The Web of trade

Since the long-awaited trade agreement between the United states and China went into effect on February 2020, new tensions popped up, first over the responsibility for the pandemic and recently over the new national security law for Hong Kong.  

Trade and politics have never been dissociated. Trade commentators and advisors (too many in today's protectionist world!) should go beyond numbers and reconsider their understanding of some trade concepts. 

First, many still believe that trade means a win-win for everyone. No, it doesn’t! (and textbook economics doesn’t say that at all!). 

Trade policy involves very real conflicts of interest, not between countries, but overwhelmingly between groups within each country. 

Producers interests matter much more than consumer interests, because producers tend to be far more organized in any given trade policy. 

Small groups of producers who benefit from protectionism often have more political influence than the much larger groups that are hurt. 

The producers who export, by demanding deals that gave them access to foreign markets, offer countervailing power against the influence of producers seeking protection.  

Second, the world trade system is a world of perfectly free trade. No, it isn’t!  

It is a world of low tariffs on most manufactured goods.  

The process itself of creating this world, back to the GATT and the WTO establishment, couldn’t be achieved without allowing few exceptions to free trade and granting countries some flexibility in imposing new tariffs under conditions of unfair practices, dumping, market disruption or national security. Why? Groups interests again.  

Third, trade policies depend on the political orientation. No, it doesn’t! 

They depend on political realism. Obama, a democrat and liberal US president, imposed a temporary “market disruption” tariff on Chinese tires.  

Trump, the republican and conservative US president, has gone ahead and imposed tariffs using the national security argument. Which lead us to the current "trade war”.

What could political realism say about it? Who are the losers and the winners (the small groups)? And how this war endgame would look like? 

One, the war is less about the economies, far from ruinous like few prophets of doom have suggested. Leading researchers from Hoover Institution argue that this war will have little impact on the China’s GDP (a 0.3% decline) and an even less significant one on the US GDP. For economists from Standard Chartered in Shanghai, China's GDP may decline by 1.3% to 3.2% and US GDP by 0.2% to 0.9%.    

Two, it is not about undesirable trade partners. James Politi from the FT wrote: "The U.S is arguably more dependent on trade with Chinese government-backed entities than it was before Trump’s trade war began.”   

Three, on the identity of the losers, US consumers and many US producers, from technology companies (Apple Inc.) to vehicles (Fiat Chrysler and GM), to heavy equipment (Caterpillar Inc., Deere & Co), are left out in the cold.  

On the winners’ side, steel companies like Nucor Corp, No.1 U.S. steel producer, are benefiting from high tariffs. American banks also, thanks to the deal, can now take control of their joint ventures in China. American farmers, once the biggest casualties of the previous trade unbalance, will resume exporting to China.   

Now, what should be offered for the dust to settle down?  

Just fulfilling the agreement terms with the US? Well, the Chinese, through the first three months of 2020, only imported 46 percent of the agreed US goods.  

An end to U.S. trade deficits? That’s not something trade policy can or should deliver. 

A democrat president in the white house? It's up to political realism. 

Until then, the tit-for-tat accusations between the two nations will, for sure, continue.