With his popular battle cry of “America First,” U.S. Pres. Donald Trump has vowed to re-negotiate or bring an end to free trade agreements he sees as detrimental to U.S. jobs and manufacturing.

Along with deals like NAFTA and the TPP, China has also often found itself at the center of Trump’s protectionist cross hairs. Trump’s attacks on China’s economic policies, and his threats against Chinese imports, have led to widespread speculation of a trade war between the world’s two largest economies.

So what would a trade war between the United States and China look like? And what is the possibility that such an economic showdown will come to pass?

U.S. claims against China

At the heart of the U.S. complaint against China is the size of the trade deficit between the two countries.

In 2016, the United States had a $347-billion trade deficit with China. That makes it the largest trade deficit the United States holds with any country — it’s five times the size of the country’s next highest trade deficit, with Japan.

In total, it adds up to more than 40% of the United States’ total trade deficit. However, it is worth noting that the United States’ trade deficit with China shrank by $50 billion since 2015, and U.S. exports to China are growing faster than Chinese exports to the United States.

As president, Trump also has continued his campaign claims that China severely manipulates its currency to the detriment of the United States. In a February interview with Reuters, Trump dubbed China the “grand champions” of currency manipulation. However, Trump’s claims don’t seem to hold up to facts, according to trade experts.

Former U.S. Pres. Barack Obama had labeled China as a currency manipulator before the financial crisis began nearly a decade ago. Since that time, China has adjusted its economic policy to favor domestic consumption over exports, which has brought change in its international exchange policies. In fact, according to the last U.S. Treasury report, China meets only one of the three criteria of being a currency manipulator: having a trade surplus over $20 billion. Another U.S. Treasury report on the matter is due out in April.

What a trade war could look like

Trump, however, has threatened tariffs as high as 45% on Chinese goods entering the United States. Some analysts have speculated that tariffs could target certain Chinese imports from industries with large surpluses over the U.S., such as the steel and furniture industries, or those from state-owned corporations. Trump also said during his campaign that he would make a priority of officially declaring China a currency manipulator.

Economists have projected that a 45% tariff on Chinese exports to the United States would lead to an 87% decline in those exports. The decline of $420 billion in exports would contract China’s GDP by 4.8%. Even minimal tariffs of 15% could lead to a 1.8% dip in China’s GDP, economists reported.

The effects of such tariffs wouldn’t only be felt by China, as they could retaliate against U.S. tariffs in a variety of ways.

Should China counter with its own set of tariffs against U.S. imports, the United States could see a major blow to its economy, as China is the 3^rd largest importer of American goods, behind Canada and Mexico. U.S. industries that would be particularly hard hit — those that rely heavily on Chinese imports — include manufacturers of air plane parts, automobiles and electronics, as well as growers of soy beans and corn.

The impact of tariffs on Chinese exports could have major impacts on American companies and families. There are many American-owned companies who export goods from China into the U.S., and an estimated 1.8 million U.S. jobs rely on Chinese imports. On top of that, Chinese imports save American households up to $850 a year.

Experts have projected that the impact on the world’s two largest economies would have a profound ripple effect on the global economy.

Will a trade war come to pass?

It’s yet to be seen whether the United States will make a move against Chinese imports that could lead to a trade war. While Trump has continued his “America First” and anti-China rhetoric, he has not set forth any policy affecting trade. However, U.S. Treasury Secretary Mnuchin did make headlines earlier this month when he refused typical G20 language rejecting protectionism during a meeting in Germany.

Chinese leaders are reportedly consulting with advisers and think tanks to determine how they should react to any potential U.S. trade policies targeted at Chinese imports. At the same time, Chinese trade officials have maintained that they would like to continue an open working relationship with the United States that is based on the development of mutually beneficial trade agreements. In fact the Chinese Foreign Ministry just announced plans for President Xi Jinping’s first meeting with President Trump at his Mar-a-Lago estate next week.

“Cooperation benefits both, while confrontation can only hurt.” – Chinese Commerce Minister Gao Hucheng said during a news conference in February.

The post Will there really be a China-U.S. trade war? appeared first on Trade Ready.

Despite the huge reception given to Thomas L. Friedman’s The World is Flat, published in 2006, our thinking about trade balances and their measurement remains over 500 years old: globalization has left trade balances behind! Mercantilism ruled from 1500 to about 1750, yet the framework it generated – “imports are bad, exports are good” – to account for and explain trade balances persists today.

The result is that this outdated and erroneous framework threatens the global operations of U.S. multinational corporations, and therefore, the:

• $23 million jobs they create in America;
• $341 billion worth of investments in America; and
• 25% or $3 trillion of America’s GDP they create.

