Unpacking a Presidential tweet: Are trade wars easy to win?

“[T]rade wars are good, and easy to win” says a tweet from President Trump. Recent developments between the US and China put this to the test. 

Summary of recent events:

• March 23, 2018 – Citing national security, US imposes 25% duties on imported steel and 10% on imported aluminum (Canada and several other countries are exempt, at least temporarily). China produces about half the world’s steel and aluminum. China says these duties violate World Trade Organisation (“WTO”) rules. Other countries (like the EU) and many trade practitioners agree.
• April 2 – China responds by imposing 15 – 25% duties against US imports, such as wine, fruits and scrap metal (worth US$3B /year). This is WTO illegal, because retaliatory duties are only allowed against countries found to have violated WTO rules (which can take years).
• April 3 – Citing unfair technology licensing practices in China against US companies, US announces 25% punitive duties on 1,300 types of imported goods from China (worth US$50B/year, about 10% of US imports from China). These goods include TVs, aircraft parts, and  medical devices. These duties are not yet in effect.
• April 4 – China retaliates by listing additional products that it will hit with 25% duties (also worth US$50B/year, about 40% of US exports to China). Products include a variety of agricultural products, cars and aeroplanes. Effective date is tied to US duties announced April 3.
• April 5 – US threatens duties on another US$100B worth of Chinese imports.
• Both the US and China have filed claims at the WTO over these events.

Implications:

In addition to market and foreign-relations implications of a potential trade war, duties typically have certain direct and relatively immediate effects. They differ between consumers and manufacturers. Consider US consumers and manufacturers.

For US consumers, import duties on goods mean higher prices. The retailer either pays the duty or buys from a more expensive non-Chinese manufacturer. The retailer then charges more to cover higher costs.
Items made using the good also increase in price. For example, the duties on steel and aluminum could add hundreds of dollars to the price of a new car because significant amounts of steel and aluminum are used to produce cars.

For US manufacturers, import duties usually mean more sales. For example, chainsaws from China are targeted for a 25% duty. In the US, the duty will make them less price competitive, and US manufacturers will benefit. US manufacturers will likely hire more employees and invest more in their businesses, such as by updating/expanding their production facilities (creating work for construction trades and others).

High duty barriers around a major economy like the US or China affect other economies.

For non-US consumers, if the US is buying fewer Chinese-built TVs, Chinese TV manufacturers may lower prices to sell more TVs in the rest of the world, to make up for lost US sales. Non-US consumers might get cheaper TVs.

While US import duties may be good for US manufacturers, they’re bad for manufacturers elsewhere. Manufacturers in the countries subject to the duties (either the China-specific duties, or any non-exempt country hit with the steel and aluminum duties) will be hit hardest. They’ll lose sales in the US, and are unlikely to make up those sales elsewhere (especially at the same prices).

Other countries will be affected too. Steel and aluminum from non-exempt countries, and the 1,300 types of Chinese goods targeted, that were formerly sold to the US, will be diverted into other markets, usually at lower prices. 

Diversion will increase competition, reduce business revenues and profits, and potentially lead to actionable unfair trade practices (like “dumping”), as all manufacturers fight to keep sales volumes in a smaller global market.

In a recent press release, the Prime Minister recognized the diversion of steel and aluminum into Canada as a threat to Canadian jobs. The EU went further by starting a defensive “safeguard” investigation, preparing to shield itself from diverted steel and aluminum by imposing its own duties.
It is hard to say much about winning, but to avoid losing, companies should structure supply chains to minimize the impact of potential trade disruptions, and should leverage defensive trade measures available to them.

Jonathan is the co-chair of McMillan’s international trade group. His practice covers the full range of international trade issues, including trade remedies such as anti-dumping and countervail investigations, customs, export/import controls, economic sanctions, and advising companies in structuring low-risk supply chains. Clients come to him for assistance from all over the world, and he enjoys the international practice he has established in his hometown of the nation’s capital.

Jonathan’s full bio can be found at mcmillan.ca/JonathanOHara.