It’s almost impossible to read the financial news today without seeing an article about world trade, tariffs and the shock it’s all giving to Wall Street and the stock markets.
Stocks are up, stocks are down, all the while consumer sentiment is being jostled back and forth and making it hard to predict what affect the American-Chinese trade war will have in the longer term.
Free Trade in a Global Economy: An Introduction
Until quite recently, America and its neighbors enjoyed relatively easy relationships and free trade.
That is to say, trade without tariffs on the majority of imports. This allowed companies like Ford to relocate some of its factories to neighboring nations, to help both with the cost of labor and distribution to buyers within countries like Canada and Mexico. These steps toward globalization made a lot of sense, saved resources and generally strengthened member relationships.
So, when trading partners China and the United States started to threaten each other with tariffs, it was understandably frightening to global markets. United States-based companies buy an incredible amount of raw material and finished goods from the global powerhouse. Incredible to the tune of $505.5 billion just last year alone. Exports to China during the same period were a mere $129.9 billion by comparison.
This may seem like a good thing. The Chinese are going to have to bear the burden of the heavy-handed tariffs being handed down from up on high, aren’t they? The truth is that Americans stand to suffer the most. The global economy is almost certainly also going to feel a sting.
Tariffs aren’t taxes on the exporter. They’re taxes on the importer. Say Ford needs special electrical window motors that a company in China has designed and made for the auto manufacturer for years. When Ford sends an order to the Chinese company, which understandably won’t take any less just because there’s a trade war on, Ford incurs an additional fee in order to get the shipment into the US.
This is one of those things that free trade eliminated. Ford’s price for window motors would only be what it cost to buy and ship them, without any additional costs incurred under this system, allowing the automaker to choose the most qualified company for the job, rather than one that happened to be close by.
U.S. Trade Agreements, the World Trade Organization and a World Gone Mad
Even as the World Trade Organization (WTO) is juggling disputes against the United States from member countries, trade tensions with China continue to escalate. The recent detention of Huawei Technology’s CFO Sabrina Meng Wanzhou in Canada has done nothing to make the situation better and any country-to-country promises have likely gone completely out the window.
Normally, when there are trade agreements to be negotiated or mediated, the countries involved turn to the World Trade Organization. Trump bucked the system and has been trying to negotiate directly with many of America’s current and potentially former trade partners, all the while angering countries that have been solid allies for decades.
It’s a little bit ironic, considering that the United States was instrumental in establishing the WTO in 1995. It’s a rules-based organization with voluntary membership and goals like smoothing out international trade, helping smaller economies get access to the global trade market and maintaining fair and equitable relationships between countries that may otherwise disagree pretty violently about everything to do with government.
US-China Trade: Now What?
The United States has long played a pivotal role in global trade, as has China.
Having the two countries digging in as hard as they seem to be digging means that consumers will suffer. Higher tariffs on Chinese goods hurt American consumers and businesses, the actual bearers of the additional costs. If it’s still cheaper or otherwise more desirable to buy transistors and raw materials from China, that’s exactly what American companies will do, especially when they have no viable alternative.
Globalization changed trade so much that what Trump is trying to accomplish may be impossible to create with little more than threats and posturing. Globalization made it so no one country had to learn how to make everything they needed for life, instead a few countries that had the right skill set among their populations and easy access to the raw supplies necessary would become the experts in creating the world’s supply of that particular and necessary thing. They would then trade with other countries with specialties of their own.
Gradually, everyone in the trading web became interdependent on everyone else. However, when a country decides to challenge the status quo by attempting to renegotiate existing international trade agreements in favor of better ones, tariffs are a viable option if negotiations fail. So far, President Trump’s tariffs have incentivized American companies new and old to operate in the USA instead of abroad, while supporting domestic production and new job creation.