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  1. #1
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    Default Free Trade or Trade Wars? The problem with Tariffs

    On the very day that a small group of Conservatives in the UK established a new think tank -the Institute of Free Trade- to promote the economic benefits of leaving the European Union, the papers reported that the US Department of Commerce has proposed a tariff of 219.63% on the import into the USA of parts being used to construct the Dreamliner aircraft ordered by Delta Airlines, parts made by the Canadian-based Bombardier company that assembles the parts in various locations, in Canada and in this key case, Northern Ireland, where 4,000 people work for the company.

    The argument appears to be simple and straightforward: when the Provincial Government of Quebec took a stake in Bombardier, it supplied the Company with a financial subsidy (or was it an investment?) with the consequence that the net cost of each aeroplane to Delta Airlines, a competitor of the US-based Boeing Corporation, would undercut the cost of their new fleet of aeroplanes. With the tariff imposed, the new Delta Airlines fleet would cost $61m per plane whereas Boeing has claimed with subsidies Delta will only pay $19m.
    https://www.theguardian.com/business...-bombardier-us

    What has shocked the business world is the size of the tariff, not an automatic ruling as this will now become the subject of appeal and litigation. What it does is expose the fantasy that tariffs may be inevitable but not something to worry about. Nigel Farage, the former leader of UKIP repeatedly stated that even if the UK crashed out of the EU and had to rely on WTO rules and tariffs, these tariffs would be low (his figures were around the 3-5% mark) and thus be easily managed by companies seeking to trade in the EU. Clearly, the levels tariff reach will be shaped to the value of the trade, though it isn't clear to me if this means aeroplanes are more expensive than bananas, and that tariffs will be higher on one than the other if, as seems to be happening, there is a shortage in supply of bananas making them more expensive to export than once they were.

    The further complication is that, as suggested above, the Canadian Company could conceivably claim the Provincial Government of Quebec invested in their company, expecting a return on the investment, that it was not a subsidy. What is not in any doubt, is that not only did Boeing not compete with Bombardier for the Delta Airlines contract (so what's the problem?), Boeing itself has been subsidized by the State of Washington in the form of tax-breaks which were supposed to maintain jobs and did the opposite, as the LA Times reported earlier this year:

    A few years ago, Washington state awarded the Boeing Co. the largest corporate tax break any state had given any corporation — a massive $8.7-billion handout aimed at encouraging the aerospace industry generally, and Boeing specifically, “to maintain and grow its workforce within the state.”Unwisely, state legislators and Democratic Gov. Jay Inslee didn’t make that a hard and fast requirement of the handout. So they’ve had to stand by powerlessly as the company has cut 12,655 jobs, or more than 15% of its Washington workforce, since that heady signing ceremony in November 2013. Layoff notices have gone out to 429 more employees in just the last few weeks.
    http://www.latimes.com/business/hilt...503-story.html

    The reality is that there are no free markets. Whatever you call it, economic liberalism or neo-liberalism, capitalist firms survive or fall in a protection racket called state capitalism. Tariffs in this context look more like guided missiles in a war, rather than instruments designed to protect domestic industry. And look here: Boeing's aeroplanes are 'Products of More than One Country', it employs over 2,000 people in the UK, just as Bombardier employs 4,000 in Northern Ireland. Tariffs thus become guided missiles aimed at the UK from the USA with the parent company's own employees potentially losing their jobs as part of the 'collateral damage' of a war, in this case a trade war.

    It was all supposed to be so easy, to welcoming, so beneficial. So is it peace and love in the wonderful world of trade, or tariffs and war?



  2. #2
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    Default Re: Free Trade or Trade Wars? The problem with Tariffs

    The US International Trade Commission has ruled in favour of Bombadier in the dispute over tariffs-

    The US International Trade Commission (ITC) has ruled in favour of Bombardier in a trade dispute with rival aircraft-maker Boeing. The result had been expected to go in favour of the US aerospace giant. The US administration had threatened to impose duties of 292 per cent on imports of Bombardier’s CSeries aircraft.
    The ruling is welcome news for Bombardier’s 1,000 employees in the North, and means the airline can start shipping its CSeries jets to Delta Air Lines as scheduled.
    Workers in the North were said to be “jubilant”. Bombardier’s Belfast plant currently manufactures the wings for the CSeries jets, and Bombardier had previously warned that the CSeries programme was “critical” to the long term future of its entire operations.
    https://www.irishtimes.com/business/...eing-1.3369964

    However, last week the US said it intended to impose tariffs on the import into the US of washing machines and solar panels, but as well as harsh reaction from China, the EU has also responded negatively-

    The European Commission said it regretted the measures, had serious doubts that they met WTO conditions and would not hesitate to react if they harmed European Union exports.
    German Finance Minister Peter Altmaier told reporters in Brussels that the EU opposed protectionism and said that the measures would make products more expensive for Americans.

