Navigating the Trade Wars

Christopher P. Ball, Ph.D.Central European Institute

Istvan Szechenyi Chair in International Economics

Quinnipiac University

Special Thanks to QU Econ Research Team Members

Niamh Savage and Jack French

THREE Goals for Today

Topic 1: Explain the basics of trade deficits

Topic 2: Discuss some current trends including the likely effects on CT and CT businesses

Topic 3: Try to provide help predicting the future

Two Wrongs that Don’t Make a Right

1. The US Economy can be thought of as one big business

1. The US President = CEO of America Inc.

2. Trade deficits = profit and loss statements

2. If we reduce imports, then that money will just go to domestically produced US goods

• Some of this does happen but the overwhelming effect of tariffs is to raise the costs of goods which reduces total spending

• Short Run: possible small boost to GDP but also higher prices

• Long Run: decline in potential GDP/growth and higher prices

These seem to be driving current US policy…

Tariffs and Trade War as Negotiating Tactic

Goals Seem to Be…

• Turn all bilateral US trade deficits to surpluses

• Get China to treat US companies better, respect intellectual property, etc.

• Encourage re-shoring to USA

Top Trade Deficits with

USA

NX = EX - IM

China ($420) $120 $540

Mexico ($81) $265 $346

Germany ($68) $58 $126

Japan ($67) $75 $142

Ireland ($47) $11 $57

Vietnam ($39) $10 $49

Italy ($32) $23 $55

Malaysia ($26) $13 $39

India ($21) $34 $54

Thailand ($19) $12 $32

Canada ($19) $300 $319

Switzerland ($19) $22 $41

Korea, South ($18) $57 $74

France ($16) $37 $52

Taiwan ($15) $31 $46

United Kingdom $6 $66 $61

Singapore $6 $33 $27

Brazil $8 $40 $31

Belgium $14 $31 $17

Netherlands $24 $49 $25

Top TotalTrade with

USA

TOTAL = EX + IM NX

China $660 $120 $540 ($420)

Canada $619 $300 $319 ($19)

Mexico $612 $265 $346 ($81)

Japan $218 $75 $142 ($67)

Germany $184 $58 $126 ($68)

Korea, South $131 $57 $74 ($18)

United Kingdom $127 $66 $61 $6

France $89 $37 $52 ($16)

India $88 $34 $54 ($21)

Italy $78 $23 $55 ($32)

Taiwan $76 $31 $46 ($15)

Netherlands $73 $49 $25 $24

Brazil $71 $40 $31 $8

Ireland $68 $11 $57 ($47)

Switzerland $63 $22 $41 ($19)

Singapore $59 $33 $27 $6

Vietnam $59 $10 $49 ($39)

Malaysia $52 $13 $39 ($26)

Belgium $49 $31 $17 $14

Thailand $44 $12 $32 ($19)

US Trade deficit as a percentage of GDP

• 2017 ≈ - 2.8%

• 2018 ≈ - 3%

• 2019 ≈ - 5%

Trade With China

since 20080

100000

200000

300000

400000

500000

600000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Imports

Exports

(450000)

(400000)

(350000)

(300000)

(250000)

(200000)

(150000)

(100000)

(50000)

0

Trade DeficitEX – IM < 0

First 6 Months of 2019

• Imports down 12%

• Exports down 19%

Explaining Trade Deficits and

Why They Won’t Go Away Anytime Soon

Domestic Production

Domestic Spending

TradeBalance

GDP C + I + G NX = EX - IM

Fundamentally, the trade balance is mostly driven by GDP minus Spending

Rare: Perfect Trade BalanceGDP = Domestic Spending → Trade Balance = 0 → Exports just equal imports

Growing Economy 1: US Consumer Optimism

Domestic Production

Domestic Spending

TradeDeficit

GDP ↑C + I + G NX = EX - ↑IM

Tariffs and the value of the USD can affect the composition of consumption (in theory)

1. Tariffs raise the cost of imports → lowering IM (and reducing a trade deficit).Generally this lowers all consumption, not just consumption of foreign goods

