Washington Wednesday: Trade war

MEGAN BASHAM, HOST: It’s Wednesday, July 18th, 2018.

Glad to have you along for today’s edition of The World and Everything in It. Good morning, I’m Megan Basham.

NICK EICHER, HOST: And I’m Nick Eicher. First up on The World and Everything in It: Washington Wednesday.

China filed a challenge this week with the World Trade Organization.

Beijing wants the WTO to intervene in the trade dispute with the United States.

The move comes less than a week after the U.S. Trade Representative proposed 10 percent tariffs on a list of Chinese goods totaling $200 billion.

The latest tariffs wouldn’t take effect until at least September. So it’s not entirely clear what if anything the WTO can do right now.

Meantime, on Monday the International Monetary Fund warned the developing trade war could cost the global economy some $430 billion over the next two years. That would mean lowering global GDP by about half a percentage point.

President Trump has insisted trade wars are good and easy to win. On Capitol Hill, lawmakers remain unconvinced. Here’s Senator Pat Toomey of Pennsylvania:

TOOMEY: Ninety-five percent of the world’s population lives somewhere else. I want to sell to them, and we do that through an environment of free trade.

Last week the Senate overwhelmingly approved a nonbinding resolution expressing its disapproval of President Trump. It could lead to actual legislation taking back the power Congress granted the president to use tariffs for national-security purposes.

Republican senators such as Bob Corker of Tennessee took the president to task.

CORKER: This is an abuse of presidential authority.

Corker is chairman of the Senate Foreign Relations Committee. He said the administration is not only misusing the Trade Act—it is misusing it against allies.

CORKER: I don’t understand how putting tariffs on our neighbors has anything to do with combating what China is doing in stealing our intellectual property…

Joining me now to provide some analysis is financial adviser and writer David Bahnsen. David, good morning.

DAVID BAHNSEN, GUEST: Good morning!

Let’s put the cookies on the lowest possible shelf here.

I think at a certain level, we understand how shooting wars work.

But I’m not sure we fully comprehend how trade wars work.

David, why should we care about a trade war?

And related to that question, how will we feel the effects of a trade war?

BAHNSEN: Well, I mean, obviously a trade war is a categorically different thing than a shooting war. Effectively what a trade war implies is that there is an action taken that has a negative economic impact and then there’s retaliatory action taken. So one bad event begets another bad event and so on and so forth. It’s extremely rare that a trade war ends after one bout of retaliation or one round, like a boxing match. Unless someone is totally knocked out, generally you’re going to go multiple rounds back and forth. And in this case, the irony of a trade war is that the person being impacted most negatively is the side that is making the action. In other words, we go implement a tariff on China, the consumer in the U.S. that is buying the product China exports to us, that we import from China, pays the tariff. So we are the one taking the action and then we are the one bearing the brunt and vice versa when the other country—in my example, China—retaliates. That’s the way a trade war works. It’s tit for tat and there is no winner by definition because the winners are those who are trading more, not less. By definition, voluntary exchange means that the two sides believe that there is a success to be had and growth to come or some benefit to come out of effecting the transaction. And when we’re doing less of those transactions, the result of a trade war, then that is a negative for both sides.

David, it seems the economy is doing really, really well. The tax cut is achieving its desired effect, the official unemployment rate is at a record low. The one negative seems to be what we started talking about this morning and that is this trade dispute.

How are the financial markets viewing all of this?

BAHNSEN: So, first of all, it’s very early, right? The very first round of tariffs to be implemented were only implemented a couple of weeks ago—in terms of this China round. And it was a very small round. When you hear the media report that it was $34 billion worth of tariffs, they’re referring to the value of the products coming in. The tariff itself was 25 percent, so you’re talking about an $8-8.5 billion tax. It’s not a very sizeable amount of money, yet, in the grand scheme of things. But the answer about financial markets is very, very clear. You have record profit growth like we’ve never seen and yet the stock market is flat on the year. You have the impact of tax reform, which has been overwhelmingly positive, and yet you have stocks not moving. So it’s added to volatility, it’s increased the up and down movement, skittishness, investor fear and uncertainty, it hasn’t tanked markets, but it certainly held markets to a lower point than they’d otherwise be, we reckon, by 1,000 to 2,000 points on the Dow.

