Daniel McCarthy

If this is a trade war, the United States will win

If this is a trade war, the United States will win
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Donald Trump is following through on his threat—or promise, as his voters see it—to impose steep tariffs on foreign goods in the name of supporting American industry, starting with levies of 25 per cent on steel and 10 per cent on aluminium imports. Allies and neighbours that had been granted temporary exemptions are now set to feel the brunt of the tariffs: Canada is America’s leading source of foreign steel, and Mexico and the European Union will also feel the pain. They’re all threatening to retaliate, and the press is calling this a trade war.

If this is a war, it’s one the United States will win. The thing to keep in mind when reading about retaliation is that the US has trade deficits with all of these countries—as well as, of course, with China, which is not one of America’s leading sources of steel but whose state-subsidised steel industry is responsible for depressing prices globally. Because the US buys far more goods from these countries than they buy from us, they stand to lose much more in a tit-for-tat over tariffs. How can China or Canada put tariffs on American goods that they don’t actually buy? They can’t, and what they do buy, while not insignificant, pales before what Americans buy from them.

Trump’s move is certainly smart politics. He is president by virtue of having won the Electoral College votes of “Rust Belt” states like Pennsylvania, Ohio, and Michigan. Those are all battleground states, where Republicans often do quite well in gubernatorial and legislative races but fall short in presidential elections. Yet the GOP can win them in presidential contests, too, as Trump has proved, if only the party speaks to their interests. If Trump can keep them in his column in two years’ time, he will be a shoo-in for re-election. 

Critics insist that the tariffs are not so good for the American economy as a whole, however. After all, what becomes of the American businesses that depend on steel? Now their costs will rise, and those costs will either be passed on to consumers or, should the rise be more than consumer demand can bear, they will cause businesses to contract, even to close. It sounds like a dire scenario, but when prices rise in other circumstances, economists have no problem explaining that substitute goods will be found or, at most, “creative destruction” will take place. Firms and prices, the market as a whole, will adjust. That will happen in the case of any disruptions caused by tariffs, too. And there is this to keep in mind as well: if the complaint is that tariffs somehow distort the delicate mechanism of the market, unleashing an evil categorically different from other kinds of ebbs and flow in costs, then what must one say about the mutilations of the market that come from China’s industrial subsidies? In concrete terms, companies that are dependent on an artificially low price for steel are in for a world of hurt in the long run—for what happens when China fulfils its goals and stops subsidising the price? Then the businesses that depend on the cheap steel market will be in the same position as they are with Trump’s tariffs, only worse.

China’s long-term goal in this will be very familiar to anyone who has studied the history of trade, war, and imperialism. Beijing would like to build up its own industrial power and hollow out that of the United States, its chief long-run strategic rival. Under imperialism, the metropole liked to foster and protect industry at home and keep colonies dependent by depriving them of manufacturing and getting them to import finished goods rather than creating them (let alone exporting them). Leverage belongs to the manufacturers. China has no need to start a war with the United States. One superpower can replace another by a gradual process of economic eclipse and induced de-industrialisation. Let Americans think that their “service economy” will sustain itself. It won’t: a nation without a strong manufacturing base is as vulnerable as a nation that cannot feed itself or supply its own vital natural resources.

Those who fear Trump’s tariffs need not lose hope, however. The president is a negotiator, as he is proving in his complex diplomacy with Kim Jong-un. The heavy tariffs are leverage for negotiating, and Trump might yet back off if, for example, Mexico agrees to pay for the border wall he has pledged to build, or Canada cooperates in renegotiating NAFTA. Critics would do well to expend less breath on effusing about a trade apocalypse and put their effort instead into coming up with other ways to revive American industry.