How the “imports kill jobs” myth serves politicians

Politicians want to attain public office and stay in power as long as they can. For that, they need votes. If unemployment among the constituents rises, the incumbents’ votes are threatened. In such a situation, the easy reaction of both politicians and their voters is to blame so-called outside forces for fewer jobs.

Of course, there could be several real reasons for the rise in joblessness. These range from bad education policies that do not create employable (i.e. qualified) workers in sufficient numbers, to burdensome taxation, to lack of policy perseverance and poor corporate strategy. One way to avoid the inconvenient truth and deflect the criticism is to put the blame on “unfair” imports for killing domestic jobs.

What would be the result of carrying the logic of “killer imports” to its absurd conclusion? All imports to the U.S. would have to be banned.

This would also affect U.S. multinational corporations that have proliferated abroad and import their foreign-made products back into the U.S. market.

However, unlikely as such a prospect might be in the real globalized world, let us visualize the effects of a hypothetical ban on imports by the U.S. For starters, most of those imports would have to be substituted by local production, the cost of which would be much higher. This would raise the inflation and in turn, interest rates.

Higher interest rates result in reduced investment. The growth of manufacturing slows; fewer new jobs are created and more jobs are lost. A rise in the cost of capital sinks the housing market as well as adversely affecting stocks, bonds and debt markets, which would be focused on diminishing returns on investment.

The bottom line is – imports create jobs

In fact, imports allow U.S. companies to make more of what they are good at, thus creating jobs in America: supply creates demand. That is why, when imports rise, so does employment. We have developed “The Economic Clock” for many of the world’s economies. Whenever the “economic time” is good in America, there is an excess demand for goods. So, of course imports rise, as does the number of jobs.

How, then, can some U.S. politicians claim that imports kill jobs when the facts support exactly the opposite view?

Another question worth asking is: When America employs fewer people in manufacturing, how can the trade surplus rise if fewer people are manufacturing goods? The share of America’s manufacturing employment in total employment shrank by two thirds – from 28% in 1960 to 8% in 2016.

As fewer Americans are employed on the manufacturing assembly lines, more goods are imported, and that allows American companies to make more of what they are good at – and in this age, these are services. Over the past several decades there has been a persistent rise in the well-paying service-sector jobs for Americans; in the 1960s one in two Americans worked in the service sector; by now two in three hold service jobs. In the corresponding period, the country’s net balance in services trade has turned into a surplus.

According to the office of the U.S. Trade Representative, the services economy generates the largest services trade in the world, with exports of $606 billion dollars in 2011 and a trade surplus of $179 billion. In Canada, commercial services have now run a surplus for 13 years, all the way back to 2003 and throughout the Great Recession, according to Global Affairs Canada.

To sum up, the idea that imports kill jobs is fallacious for a number of reasons. The fact is that, thanks to the growth in the services sector, the U.S. export surplus in services has risen significantly.

Protectionism defeats everyone

While the immediate aim of this content is to reach decision-makers particularly in Washington and China, the broader objective is to move the thinking away from national or nation-state trade balances and towards multinational trade balances. This needs to be done to avert protectionism based on wrong-headed mercantilism.

Protectionism defeats everyone and the resulting animosity leads to unemployment, followed by social unrest and even wars.

It is always easier to blame the foreigner than to work on one’s own backyard. Most of all, this content is meant to stir some debate in order to solve the problem of protecting American workers from offshoring and, as Prof. Alan Blinder stated in one of his essays: “My main purpose is to get as many smart people as possible thinking creatively about the problem.”

The post Imports do not kill jobs – protectionism does appeared first on Trade Ready.

A myth is a “widely held but false belief” according to the Oxford English Dictionary. Politicians and pundits everywhere seek to sway opinion by exploiting the large following that fictitious yet popular ideas command. Small wonder then that such myths, based on the mindset of the 1500s, are still flourishing.

To bring us into the 21st century, it is worth questioning these myths in order to show how irrelevant they are in today’s era of deepening globalization.

The exchange rate myth

A ploy in the criticism of domestic policies that have fostered unemployment through trade, is to blame the exchange rates of a country that is running a large surplus with America. The simplistic logic of this complaint is that if only that country’s exchange rates were stronger, America would have no deficit.

It is all well to hector other nations to up their exchange rates, but it is far from easy to have it implemented, especially if the other country has enough economic and political clout in the world. In turn, leaders of that country, as well as some voices in the U.S., would demand that the greenback be devalued even more.

