Tags: buzz | trade | barriers | deficits | tariffs

The Buzz About Trade Barriers, Deficits, and Tariffs

The Buzz About Trade Barriers, Deficits, and Tariffs
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By    |   Thursday, 21 June 2018 06:40 AM

Washington has been buzzing with talks of trade barriers and tariffs to counter them.

The recent G-7 meeting in Canada displayed how testy the subject has become, even with America’s longest and closest allies. And a potentially ugly confrontation seems to be in the making with China, the largest exporter and second-biggest economy in the world. 

From a number of official statements, I concluded that the figures being quoting, especially regarding Canada, may not reflect accurately the situation. And the question came to mind whether in today’s interconnected and interdependent world unilaterally striking America’s most important trading partners with tariffs is in the interest of the United States.

Taking a look at some figures the office of the American Trade Representative has published about trade in goods and services between the U.S. and Canada leads to the opposite conclusion of America incurring large deficits, as Washington claims.

Here’re two examples:

In 2017, the U.S. exported to Canada $ 282.4 billion worth of goods and importing from Canada goods for $300 billion. The figures for the service sector of U.S. exports to Canada were $58.7 billion and its imports in services from Canada amounted to $32.8 billion.

By deducting America’s surplus in service exports of $25.9 billion from its deficit of $17.6 billion in its goods exports, the U.S. comes out with a surplus of $8.3 billion.  

In that year, the volume of the two-way trade between the two countries was quite exceptional. The trade in goods between them amounted to $582.4 billion. Their two-way trade in services totaled $91.5 billion, for a total two-way trade in both goods and services of $673.9 billion. Last year’s trade elevated Canada to America’s largest single-country trading partner, relegating China to second place.

The situation in 2016 was not much different. The U.S. exported goods to Canada worth $266 billion and imported goods from Canada totaling $278.1 billion, for a total two-way trade in goods amounting to $ 544.1 billion.

In that same year, America’s export in services to Canada amounted to $54.2 billion and its imports in services from Canada totaled $26.9 billion, affording America a healthy overall surplus of $15.2 billion.

As for the European Union, a merger of 28 European countries, the U.S. has always had deficits in its combined goods and services trade going back as far as 1997.

In 2016, the last year for which there are complete data available, the U.S. export of goods and services to the EU amounted to $501 billion. It imported from the EU goods and services worth $592 billion, for a total two-way trade in both goods and services of $1.093 trillion.

This remarkably large trade was imbalanced in favor of the EU by $91 billion. The deficit seems to be instigated by a multitude of causes, rendering its rectification difficult.

In its trade with the EU, the U.S. is consistently more successful in the service sector, while the EU regularly manages to accumulate substantial surpluses in its goods trade, leading to a substantial overall deficit on the U.S. side.

Whether these surpluses are due to trade barriers is open to question. Both the U.S. and the EU impose tariffs on each other. For example, the U.S. imposes a duty of 350% on imports of raw tobacco and peanuts. The EU charges 10% on cars from the U.S., while the U.S. duty for this item is 2.5%.

One thing that the EU has been getting away with is its ban on imports of American genetically-modified foods and agricultural products. This regulation prevents a considerable percentage of American agricultural products from entering the EU. The ban has been recently further widened to also include American investments in biotech industries.

Another contributing factor to the deficit in America’s goods exports to the EU, could be the different purchasing and consumption patterns of European and American consumers.

The majority of Europeans has shifted to very small cars, while American motor-vehicle manufacturers still concentrate on the production of what Europeans consider to be large cars. Most American cars don’t seem to appeal to average Europeans. There could be two reasons for that.

First, the average European does not need to drive as far as the average American does on a daily basis, making the investment in a roomy, comfortable redundant. Second and perhaps more important, European countries tax motor-vehicle fuels much higher than does the U.S., causing fuel prices to be about double of what Americans pay.  

The low rate of savings in the U.S. and the European habit of higher savings could be another reason that Europeans consume less than Americans. The much easier access to credit in America could, yet, be another cause for the larger consumption of consumer goods by Americans.