Now, I noticed that in some of the congressional debate that we heard a little bit ago that the Republicans did concede that China is a bad actor, but said that tariffs are not the way to go and it certainly shouldn’t be considered a national-security issue. What would you say, David, is the appropriate weapon to fight Chinese misbehavior, if anything at all?

BAHNSEN: Well, let me clarify two things that are really important. It’s a great question. First of all, the Senate action was dealing with Canada and the notion that Canada’s exporting of aluminum into our country represented a national-security threat. It is absurd on its face that anybody believes Canada and what they’re doing buying and selling aluminum is a national-security threat…

But, to the extent the broader question is what do we do where there is China misbehavior, I believe it becomes a lot easier for policy-makers to formulate answers and for the listeners to think about the issue to understand a couple basic economic facts. Countries don’t trade with each other. People and companies trade with each other. So, the whole idea that China is tariffing U.S. or U.S. is tariffing China is a purposely vague, inaccurate, and hasty, generally unhelpful way to frame it. If there are bad actors in China, and there most certainly are, who are stealing intellectual property of U.S. companies, the number one thing that everybody knows we could do and we’re not doing is go punish the actual actor.

Now, that opens up a whole can of worms about enforcement and it opens up the real can of worms which is that a lot of this intellectual property theft is being aided and abetted by the U.S. companies that are all too happy to let their own IP get stolen in exchange for the benefit they’re getting from the transaction.

Keep in mind, they are the ones sending their formulas, their secret sauce to Chinese manufacturers who are then reverse engineering, taking IP. So, this is not happening in secret, but nevertheless it shouldn’t be happening. And we have every ability to deal with company XYZ and company ABC, rather than the broad, blunt instrument of a tariff.

Now, I don’t want to reduce all of this to pure politics, David, but trade protectionism, tariffs, trade wars, all of that seems like traditional Democratic stuff, Democratic politics. But I’ve heard the argument that this is how Trump succeeds with forgotten traditional Democrats and how he wins in states like Ohio, Michigan, Pennsylvania. The big surprise. Is this a case of bad economics but good politics at a certain level?

BAHNSEN: Well, the possibility of that playing out is all dependent on him not actually following through. I agree it is good politics. It saddens me that it is, but I agree it is if he doesn’t really do anything. In other words, if he just threatens with tariffs and postures and flexes and renegotiates and ends up with some sort of face-saving conclusion. Which, by the way, is exactly what I think will happen. And I even think substantively there may actually be some real improvements. It’ll be a little trickier on the China side. They have a lot more leverage than anyone wants to admit, but I think that we will end up with a better NAFTA agreement with Mexico and Canada, and I think that he may even get some kind of superficial victory with the European Union, some of these auto imports and so forth.

But… It would not be good politics if all of a sudden the consumers in the Rust Belt, blue collar states, industrial America was eating the economic results of the higher tariffs. But, see, you notice that the first batch of these tariffs from China were 25 percent. And now they announced, they haven’t implemented yet, but they’ve announced their intention to do another round of tariffs on $210 billion, almost all consumer products. They announced that rate at 10 percent. Now, why did they go from a 25 percent, heavier tariff for the first round to 10 percent in the second? Because the second round is very consumer driven. I think there are cooler heads in the Trump administration that are well-aware of the fact that they hurt their political benefit if this ends up affecting consumers in their pocketbook.

Alright. Financial adviser and writer David Bahnsen. David, thank you for your time.

BAHNSEN: My pleasure. Thank you for having me.

(Chinatopix via AP) In this July 6, 2018, photo, a truck moves a China Shipping shipping container at a port in Qingdao in eastern China’s Shandong Province. 

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