What would happen if the U.S. dollar were to be devalued progressively? Among other things, the U.S. would import higher inflation, interest rates would rise, and the value of U.S. assets held by foreigners would shrink. Foreign central banks and overseas investors would wonder why they were holding depreciating assets in U.S. dollars. All of this would lead to a huge sell-off of U.S. assets, including U.S. stocks and bonds.

Decline in investment affects the growth of business and costs jobs in America.

Exchange rate fact vs fiction

Removing the myths and probable scenarios, what are the remaining facts about exchange rates and trade surpluses? In fact, over the past three decades, Germany and Japan have had rising exchange rates and rising trade surpluses, while Britain and America have had falling exchange rates and rising trade deficits.

From 1971 (when Bretton Woods was replaced by floating currencies) to 2007, the Deutschmark rose 2.5 times in its annual average value against the dollar. In that same time Germany’s global trade surplus rocketed 25 times, to euro 162 billion.

Japan reveals a similar story. From 1971 to 2007, the yen rose 2.6 times against the greenback, and Japan’s global trade surplus shot up over seven times, to nearly 11 trillion yen.

How, then, can some U.S. politicians claim that a stronger exchange rate kills exports, when exactly the opposite is true in two of the three members of the G-3?

Meanwhile, the story is radically different for the Anglo-Saxon economies. From 1971 – 2007, the British pound fell by about 20% against the U.S. dollar; however, this masks the fact that it had halved in value by 1985. Yet the UK’s trade deficit rocketed 463 times during the same period.

Putting an end to the blame game

And finally to the core of the argument of many U.S. politicians seeking election or re-election; that others’ “undervalued” exchange rates are to blame for America’s ballooning trade deficit.

In fact, from 1971 – 2007, the U.S. dollar fell by one third in terms of its trade-weighted exchange rate with major trading partners, but America’s trade deficit ballooned nearly 360 times, to over $800 billion. How, then, can some U.S. politicians still claim that a weaker exchange rate propels exports, thus creating a trade surplus?

To sum up, the myth is that exchange rates or other currencies cause American trade deficits.

The fact is that exchange rates matter in the aggregate only at the margin. We have just demonstrated that countries do not have trade surpluses or deficits because of the exchange rate.

Look at Germany’s rising currency and its rising surplus – and at America’s recent falling exchange rate and its rising deficit. Of course, individual companies have headaches hedging against their specific currency risks.

What really drives trade is the comparative advantage of an economy, not exchange rates.

The post Another trade myth debunked – exchange rates do not drive trade appeared first on Trade Ready.

Dismal figures for March

The U.S. imported $232.9 billion worth of goods $187.8 billion, while only exporting $187.8 billion, resulting in a trade deficit of $51.4 billion. This deficit marked an increase of $15.5 billion – or 43.1% – over February 2015 numbers.

The biggest segment of imports ($9 billion worth) was cell phones and clothing, while another $4 billion went to capital goods. U.S. consumers imported $2.7 billion in automobiles and associated parts.

From February, U.S. exports only saw a 0.9% increase from February’s figures.

The U.S. trade relationship with China marked the biggest change, recording its highest-ever trade deficit in history at $37.7 billion. This amount accounts for 74% of the U.S.’ total trade deficit.

There are two key reasons why the U.S. is reporting such a monumental trade deficit in only one month’s time.

First, a 9-month-long strike at 29 ports on the West Coast has taken its toll. The labor dispute is believed to have created a bottleneck of imported goods, which ultimately created a decrease in the number of imported goods American consumers were buying.

The resolution of this labor conflict will improve U.S. trade numbers, several economists say, but in the short term creates a spike in imported goods as the last of the congestion is processed.

The increasing power of the U.S. dollar is also to blame

Strong currencies are often paraded by politicians as a mark of economic strength – with few acknowledging the potentially substantial side-effects for the economy as a whole.

When the value of the American dollar rises, foreign potential buyers of American-produced goods find the price of those goods to be more expensive than before, which can significantly depress sales of those goods.

This was reflected in the trade numbers for March, with fewer buyers willing to acquire goods produced in the U.S. in favor of goods produced elsewhere, and selling for less expensive price tags.

The potentially long-lasting economic effects

Trade deficits – especially those with as much pronounced change as this one – have both immediate and long-term effects.

Following the news, economists revised their projected GDP growth for the U.S. economy to zero, down from an already dismal 0.2% rate. But longer-term, a prolonged trade deficit can hurt the domestic economy in other ways.

First, a sustained trade deficit could have a negative impact on foreign and domestic investment into domestic industries.

A trade deficit means that U.S. customers are opting for foreign-produced goods over domestically produced goods, which indicates that domestic industries are either producing less competitive products, or products that are deemed too expensive by consumers.