Finally, the dollar’s global acceptance as means of payment greatly facilitates America’s overspending abroad, potentially leading to large deficits to occur in the country’s balance of payments.

Such undercurrents render it difficult to find a single clear reason for the consistency of the deficits the U.S. suffers in its trade with the EU. Especially, since the EU’s economy is, on developmental levels, quite similar to that of the United States and one would expect the trade levels to be much more in equilibrium than they are.  

Because of the intricacy of the trade with the European Community, accusations of ill-will and moves toward a trade war will fail to rectify the situation and cannot be in America’s interest. Washington must keep in mind that it is dealing with America’s most reliable partners and, yes, we should not forget that the American trade with the European Union supports more than 2.5 million American jobs. 

However, the enduring and, overtime, growing imbalance in favor of the EU could in time be problematic. Should the situation continue much longer, the one-sided transfer of wealth could lead to a painful disadvantage for America. Clearly, there is a need for focusing on the present condition and searching for realistic and cooperative ways to equilibrize the trade as far as possible.

The very large trade deficit between the United States and China is altogether a different beast. The similarities that are evident in the economies of the U.S., Canada, and the EU do not exist in the case of China’s economy.

Some 40 years ago, China had a rudimentary and small economy. Few people believed then that China would in a generation or so own the second largest economy in the world, one that would attain the complexity and maturity it displays today.

If we today believe we have a problem with the Chinese economy, we must also realize that American companies had a role in China’s stupendous rise to an economic powerhouse.

Today, these two enormous economies are closely interlinked and mutually interdependent. They have together accumulated enormous wealth for both countries. There seems no doubt that China’s stunning economic rise was the greater beneficiary of the two countries’ economic collaboration. America was not the main beneficiary of the process but profited critically as well.     

Where would Apple and other U.S. computer makers be without access to Chinese cheap labor and manufacturing facilities? Apple seems to be on its way reaching a market value of $1 trillion. Hewlett Packard is the largest and Dell third in line among computer makers. General Motors sells more Buicks in China than in the U.S., and inexpensive Chinese apparel and a myriad of other consumer goods have contributed to America’s low inflation.

Some of the large amounts of dollars China collected from its trade surpluses returned to Washington in form of loans, financing the large budgetary deficits that American administrations, both Democratic and Republican, have consistently been running.

As in the case of the European Union, the working of the two-way trade between the U.S. and China is too multifaceted to definitely pass blame for the deficit and easily determine how to alleviate it.

Corporations don’t usually hold allegiance to a specific nation. Traditionally, they tend to move their production to the place that promises the least cost. They normally choose countries were labor is cheap, laws are supportive of business and investments, and where the governing system is stable and reliable.

After China freed its economy from the communist straightjacket, uncounted American, Japanese, and European manufacturers of all sorts of goods rushed to China to either start their own production facilities there or simply order the products they were selling to be produced by already established Chinese factories.   

Thus, began the unpresented rapid growth of China’s economy and the availability of "Made in China" products on a global scale. China became rich.  And, yes, there is a large deficit in the U.S. trade with China.

However, how do we account for products which American companies either order to their own specifications to be produced by Chinese manufacturers or in their own facilities in China and then brought to the United States to sell in the American market or reexport to other countries?

Are these goods simply Chinese products and must be counted as Chinese goods imported to America? Or are they American products and should not be counted as imports to the United States?

Furthermore, we cannot expect an average Chinese citizen, whose income is about one fifth of an average American, to consume as much as Americans do.

As in the case of the European Union, the American trade with China has its own complexities. Threats of unilaterally imposing tariffs appears to be neither fair nor in the interest of the United States. Mutually searching for an acceptable solution would be the right way to proceed.   

Nasir Shansab has maintained homes, business interests and dual citizenship in both the United States and Afghanistan for the past three decades.

  

         

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NasirShansab
The very large trade deficit between the United States and China is altogether a different beast. The similarities that are evident in the economies of the U.S., Canada, and the EU do not exist in the case of China’s economy.
buzz, trade, barriers, deficits, tariffs
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2018-40-21
Thursday, 21 June 2018 06:40 AM
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