This week trade is in the news mostly because of the Donald and his policy of America First. This has involved looking to take jobs back to America which is interesting when apparently the jobs situation is so good.
Our economy is perhaps BETTER than it has ever been. Companies doing really well, and moving back to America, and jobs numbers are the best in 44 years. ( @realDonaldTrump )
This has involved various threats over trade such as the NAFTA agreement primarily with Canada and Mexico and of course who can think of Mexico without mulling the plan to put a bit more than another brick in the wall? Back in March there was the Trans Pacific Partnership or TPP. From Politico.
While President Donald Trump announced steel and aluminum tariffs Thursday, officials from several of the United States’ closest allies were 5,000 miles away in Santiago, Chile, signing a major free-trade deal that the U.S. had negotiated — and then walked away from.
The steel and aluminium tariffs were an attempt to deal with China a subject to which President Trump has returned only recently. From the Financial Times.
Equities sold off and havens firmed on Tuesday after Donald Trump ordered officials to draft plans for tariffs on a further $200bn in Chinese imports should Beijing not abandon plans to retaliate against $50bn in US duties on imports announced last week.
According to the Peterson Institute there has been a shift in the composition of the original US tariff plan for China.
Overall, 95 percent of the products are intermediate inputs or capital equipment. Relative to the initial list proposed by the Office of the US Trade Representative on April 3, 2018, coverage of intermediate inputs has been expanded considerably ……….Top added products are semiconductors ($3.6 billion) and plastics ($2.2 billion), as well as other intermediate inputs and capital equipment. Semiconductors are found in consumer products used in everyday life such as televisions, personal computers, smartphones, and automobiles.
The reason this is significant is that the world has moved on from even the “just in time” manufacturing model with so many parts be in sourced abroad even in what you might think are domestic products. This means that supply chains are often complex and what seems minor can turn out to be a big deal. After all what use are brakes without brake pads?
Whilst currently China is in the sights of President Trump this mornings news from the ECB seems likely to eventually get his attention.
In April 2018 the euro area current account recorded a surplus of €28.4 billion.
Which means this.
The 12-month cumulated current account for the period ending in April 2018 recorded a surplus of €413.7 billion (3.7% of euro area GDP), compared with €361.3 billion (3.3% of euro area GDP) in the 12 months to April 2017.
So the Euro area has a big current account surplus and it is growing.
This development was due to increases in the surpluses for services (from €46.1 billion to €106.1 billion) and goods (from €347.2 billion to €353.9 billion
There is plenty for the Donald to get his teeth into there and let’s face it the main player here is Germany with its trade surpluses.
Trade what is it good for?
International trade brings a variety of gains. At the simplest level it is access to goods and resources that are unavailable in a particular country. Perhaps the clearest example of that is Japan which has few natural resources and would be able to have little economic activity if it could not import them. That leads to the next part which is the ability to buy better goods and services which if we stick with the Japanese theme was illustrated by the way the UK bought so many of their cars. Of course this has moved on with Japanese manufacturers now making cars in the UK which shows how complex these issues can be.
Also the provision of larger markets will allow some producers to exist at all and will put pressure on them in terms of price and quality. Thus in a nutshell we end up with more and better goods and services. It is on these roads that trade boosts world economic activity and it is generally true that world trade growth exceeds world economic activity of GDP (Gross Domestic Product) growth.
Since the Second World War, the
volume of world merchandise trade
has tended to grow about 1.5 times
faster than world GDP, although in the
1990s it grew more than twice as fast. ( World Trade Organisation)
Although like in so many other areas things are not what they were.
However, in the aftermath of the global
financial crisis the ratio of trade growth
to GDP growth has fallen to around 1:1.
Although last year was a good year for trade according to the WTO.
World merchandise trade
volume grew by 4.7 per
cent in 2017 after just
1.8 per cent growth
Trying to specify the gains above is far from easy. In March there was a paper from the NBER which had a go.
About 8 cents out of every dollar spent in the United States is spent on imports………..The estimates of gains from trade for the US economy that we review range from 2 to 8 percent of GDP.
Actually there were further gains too.
When the researchers adjust by the fact that domestic production also uses imported intermediate goods — say, German-made transmissions incorporated into U.S.-made cars — based on data in the World Input-Output Database, they conclude that the U.S. import share is 11.4 percent.
So we move on not enormously the wiser as we note that we know much less than we might wish or like. Along the way we are reminded that whilst the US is an enormous factor in world trade in percentage terms it is a relatively insular economy although that is to some extent driven by how large its economy is in the first place.
Any mention of numbers needs to come with a warning as trade statistics are unreliable and pretty universally wrong. Countries disagree with each other regularly about bilateral trade and the numbers for the growing services sector are woeful.
This is one of the few economic sectors where theory is on a sound footing when it meets reality. We all benefit in myriad ways from trade as so much in modern life is dependent on it. It has enriched us all. But the story is also nuanced as we do not live in a few trade nirvana, For example countries intervene as highlighted by the World Trade Organisation in its annual report.
Other issues raised by members
included China’s lack of timely and
complete notifications on subsidies
and state-trading enterprises,
That is pretty neutral if we consider the way China has driven prices down in some areas to wipe out much competition leading to control of such markets and higher prices down the road. There were plenty of tariffs and trade barriers long before the Donald became US President. Also Germany locked in a comparative trade advantage for itself when it joined the Euro especially if we use the Swiss Franc as a proxy for how a Deutschmark would have traded ( soared) post credit crunch.
Also there is the issue of where the trade benefits go? As this from NBC highlights there were questions all along about the Trans Pacific Partnership.
These included labor rights rules unions said were toothless, rules that could have delayed generics and lead to higher drug prices, and expanded international copyright protection.
This leads us back to the issue of labour struggling (wages) but capital doing rather well in the QE era. Or in another form how Ireland has had economic success but also grotesquely distorted some forms of economic activity via its membership of the European Union and low and in some cases no corporate taxes. Who would have thought a country would not want to levy taxes on Apple? After all with cash reserves of US $285.1 billion and rising it can pay.
So the rhetoric and actions of the Donald does raise fears of trade wars and if it goes further the competitive devaluations of the 1920s. But it is also true that there are genuine issues at play which get hidden in the melee a bit like Harry Kane after his first goal last night.