2. Stronger USD makes foreign goods cheaper → raising IM (and worsening a trade deficit)

Growing Economy 2: US Investment Boom

Domestic Production

Domestic Spending

TradeDeficit

GDP C +↑I + G NX = EX - ↑IM

Why might US Investment Increase?1. Economic growth is generally led by rapidly growing

investment2. US economic growth is better than rest of the

world3. Higher returns on USD investments relative to the

rest of the world

Government Spending(especially Deficit Spending)

Domestic Production

Domestic Spending

TradeDeficit

GDP C + I + ↑G NX = EX - ↑IM

Growing Economy 3: Export-led Growth

Domestic Production

Domestic Spending

TradeSurplus

↑GDP C + I + G NX = ↑EX - IM

WHY might this happen?1. Foreign economies are growing rapidly relative to the US (foreign demand =

our exports)2. Development Economic Strategy some emerging markets have intentionally

launched “export-led” strategies to open up previously protected industries to international competition to increase their efficiency/competitiveness

Trade deficits are likely to persist because…

1. US is growing faster/stronger than rest of world

2. Strong US returns to investment (and strengthens USD)

3. US government deficit spending will persist

• Continued tariffs, tariffs threats, tariff changes, and general trade cost uncertainty

• This raises the costs of imports and costs of production for most US companies and consumers• Short Run: possible small boost to GDP but also higher prices• Long Run: decline in potential GDP/growth and higher prices

Therefore, the trade wars will persist…

Insights into likely countries and likely

effects for Connecticut

The Connecticut Economy and Trade

Total CT “GDP” ≈ $274 billion

CT Exports ≈ $17.4 billion 6% of CT GDP

CT Imports ≈ $19.9 billion 7% of CT GDP

2018 estimates

Effects on CT and CT Businesses

• Raises costs of production

• Time, money and energy spend on developing new global supply chains (will not be quickly reversed when/if tariffs go away)

• Can boost CT businesses that compete with foreign goods

• Time, money and energy seeking technological solutions to higher input costs and cheap foreign suppliers

→ increased mechanization and robotization of production jobs

Top Trade Deficits with

USA

NX = EX - IM

China ($420) $120 $540

Mexico ($81) $265 $346

Germany ($68) $58 $126

Japan ($67) $75 $142

Ireland ($47) $11 $57

Vietnam ($39) $10 $49

Italy ($32) $23 $55

Malaysia ($26) $13 $39

India ($21) $34 $54

Thailand ($19) $12 $32

Canada ($19) $300 $319

Switzerland ($19) $22 $41

Korea, South ($18) $57 $74

France ($16) $37 $52

Taiwan ($15) $31 $46

United Kingdom $6 $66 $61

Singapore $6 $33 $27

Brazil $8 $40 $31

Belgium $14 $31 $17

Netherlands $24 $49 $25

Top EXPORT Destinations

Country 2018 Exports

France $ 3,178

Germany $ 2,332

Canada $ 1,963

United Kingdom $ 1,484

Mexico $ 948

China $ 942

Netherlands $ 770

Japan $ 628

Singapore $ 623

Korea, South $ 423

Top TotalTrade with

Connecticut

Country 2018 % Total = EX + IM NX

1 Canada 16.8% 5,536$ $1,963 $3,573 ($1,610)

2 France 11.9% 3,906$ $3,178 $ 728 $2,450

3 Germany 11.5% 3,797$ $2,332 $1,465 $867

4 Mexico 10.5% 3,451$ $ 948 $2,503 ($1,555)

5 China 9.9% 3,243$ $ 942 $2,301 ($1,359)

6 United Kingdom 8.1% 2,660$ $1,484 $1,176 $308

7 Netherlands 4.2% 1,375$ $ 770 $ 605 $165

8 Singapore 3.4% 1,124$ $ 623 $ 501 $122

9 Japan 3.2% 1,051$ $ 628 $ 423 $205

10 Italy 2.4% 791$ $ 173 $ 618 ($445)

11 Ireland 2.0% 655$ $ - $ 655 ($655)

12 Korea, South 1.9% 629$ $ 423 $ 206 $217

13 Switzerland 1.8% 605$ $ 153 $ 452 ($299)

14 Belgium 1.5% 498$ $ 242 $ 256 ($14)

15 Poland 1.4% 460$ $ 203 $ 257 ($54)

16 Brazil 1.4% 459$ $ 204 $ 255 ($51)

17 Taiwan 1.3% 442$ $ 230 $ 212 $18

18 Russia 1.3% 414$ $ - $ 414 ($414)

19 India 1.1% 357$ $ 139 $ 218 ($79)

20 Israel 1.1% 351$ $ 206 $ 145 $61

Photo by Brett Zeck on Unsplash

16.4%

10.2%

35.8%9.8%

9.4%

3%

9.8%

Connecticut’s top trading partners as a percentage of CT’s total trade and their trade war danger

