World economy: Close to a trade war?

March 25, 2018 10:06 pm

Trump provokes new conflicts

Per-Ake Westerlund, from Offensiv (the weekly paper of CWI Sweden)

This article appeared in the Swedish socialist newspaper Offensiv on 14 March, one week before the US government further escalated trade conflicts with a US$50 billion package of tariffs against Chinese goods, targeting alleged intellectual property theft.

Donald Trump’s tariffs on imports of steel and aluminium have caused concern around the world. Basically, these measures are yet another expression of a world political and economic crisis.

“Trade wars are easy to win”, Trump wrote in a typical tweet about the steel tariffs that will be implemented in a couple of weeks. Rarely has a world leader taken a more light-minded approach to very serious conflicts. Economists worldwide say virtually unanimously that Trump’s actions will not benefit the economy, including in the United States. This position is also held by more than 100 Republican House Representatives in the US Congress.

But for Trump it’s about politics. He is the symbol of the new nationalist, right-wing populist course that has become the foothold of leading politicians in an increasing number of countries. His actions should also be seen as a way of diverting attention from all home-based crises. Trump is committed to “America First” to keep his loyal followers. If he says that protectionism create jobs “stolen” by other countries, this is completely in line with his message in the 2016 election campaign.

The first action, with 25 percent steel tariffs and 10 percent on aluminium, is relatively modest. The value equals only two percent of US imports. But the consequences can be devastating, if the EU responds with countermeasures, and the White House then strikes back. Thereafter, what might become a much harder confrontation awaits when Trump seriously threatens tariffs on goods from China (as he has now done – Editor’s note).

This is happening in a situation where politicians’ increased nationalism has already sharpened the contradictions between the imperialist powers and the blocs, but also within the blocs, for example within the EU.

A direct effect of tariffs is increased prices. In Swedish newspaper Dagens Nyheter, Lars Magnusson, professor of economic history, warns of a development similar to the early 1930s, where a fully developed trade war deepened the economic crisis.

“One can imagine that the tariffs create unemployment and lower growth. Then there is a worst case scenario. If there is a lot of pessimism, stock markets can collapse,” comments Lars Magnusson. He also points out that the austerity economic policy after the 2008-09 financial crisis laid the foundation for populism.

The crisis of capitalist globalisation

The crisis 10 years ago, The Great Recession, punctured the myth that capitalism had achieved a new, stable stage. Two decades of capitalist globalisation and neo-liberalism ended with the most serious economic crisis since the 1930s. Privatisations and deregulation led by hedge funds, big banks and speculators had created a new bubble that burst.

The major dissatisfaction with the crisis and drastically increased inequality created a space for right-wingers like Trump. At the same time, the support for Bernie Sanders’ criticism of Wall Street from the left, especially among young people, showed the great opportunities that would be for a new, fighting, democratic and socialist party for workers and ordinary people.

Capitalist politicians have no way forward. No more than neo-liberalism is protectionism a road to prosperity and safe jobs. When George W. Bush introduced steel tariffs in 2002, a milder variant than Trumps, 170,000 jobs disappeared in US industries that use steel in their production. The tariffs made steel more expensive, and also the finished products, which reduced sales.

In today’s United States 140,000 work in the steel industry, while 17 million work in steel-using industries. That is why even capitalists in the United States reacted negatively to the tariffs. That includes breweries and others who use aluminium cans. The country’s largest lobby group for the arms industry, the Aerospace Industries Association with 2.4 million employees, says its costs will increase by two billion dollars. Even the largest lobby group for big business, the United States Chamber of Commerce, has expressed “great concern for increased risk of a trade war”.

Confrontation with the EU?

Trump’s protectionism is said to be aimed at China, but the tariffs hit some of the United States’ closest allies. In 2017 the EU accounted for 21.4 percent of the steel imported by the United States and South Korea for 9.6 percent.

Canada (17.6 percent) and Mexico (8.6 percent) have been exempted from the tariffs because the US is renegotiating the North American trade deal NAFTA with these countries.

China is only in 11th place among steel exporters to the United States, with two percent of US imports. Of the whole of China’s steel exports, only 0.2 percent goes to the US. For aluminium, China is the fourth largest exporter to the United States. But in value, it’s less than one percent of China’s exports to the US, 3.1 billion dollars of a total of 462 billion.

Trump has quite coldly assumed that those who have large exports to the US will be forced to accept unilateral tariffs. His actions are therefore also directed against the EU, which is the United States’ largest trading partner, with a 151 billion euro trade surplus with the US, and its most important military ally. This, however, did not prevent an unusually strong initial response from Brussels.

The EU Commission presented a list of 100 products as a target for 25 percent tariffs. There were many well-known products, such as Levi’s jeans and Harley Davidson motorcycles, but also oranges, kidney beans and lipstick. The total value was $2.8 billion, which is less than half of the EU’s steel and aluminium exports to the United States.

EU Commerce Commissioner, Cecilia Malmström, from the Swedish Liberal Party, commented at the same time: “We still hope there will be nothing. And if it goes ahead, we hope that the EU will be exempted.”

The possibility of exemption is shown by the fact that Canada and Mexico are not included, and that Australia, after a call between Trump and the country’s Prime Minister Malcolm Turnbull, is also to be excluded.

