by Michael Roberts
Today is a threshold date for the global economy. Trump’s US
administration starts imposing trade tariffs on $34bn of imports from
China. And Beijing is set to target an equal amount in
retaliation. Add that to the pile of tariffs and counter-tariffs
growing across the Atlantic and North America, and the value of trade
covered by the economic wars that Trump has launched will race through
the $100bn mark by today.
And that’s just the beginning. This escalating trade war could
easily surge through the trillion-dollar mark, taking 1.5% of global
GDP. It would be equivalent to a quarter or more of the US’s $3.9tn
total trade with the world last year and at least 6% of global
merchandise trade (worth $17.5tn in 2017, according to the World Trade
The $34bn in Chinese imports being targeted by the Trump
administration today are roughly equivalent in value to a month of
imports from China. In this tranche, a 25% import tax will be applied
on 818 products ranging from water boilers and lathes to industrial
robots and electric cars. In return, Beijing charge a similar tariff on a
list that includes soya beans, seafood and crude oil. Both countries
have also issued further product lists that would take the total trade
covered to $50bn on each side.
Angered by China’s retaliation, Trump has ordered a further $200bn
worth of imports to be targeted for a 10% tariff and threatened to go
for another $200bn beyond that. To which Beijing has vowed its own
response. US imports from China were worth $505bn last year while US
exports to China reached a record $130bn. So a £450bn rise in tariffs
will sweep across much of China’s imports. The Trump auto wars could be worth even more than $600bn. In a
televised interview on Sunday the US president called his plan to impose
tariffs on imported cars and parts in the name of US national security
“the big one”. And that is certainly how the EU and others see it.
According to official data, the US imported $192bn in cars and light
trucks in 2017 and a further $143bn in parts for a total of $335bn.
Then there’s NAFTA. The US trades more with Canada and Mexico
($1.1tn) than it does with China, Japan, Germany and the UK combined.
Trump is seeking to renegotiate it just as a leftist and nationalist
President AMLO has been elected in Mexico. Trump seems to believe the
auto tariffs will give him leverage over the EU and Japan in trade
negotiations as well as over Canada and Mexico in the continuing talks
over an updated North American Free Trade Agreement. Mr Trump is
dialling up the pressure to force capitulation. For that reason, the US
could impose 20% tariffs on some or all of those imports.
Then there is FART. Trump is planning a bill through Congress,
called the Fair and Reciprocal Tariff Act, or FART for short. FART would
allow Trump to abandon the World Trade Organization’s tariff rules,
granting him new authority to unilaterally change tariff agreements with
certain countries; to abandon central WTO trade rules, namely the “most
favoured nation” principle that keeps countries from setting different
tariff rates for different countries outside of free trade agreements
and “bound tariff rates,” the tariff ceilings that each WTO member
country has previously agreed to. In short, it would give Trump the
authority to start a trade war without Congressional oversight, all
while flouting the WTO’s rules. It would mean the end of the WTO, in
essence. Already, at least one prominent Trump backer, Trump’s
short-lived communications director Anthony Scaramucci, tweeted that
FART “stinks.” But the smell is getting worse.
Any US tariffs are likely to be met with retaliation. EU officials
have been working on a plan to target upwards of €10bn in US goods for
retaliation if it goes ahead with tariffs on the $61bn in cars and parts
it imported from the EU in 2017. But in the extreme scenario — of
like-for-like, tit-for-tat tariffs — more than $650bn in global trade
would be covered, with consequences for companies globally.
What is the likely impact on global growth from this trade war?
Well, Paul Krugman, Keynesian economist, won the Nobel prize in
economics for his work on international trade and recently he did a
‘back of the envelope’ calculation. Krugman reckons that “there’s a
pretty good case that an all-out trade war could mean tariffs in the
30-60% range; that this would lead to a very large reduction in trade,
maybe 70%”! And the overall cost to the world economy would be
about a 2-3% reduction in world GDP per year – in effect wiping out more
than half of current global growth of about 3-4% a year (and the latter
assumes that there is no new global recession).