RED = most dangerousPINK = some dangerGREEN = safest

Insights from the USMCA

(new NAFTA):United States-

Mexico-Canada

Agreement

• Level playing field for American workers: 40 to 45 percent of automobile parts must be made by workers who earn at least $16 an hour by 2023.

• Intellectual property and new digital economy Extended copyright and pharmaceutical protections plus protections on digital goods and services (music, e-books, etc.)

• Cooperation to Increase Trade and Investment Opportunities for SMEs. SME centers, incubators and accelerators, export assistance centers, and other centers

• Country of origin rules: automobiles, trucks, other products, and Automobiles must have 75 percent (up from 62.5) of their components manufactured in Mexico, the US, or Canada to qualify

• Disciplines on currency manipulation

• The Canadian dairy market opened up for US farmers

• Sunset clause: agreement expires after 16 years and is subject to a 6-year review

Insights from Japan

(WSJ, Aug. 25, 2019)

• “President Trump said Sunday the U.S. and Japan had reached a trade deal “in principle” that would pave the way for more U.S. farm exports to Japan, while dropping the threat of increased U.S. tariffs on Japanese cars.”

• “The U.S. automobile tariffs, which Japanese officials wanted to see reduced, will stay in place, Mr. Trump said, but U.S. Trade Representative Robert Lighthizersaid other U.S. tariffs would be dropped.”

• “Mr. Trump pulled the U.S. out of the unratified 12-nation Trans-Pacific Partnership, which included Japan, on his first working day in office in 2017. A revised TPP took effect last year without the U.S., and now U.S. farmers are complaining as member countries—including Australia, Canada and New Zealand—as well as the European Union get greater access to Japan’s long-protected markets for beef, pork and dairy products.”

Predictions

• High tariffs will harm foreign markets first• Drop in demand for US goods will harm US producers• Keeps US relatively best place to invest → drives

further trade deficit

• High tariffs will raise costs for US producers• Re-structuring global supply chains• Increased automation/robotization/AI

• There will be some re-shoring and some positive examples

• US Trade Deficits won’t improve much, if at all and could worsen

• Tariffs will not “fix China”

• We’ll see more retaliatory tariffs

• Promote US exports bilaterally when possible + exclusion from multi-lateral trade agreements

• Continued government deficits also need global financing and drive further trade deficits

This too shall pass

Thank you!

References• All calculations by Chris Ball.

• All government budget deficit graphs and data from the Congressional Budget Office’s An Update to the Budget and Economic Outlook: 2019 to 2029. Released August 21, 2019. www.cbo.gov

• All trade data from the U.S. Census Bureau. www.census.gov/foreign-trade

• Cover slide: Photo by Richard Lee on Unsplash

• Slide 7. Graph from U.S. International Trade in Goods and Services (FT900). https://www.census.gov/foreign-trade/Press-Release/current_press_release/index.html

• Slide 8. Data from U.S. Census Bureau, calculations and chart by Chris Ball.

• Slide 10. graph from Brian Reinbold and Yi Wen, "Historical U.S. Trade Deficits," Economic Synopses, No. 13, 2019. https://doi.org/10.20955/es.2019.13

• Slide 12. 10-year Government Bond yields from Wall Street Journal Markets Global Government Bond Yields.

• Slide 18. Water & Hand Photo by Ian Espinosa on Unsplash

• Slide 18. Robot Photo by Rock'n Roll Monkey on Unsplash

• Slide 22. Photo by Brett Zeck on Unsplash

• Slide 26. U.S. Average Tariff Rates (1821-2016) graph• Department of Commerce, Bureau of the Census, Historical Statistics of the United States 1789-1945, U.S. International

Trade Commission, dataweb.usitc.gov

• Slide 27. Photo by Miguel A. Amutio on Unsplash