Trump’s response to the EU list is a threat of tariffs on cars from the EU. He has previously talked about 35 percent tariffs. But such a decision would face obstacles in the form of globalised production. The German automotive industry says that half of their production in factories in the US is exported to other countries. For example, BMW has its largest factory in South Carolina, where 371,000 cars were manufactured in 2017.

Trump increased his pressure on the EU this weekend by offering concessions if the EU lowered other tariffs. But it’s very unclear what tariff reductions or actions Trump wants from the EU.

EU states also fear that the steel that can no longer be sold in the United States will come to Europe. “We have entered an era where the trade war has begun to bare its teeth,” commented France’s Minister of Trade, Jean-Baptiste Lemoyne.

WTO on the sidelines

The question is also what happens to the World Trade Organisation (WTO) and its regulatory system. South Korea and Japan have threatened to report US steel duties to the WTO. However, the organisation has lost a lot of its former status as conflicts have increased. Three years ago, the latest attempt to reach a new global agreement, the Doha Round, collapsed.

For the WTO, Trump’s steel tariffs also provide additional headaches as the White House cites “national security” as the reason for the tariffs. This through a 1962 law that has rarely been used. The EU Commission argues that this is a violation of WTO rules.

Should the WTO approve the duties, it means that more governments can use similar arguments. On the other hand, if the United States loses a WTO case on this, it is highly likely Trump will decide the country should leave the WTO.

China – “the main enemy”

Trump’s main enemy in trade is undoubtedly China. His trade director, Peter Navarro, is an infamous China hawk who describes Chinese exports as an “invasion”. Economic nationalists further strengthened their influence in the White House when Trump’s financial adviser, former Goldman Sachs director Gary Cohn, resigned last week.

The US had a trade deficit with China of $375 billion, of total trade worth $635 billion. The mutual dependence of the world’s two largest economies has made China the world’s dominant manufacturing and exporting country, while its cheap products have lowered prices in the United States, which was also able to sustain its huge deficits.

China’s growing economy and influence in the world represents a challenge to US imperialism. Beijing’s state capitalism and imperialism were perceived after the 2008-09 crisis as more stable than US neo-liberalism, despite China also building an enormous debt mountain.

Already last year, the Trump Administration launched an investigation into China and Intellectual Property (trademarks, patents, cultural works, etc.). The outcome is expected to lead to new tariffs against Chinese goods, barriers for Chinese companies to buy companies in the United States, and for US companies to cooperate with Chinese companies.

Among US capitalists and politicians there is even greater concern over these proposals than over steel tariffs. They fear a real trade war and falling production, triggered by Trump. After his visit to Beijing last year, Trump claimed that China promised a plan to reduce the US deficit by one billion dollars – out of 375 billion.

Trump’s strategy of negotiating with each country at a time means the US is alone, instead of acting together with, for example, the EU against China.

Spectre of the 1930s

Many economists draw parallels to the protectionism and trade barriers that led to the Great Depression in the 1930s. Following the stock market crash in October 1929, the United States Congress in June 1930 adopted the Smoot-Hawley Act, which imposed tariffs on 100 products. Other countries’ governments responded with their own duties. World trade fell by two-thirds, 66 percent, from 1929 to 1934. The duties were not the cause of the crisis, the reason for which was the capitalist system itself. The contradictions between states, the class struggle, falling profits and a big speculation bubble led to the crisis. Tariffs in turn worsened the crisis.

With stronger growth in the world economy this year than during the last decade, a crisis may seem far away. But it is precisely in such a situation that alarm bells should start to ring says, for example, the well-known economist Stephen King at the HSBC bank. He believes the Asian crisis in 1997, the collapse of the Nasdaq stock exchange in 2000, and the global crisis in 2008, are examples of rapid growth followed by sharp crises. Growth creates financial bubbles, leads to price increases and governments tighten monetary policies. An additional factor today is that central banks have already set very low or negative interest rates, and themselves are highly indebted following the measures adopted to allow the system to survive 2008-09.

A trade war can not be ruled out, even if it is not in the interest of capital to force a conflict. A major conflict between the United States and China is probably unavoidable in the long-term, but the rulers in both states realise how serious the consequences would be.

Trump’s tariffs are symptom of capitalism’s attempt to escape its crises. Nationalism and protectionism have replaced globalism. At the same time it creates new conflicts among the capitalists and their politicians. Trump is challenged by some of the biggest companies. These battles at the top are also signs of crises and revolutionary ferment in society.

Socialists support neither free trade nor protectionism. It’s workers and ordinary people who will have to pay the price in both cases. Both free trade (which is actually trade governed by around 100 really big multinational companies) and protectionism create new crises.

Our alternative is a democratically run planned economy. Socialists stand for real internationalism and solidarity. Capitalism’s profit hunt and exploitation of people and nature must be replaced with production and trade to meet society’s needs and in harmony with the environment. In order for this to be possible, democratic, fighting, socialist workers’ parties and movements are needed.

Trump’s proposals

Trump’s proposal: 25 percent on steel and 10 percent on aluminium. They account for $46 billion, two percent of US imports in 2017, $2,400 billion.

US deficits

US deficit in trade with China: $375 billion of total trade of $645 billion (2017). US deficit in trade with the EU: EUR 151 billion of total trade of 608 billion (2016).

WTO

In 2016, more trade disputes were handled by the WTO than any previous year, close to 250. In 2017 these continued to increase. Of all complaints filed over the years, the United States stands for the most (112), followed by the EU (97).

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