Media  Global Economy  2018.07.04

Trump launches a trade war against the rest of the world - His protectionism will do more harm to American industries and consumers.

The article was originally posted on Webronza on June 20, 2018

U.S. vs China "If they do, we will retaliate"

On June 15, U.S. President Donald Trump announced that the U.S. would impose a 25% tariff on 50 billion dollars worth of Chinese goods (high-tech products such as industrial robots and electronic components, etc.) starting from July in retaliation for China's infringement of intellectual property rights.

In response to this, China, whose cabinet-level agreements with U.S. were annulled by Trump, immediately announced that they would take additional tariff measures of a corresponding number and quality, targeting 50 billion dollars worth of American imports, including beans, beefs and automobiles, in a move that will be harmful to major U.S. export industries.

President Trump responded by saying: "If China implements counter-measures against the U.S., we will take retaliatory measures." If so, a trade war will occur between the U.S. and China in retaliation.

President Trump also made clear his intention to slap tariffs on steel and aluminum imported from major U.S. allies Japan, Canada, Mexico and the EU, with further plans to introduce significant tariff increases on imported cars. At the G7 summit held in Canada, he stood conspicuously alone regarding trade issues. Although the Summit leaders managed to agree on a joint communiqué, Trump was angered by the comments made by Canada's Prime Minister, Justin Trudeau at the press conference and subsequently tweeted that he would withdraw his support for the communiqué.

So far, Japan has taken an uncertain stance regarding what countermeasures it might take against the U.S. in response to the Trump Administration's imposition of additional tariffs, considering the relationship between Prime Minister, Shinzo Abe and Trump, though it is unlikely that it will continue to leave the situation as is indefinitely. Aside from Japan, all of the other countries affected by U.S. tariff increases have officially announced that they would increase tariffs on U.S. imports as a counter measure. The Trump Administration is primed to set off to a trade war with leading economic powers around the world, including China, the EU, Canada, Mexico, India, and possibly even Japan.

It is U.S. industries that will be harmed

Countries generally impose higher tariffs on imported goods that are more competitive in their domestic markets than their own domestically produced counterparts. From the point of view of consumers in the importing country, since the prices of domestic goods are comparatively high, they import cheaper foreign goods. If decisions are made by two trading nations to increase import tariffs on both sides, industries in the importing country that are overwhelmed by imported products benefit from the higher tariffs. Export industries in the exporting country and consumers in the importing country however will be at a comparative disadvantage.

Regarding trade between the U.S. and the rest of the world, higher tariffs will be imposed on both American imports and exports, meaning that U.S. manufacturers and farmers will be forced to pay higher tariffs to export their products to other countries.

On the other side, manufacturers in other countries will have to pay higher tariffs in order to export their products into U.S. market, as well, however their trade with other countries will still remain subject to lower tariffs. For example, Ford will not be able to export its cars to major markets without paying higher tariffs, while Toyota will still be able to export its cars to the lower-tariff European and Chinese markets, though higher U. S. tariffs will restrict its exports to the U.S. market.

This is to say that, although the rest of the world, including Japan, has suffered from the trade war triggered by President Trump, it is ultimately American industries that will suffer the most serious harm.

The biggest victims are U.S. consumers

Besides that, the gains from trade are those from consumption. The essence of trade is that it is beneficial to consumers in both countries because they are in effect exchanging goods in which they each have a comparative advantage. This basic theory applies not only to international trade but, inter-regional and interpersonal trade as well.

As such, the biggest victims of the Trump trade debacle will paradoxically be American consumers, who will be forced to pay comparatively higher prices for goods that they had heretofore been able to import more cheaply as a result of trade.

If the price of a Ford rises, Chinese consumers will still be able to import cars from Japan, Germany, France, etc. at the same prices as before. If the price of a Boeing airplane increases, they can then conversely choose to increase the number of planes that they import from Airbus.

On the contrary, for U.S. consumers, the price of Japanese or German cars, for example will rise. In addition, U.S. car manufacturers such as Ford and GM will be likely to benefit from increasing their prices accordingly. In the high-demand home appliances sector, PBS (Public Broadcasting Service in the United States) reported that Whirlpool, U.S. leading washing machine manufacturer, raised the price of its washing machines when the U.S. government increased tariffs on imported washing machine from Korea, etc.

In addition, if U.S. exports decline, American citizens will see falling incomes, which will have a negative effect on domestic consumption and further lead to a decrease in the collective purchasing-power of the entire American economy, with negative carry-over effects on major industries.

What this basically means is that, by building walls around itself so to speak in the form of higher tariffs, the U.S. is going to destroy a route connecting itself to the rest of the world, and as a result, suffer needless self-inflicted damage. The U.S. now faces a difficult situation in terms of both importing and exporting.