Krugman reminds us that in the Great Depression of the 1930s, the
trade war launched by the US with the Smoot-Hawley tariff, pushed
tariffs up to 45%. “So both history and quantitative models suggest
that a trade war would lead to quite high tariffs, with rates of more
than 40% quite likely.” Remember current global trade tariff rates are about 3-4% only.
Already, world trade has been staggering from the impact of the Great
Recession and the subsequent Long Depression. And world trade share
(share of trade in global GDP) has stagnated at about 55% (see figure
below). Indeed, the great era of globalisation is over. Now the trade
war – another consequence of the Great Recession and the Long Depression
since 2008 – could roll back the world trade share to 1950s levels,
according to Krugman. ”If Trump is really taking us into a trade war, the global economy is going to get a lot less global.”
Given this, Krugman looked at the hit to US economic growth. He
reckoned it could take 2% of GDP off real growth each year. As average
growth is expected to be about 2% a year over the next five years
(assuming no world slump), that would mean the US economy would
stagnate. That is not as bad as the Great Recession, which knocked 6%
of US real GDP growth, but it’s bad enough to sustain a further leg of
the current Long Depression.
And other countries will be hit even harder. Several major economies
rely on trade much more than the US and Europe for growth. In the
league of global value chain for trade, Taiwan is top with nearly 70% of
value-added coming from exports; and many Eastern European countries
also have high export ratios. The US is only at 40% and indeed China is
According to Pictet asset management, if a 10% tariff on US trade
were fully passed onto the consumer, global inflation would rise by
about 0.7%. This, in turn, could reduce corporate earnings by 2.5% and
cut global stocks’ price-to-earnings ratios by up to 15%. All of which
means global equities could fall by some 15-20%. In effect, this would
put world stock market price back by three years – indeed a crash.
Meanwhile, Asian governments, led by China, are continuing their
drive to relax trading restrictions among themselves, while retaliating
to Trump’s trade war. Last week, the 16-nation Regional Comprehensive
Economic Partnership, which includes China, Japan and India but not the
US, met in Tokyo to try and complete a new trade pact that would include
the 10 members of the Association of Southeast Asian Nations as well as
South Korea, Australia and New Zealand, and cover one third of the
world’s economy and almost half its population.
And of course, as I have argued previously,
China is driving forward its belt and road global investment scheme
across central Asia. So, although many Asian and Eastern European
economies may suffer more than the US initially from a global trade war,
longer term, trade pathways may alter to make them more Euro-Asia
centric, to the detriment of the US and Latin America.
Global growth has been picking up in the last 12 months after a
near-recession in 2015-16. Indeed, Gavyn Davies, FT economics blogger
and former Goldman Sachs chief economist, reckoned that world growth was growing at 4.4%, about 0.6% above trend, and a full percentage point higher than a couple of months ago.
But the trade war will particularly hit the manufacturing and
productive sectors of the major economies. And while global growth as a
whole may have picked up recently, world manufacturing growth is
looking frail. The global manufacturing PMI measures activity in
manufacturing and anything over 50 means growth. So not looking so
Indeed, the US stock market has not bounced very much because, counteracting the one-off rise in corporate profits, has been the
possibility of rising interest rates driving up the cost of borrowing
and servicing existing debt and the potential hit from the coming trade
Hopes for a sharp rise in productive investment from the tax cuts
appear dashed. Instead of more investment, there has been a three-fold
increase ($150bn) is share buybacks. In Q1 alone, US corporations
collectively repatriated $217bn of their international stashes, around
10% of the $2.1trn of greenbacks estimated to be currently offshore.
But JPMorgan calculates only $2bn of the $81bn repatriated in Q1 by the
top 15 companies was spent on productive investment.
World economic growth (and US growth may have peaked in Q2 2018 and now there is the prospect of an all-out trade war.
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