In this economic environment, investors are less likely to place their funds in these struggling enterprises and will opt instead to back industries with a stronger customer base.

How the deficit could hurt future trade deals

Second, the current trade deficit could hurt ongoing negotiations in the U.S. government over the proposed Trans-Pacific Partnership (TPP) trade deal.

Though President Barack Obama is firmly behind the deal, his own party is split on whether to support a trade policy which some believe may have negative repercussions for U.S. workers, particularly in manufacturing.

Many opponents to the trade deal equate a previous deal – the North American Free Trade Agreement (NAFTA), signed between the U.S., Canada, and Mexico in 1994 – with the end of U.S. dominance of global manufacturing, spelling the end of employment for thousands of American workers.

However, economists by and large agree that the root causes of the death of manufacturing in America had far more to do with China’s economic rise than the signing of NAFTA. But old attitudes die hard, and this particular strain (that NAFTA equals job losses) is an especially stubborn one.

Do you think U.S. trade figures will rebound in the coming months? How do you think this deficit will effect imports and exports?

The post Why the U.S. trade deficit could be a big red flag for the U.S. economy appeared first on Trade Ready.

As the U.S. enters into trade negotiations to create long-standing agreements with the European Union and with Asian partners, a debate is raging about whether or not international trade pacts are hurting or helping the U.S. middle class.

This question is especially poignant, given how many workers have fallen out of the middle-class category following the global financial crisis, and continuing concerns over the slow rebound in hiring and persistent wage stagnation across industries.

Trade deals have been seen in a negative light since NAFTA was passed in 1993; many felt that the promised returns of the deal never materialized and blamed the deal for the loss of manufacturing jobs.

The argument for trade deals

But two economists from the centrist think tank Third Way, Jay Chittooran and Jim Kessler, assert that this argument is outdated, citing more recent trade deals that have had a substantial benefit for blue-collar workers in the U.S.

The U.S. trade balance, in the goods sector, has benefited tremendously from trade deals made with 17 countries since NAFTA’s signing. These countries include Singapore, Australia, a host of Central American states, Oman, and Bahrain. according to their research.

Limiting their analysis to goods, Chittooran and Kessler argue that the U.S. now has a trade balance of $31 billion with these 17 countries, since NAFTA. This is in comparison to the combined $3 billion deficit the U.S. had with these 17 countries in the years before the trade deals were signed.

Since signing trade deals with El Salvador and Honduras roughly nine years ago, the U.S. trade balance with these two countries have improved by $3 billion in manufactured goods alone.

It’s not just in the production of goods that the U.S. economy benefited from these trade deals, they add. The provision of services, which is primarily provided by white-collar workers, also increased substantially with these 17 countries.

In his State of the Union speech on January 20, President Barack Obama made a more generalist argument for why trade deals are important for the U.S. economy.

“I’m the first one to admit that past trade deals haven’t always lived up to the hype,” he said.

But ninety-five percent of the world’s customers live outside our borders, and we can’t close ourselves off from those opportunities.

“More than half of manufacturing executives have said they’re actively looking at bringing jobs back from China. Let’s give them one more reason to get it done.”

How crucial is the export of manufactured goods to the U.S. economy?

Criticism of trade deals comes mostly from the left, which considers itself the defender of the American middle class. Republicans embrace free trade and allowing the market to perform without the intrusion of the federal government.

Robert Reich, an economist and former Secretary of Labor under President Clinton, argues that the nature of free trade has changed drastically from the 1960s and 1970s, and no longer focuses on the production and export of manufactured goods.

U.S. exports are now overwhelmingly ideas and brands, and take the form of software, franchises, and scientific processes, Reich argues, pointing to the U.S. firms of Google, Apple, Walmart, and Microsoft, to name a few. As such, only Wall Street and the top 1% of the country’s income scale stand to make any profit in modern trade agreements.

Undoubtedly, trade deals bolster America’s gross domestic product.

But while these agreements may make goods somewhat cheaper, this comes with its own price tag: the loss of jobs in certain sectors and diminished wages for the middle class

Reich contends.

He bolsters his argument by citing statistics about the U.S.-China trade balance; the U.S. has a $23.9 billion trade deficit with the East Asian economic giant, which Reich sees as responsible for continuing wage stagnation in the United States.

In the end, the president is intent on winning more global trade agreements, and the Republican-led Congress is behind this initiative. The ultimate impact of trade agreements on the American middle class will reveal itself as these trade deals come into effect.

What’s your take? Are you for or against trade deals?

The post Will trade deals destroy the U.S. middle class – or save it? appeared first on Trade Ready.