President Donald Trump is confident that he can win this trade war, but No matter how this situation is analyzed, the U.S. will no longer have the power to win the battle against the rest of the world.

Disunited America allows Trump to do "what he pleases"

President Trump believes that imports are bad and exports are good. He holds tightly to the idea that the U.S. trade deficit has been caused by the shrewd and unfair trade practice of other countries. This is an old belief that many American held in 1980's. He still believes it.

Trump seems to believe that he can bend everyone his will, not only regarding trade issues, but political issues as well. He called for the G7 to readmit Russia and withdrew from the Paris Climate Agreement, the Iran Nuclear Deal and the TPP. He impulsively does what he wants without taking the time to thoughtfully consider how other countries might think or feel.

Domestically, there are many scandals surrounding Trump such reports about an alleged sexual encounter with an adult-film actress and the attempts to hush it up through financial means, the improper use of charity money by the Trump Foundation, Russian intervention in the presidential election, the list goes on. Any of these would have likely led to the collapse of any other previous administration.

He does not seem to be daunted by any of it at all. This is perhaps because American society has divided into two groups: one composed of those who fervently support Trump, and the other composed of those who fervently oppose him. Against this backdrop, President Trump's approval rating consistently hovers around 40%; a record low in this ten years. Trump supporters, however, will not give up on Trump no matter what he does. He has a solid base of support, which essentially means that though his approval rating is indeed historically low, it does not drop, instead, it goes up recently.

The U.S. Media are also divided. Trump supporters do not watch television programs or read newspapers that are critical of Trump. On the Internet, algorithms ensure that they will only see news and articles favorable to him and his views.

President Trump only cares about his supporters, too, seemingly mocking, or worse, attacking all others. He doesn't just reserve his verbal attacks for politicians like Canadian Prime Minister, Justin Trudeau either, but for anyone who makes any anti-Trump comments such as actor Robert De Niro. He never thinks that this will decrease his approval rating. At Trump's rallies, supporters are adamant that Trump should be awarded the Nobel Peace Prize for his efforts toward the US-North Korea Summit with thunderous applause, which pleases Mr. Trump. He apparently believes that the only thing that he has to do is maintain the support and adulation of his supporters.

Trump will lose way in the midterm election

The future of Trump's administration will be decided by the results of the midterm elections this coming November, where all 435 seats in the U.S. House of Representatives, and approx. one third of the seats in the U.S. Senate will be contested.

In the midterm elections, which are held halfway between presidential elections, the party in power (now the Republican) generally loses seats because voters tend to vote against the President. In addition, the Republicans are also intimately tied to Trump's misconduct and scandals. The "Me Too movement" which revealed a pervasive culture of sexual harassment in certain segments of society, and Trump's extramarital affairs with an adult film star have activated the feminist movement in the Democratic Party. This is a problem for Trump and his party because almost half of Democratic candidates running this year are women.

Because of this, it has been reported that strong Republican candidates are actively avoiding running in this year's midterm elections. Many traditional Republican-leaning voters are in many cases finding themselves at some distance from the party as it has morphed to become more Trump-like than ever before, all while possible Republican candidates must earnestly seek the support of Trump to win the primaries necessary to even run in the midterm elections.

Trump is supported by white voters who believe that whites have suffered unreasonable harm due to immigration and free trade. His policy of imposing higher tariffs on steels and automobiles and imports from China, will no doubt please his supporters. He takes this policy assuming that it will benefit Republicans in the midterm elections.

To what degree, is this strategy effective? Many current Republican representatives are from agricultural states or regions other than urban areas located near East or West Coast. Trump won the 2016 Presidential election in these local areas, too. By comparison, he got only 4% of votes in Washington D.C., where there are only a few Republicans. The more remote from cities, and the more near agricultural villages the location is, the more Republicans there are. This is to say, the Republicans are now a rural-based party, much like the Liberal Democratic Party in Japan in old days.

Trump's trade policies may gather a few votes from supporters in "Rust Belt" states such as Michigan and Ohio where products that are less competitive than imports are manufactured, but U.S. export industries will be hit by retaliatory tariffs from other countries.

One of these export industries is agriculture, which is an important base of support for Republicans. In addition, conservative farmers don't like Trump's scandals. If they become anti-Trump, the Republicans will drop to the status of minor party and Trump will immediately become a lame duck.

To be clear, President Trump represents only a part of a divided United States, not the whole. It is dangerous to regard him as America. Understanding this however, when thinking carefully about the future and national interests of Japan, we are still very concerned that our leader is too close to President Trump.

(This article was translated from the Japanese transcript of Dr. Yamashita's column in "Webronza" on June 20, 2018.)