accounts for just 0.8% of China's exports, or 0.1% of China's steel production.

Trade is not a zero-sum football game, where the US only wins if China loses. The IMF simulated what would happen if the US imposed a 10% tariffs on all imported goods: it showed that US GDP would go down by 1% and the rest of the world by 0.3% over the long-term. Everyone loses.

The often referenced US trade deficit with China is not as simple as it looks. The headline number of $370bn in 2017 is probably overstated. If you take into account China's supply chain hub status - i.e. allowing for good shipped by other countries like South Korea to China to be finished off and then re-exported, the number is closer to $150bn. And then if you throw in the US services trade surplus, the number drops to $110bn. (Source: Financial Times)

History has repeatedly shown us that no one wins in trade wars. In 2002, when George Bush implemented steel tariffs, 200,000 people employed downstream in the US lost their jobs, more than the the total employees in the US steel industry today. (Source: Boston Globe) Imposing tariffs on steel for example, imposes higher costs on related industries such as automakers, beer companies and airplane manufacturers, which employ far more workers.

Trade wars hurt companies, countries, workers, and consumers. Let's hope this foolish game ends before too many people get injured.

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