There was a time, not too long ago, when most Americans could go about their lives without giving much thought to the idea of free trade among nations.
Through a combination of free trade agreements and globalization during the 20th century, firms and consumers could obtain nearly any good or service they desired, without worrying about cost-prohibitive taxes or tariffs on international commerce. That assumption became a little shakier on March 8, 2018, when President Trump issued Proclamations 9704 and 9705, which instituted a 25 percent tariff on steel and aluminum imported into the U.S. With some notable exceptions (Mexico, Canada, and Australia), the tariff hits our geopolitical allies and enemies alike, and they have all retaliated in their own ways. More recently, the Trump Administration removed trade preferences for India, and that country too has hit back with its own trade barriers against the U.S.
As trade tensions and battles escalate, we may see higher tariffs on our exports of goods—and especially services—that are the mainstay of U.S. businesses. Worse, since U.S. exports are concentrated in thriving industries, the trade war is jeopardizing U.S.-based companies
For Tuck associate professor Emily Blanchard, these are heady times. As a trade economist who closely studies how foreign investment and global value chains are changing the role of trade agreements in the 21st century, her expertise is especially relevant today as businesses and individuals struggle to make sense of the escalating trade wars instigated by the U.S. That, in part, motivated Blanchard to write “Trade Wars in the Global Value Chain Era,” an accessible primer on the reasons why the current trade conflicts are especially dangerous, given the fragmentation of the global supply chain. The piece is a chapter in the free Vox e-book, Trade War: The Clash of Economic Systems Endangering Global Prosperity, which is available to download here.
Below, Blanchard answers some questions about the recent trade actions and highlights some of the most important points from her piece.
Candidly, it’s not clear. The administration has offered a series of justifications for various trade actions, some of which make more sense than others. Most conspicuously, the president has said repeatedly that new tariffs are in part to address trade imbalances, to get rid of the current account deficit. But that’s just silly. The current account deficit is determined by the difference between national saving and national investment—so unless tariffs cause us to save more or invest less, they’re not going to make a dent. (And think about it—investing less and saving more both reduce economic activity. History shows us that recessions are a great way to reduce the current account deficit, but I don’t think that’s what the president is hoping for.) So while tariffs aren’t going to eliminate the trade deficit, they are upsetting our trading partners. And as trade tensions and battles escalate, we may see higher tariffs on our exports of goods—and especially services—that are the mainstay of U.S. businesses. Worse, since U.S. exports are concentrated in thriving industries, the trade war is jeopardizing U.S.-based companies with high profits and high wages.
An alternative justification for the tariffs is that they’re actually designed to give the U.S. greater leverage in trade negotiations. This makes more sense, but it’s still an expensive and risky strategy with so many U.S. businesses and workers on the line. In some cases this may work— for example, by threatening tariffs, some trading partners like Brazil and South Korea offered to “voluntarily” reduce sales of steel to the U.S. (To be clear, this raises costs to U.S. consumers and the many U.S. manufacturing firms that use steel as an input to production. But if the goal is only to increase prices of steel in the U.S. for the benefit of U.S. steel producers: mission accomplished.) But this is also getting out of hand. For instance, when the president threatened to slap across-the-board tariffs on Mexico because he wanted Mexico to keep Central American asylum seekers from entering the U.S., the threat upended the norms and rules of the system of global trade cooperation that the U.S. has built and led for the past 70-plus years. The president has been weaponizing trade in a way that may have long-lasting consequences for global governance.
Well sure, and it’s important to give the president credit for diagnosing some legitimate problems. For example, China is expropriating (implicitly and explicitly), intellectual property of U.S. and foreign firms. That’s a violation of the norms of international commerce, if not the explicit rules. He’s not the first to recognize and try to address the issue, but he’s really called it out. (The Obama and Bush administrations also had deliberate strategies to try to change China’s behavior, not least via the Trans-Pacific Partnership, which the Trump administration scuttled in 2017.)
Without this agreement we’ll both lose. Other countries may lose more—especially if they are small—but there is no doubt that we’ll lose too.
He’s also implied that, since the end of WWII, the U.S. has been a global leader through global governance initiatives and the Marshall Plan, and deliberately left a lot of gains on the table for other countries to share in. The U.S. strategy was to build a liberal world order based on rules, norms, open markets, and a set of American values. Now Trump’s actions seem to be saying, We’re bigger, so we should get all the benefits. More cookies for us: less for the world. America First. So if we had written an agreement where everyone was winning, maybe we should be winning more. While I think his premise is correct—the U.S. did stop short of pushing its trading partners to the wall in each and every negotiation—I’m concerned about the implications of this new tack, for the world, and for us. I worry that the president doesn’t appreciate the mutual gains from our existing trade agreements. He often argues that other countries will be worse off if we don’t have these agreements, but that the U.S. will be better off. He’s thinking of trade as a zero-sum game, as if it’s a real estate transaction. And it’s just not. What would be correct to say is: without this agreement we’ll both lose. Other countries may lose more—especially if they are small—but there is no doubt that we’ll lose too.
There’s really no such thing as an “All-American” firm that hires only American workers, uses only American machinery and capital and inputs, has only American investors and then sells its products as exports to the world.
The first thing to know is that the way we make things in the world is different today than it was in the time of Adam Smith, David Ricardo, or even when the GATT (General Agreement on Tariffs and Trade) was signed in 1947. The president seems to be thinking with that very mercantilist mindset, which is decidedly unhelpful, if not dangerous. The fact of the matter is there’s really no such thing as an “All-American” firm that hires only American workers, uses only American machinery and capital and inputs, has only American investors and then sells its products as exports to the world. At the same time, our imports are not coming from fully foreign entities. A lot of what we import was made by U.S. firms, funded by U.S. investors, using inputs and ideas from U.S. workers and then assembled abroad. Putting tariffs on “foreign” goods means implicitly taxing all of the U.S. capital, labor, ingenuity, and industry that go into making products around the world. This complex reality means trade wars today are profoundly expensive in three ways:
For more insights, read Emily Blanchard’s “Trade Wars in the Global Value Chain Era.”