    https://uk.reuters.com/article/uk-us...-idUKKBN1FC079

    A more ominous sign of discontent in the EU when last week an unidentified Commissioner was quoted as saying
    restrictive trade measures from the United States” would face a robust response from Europe.
    “For us, trade policy is not a zero-sum game, it is not about winners and losers,” the spokesperson told reporters in Brussels.
    “We here in the European Union believe that trade can and should be win-win.
    “We also believe that while trade has to be open and fair it has also to be rules-based.
    “The European Union stands ready to react swiftly and appropriately in case our exports are affected by any restrictive trade measures from the United States.”
    http://www.independent.co.uk/news/wo...-a8183156.html

    Just as ominous was the statement last week in Davos by US Secretary of State for Commerce, Wilbur Ross (once known as the 'King of Bankruptcies')

    “US troops are now coming to the ramparts” in the fight against what he called “predatory trade practices”
    .

    We shall see.



  3. #3
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    Default Re: Free Trade or Trade Wars? The problem with Tariffs

    Here we go again: the President has announced his intention to slap tariffs of 25% on imports of steel and 10% on aluminum. Although he claims China is dumping steel on global markets the US gets most of its steel imports from Brazil, Canada, Mexico, Germany and South Korea while most aluminum imports are from Canada, Russia and the United Arab Emirates.

    It is reported in the Telegraph that
    Mr Trump reportedly favoured a 25 per cent figure rather than the 24 per cent recommended because it was a round number.
    https://www.telegraph.co.uk/news/201...-steel-tariff/

    Round numbers do make sense, like when stock falls -as it did yesterday- and you tell your broker 'BUY 10,000!'. Best time to make some money, though of course I am not suggesting the President is making profits out of his public statements knowing they wil affect the stock price of firms with long-term potential and rich in assets...surely not!

    The policy will be presented in more detail next week but the first reaction is not good unless you think protectionism is a good idea, and is, after all, better than a free market. That most jobs in the US steel industry disappeared because advanced technology reduced the need for labour is presumably a 'minor detail' the President is not interested in as it doesn't fit his 'we're being screwed' ideology.

    But we have been here before: President GW Bush imposed tariffs on steel of 8-30% to last until 2005, but it only lasted a year during which supporters claimed it led to $3bn being spent re-structuring the US steel industry, while the threat of counter-sanctions from the EU and the increased cost in materials for car manufacturers was seen as a negative. So even if the tariffs are imposed, it is not certain they will last, and as the President seems to back one policy on Monday and change his mind on Friday, your guess is as good as mine.

    On the 2002 tariffs-
    https://www.economist.com/node/1021395
    https://www.theguardian.com/world/2003/dec/04/usa.wto1


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  4. #4
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    Default Re: Free Trade or Trade Wars? The problem with Tariffs

    As the tariff barriers may be raised, so

    Donald Trump has escalated the threat of a trade war with Europe, warning that the US will slap a tax on cars made on the continent if the European Union (EU) retaliates against tariffs on imports of steel and aluminium.
    https://www.theguardian.com/us-news/...at-tax-eu-cars

    Given the difference between Made in the USA, and Assembled in the USA, maybe someone should explain to the President how US cars are made, not just Toyota Cars (the engines come from Japan) and how the lowering of tariff barriers has actually facilitated intra-firm trade that devolves production around different parts of the world but still employs US workers directly involved in auto manufacture as well as the allied trades and services. Crucially, the point of imports is not that they are finished goods that Americans could in theory make themselves (the US doesn't have natural stocks of Aluminum so it can't make its own beer cans) bu that they are inputs used by American industries and low tariffs means the overall cost to the US producer and consumers is lower than it would be, thus:

    In contrast, the higher the prices of imported inputs (e.g. through higher tariffs), the less competitive US companies will be, and the fewer workers they will hire. Keep that in mind the next time you hear Trump’s nitwittery about creating more American jobs by making imported inputs more expensive with his proposals to impose double-digit tariffs on goods from Mexico and China.
    http://www.aei.org/publication/nearl...and-factories/

    The nitwit in chief made this decision off the cuff after a bad week in which he lost another ally in Hope Hicks. To soothe his ruffled pride Wilbur Ross and others in the fractured White House opposed to free trade late in the evening made the calls to assemble the Chief Executives of US steel firms the following morning when the Nitwit in Chief made his announcement, not having bothered to tell anyone else-

    There were no prepared, approved remarks for the president to give at the planned meeting, there was no diplomatic strategy for how to alert foreign trade partners, there was no legislative strategy in place for informing Congress and no agreed upon communications plan beyond an email cobbled together by Ross’s team at the Commerce Department late Wednesday that had not been approved by the White House.

    No one at the State Department, the Treasury Department or the Defense Department had been told that a new policy was about to be announced or given an opportunity to weigh in in advance.
    https://www.vox.com/world/2018/3/2/1...minum-disaster
    What impulsive decision will the Nitwit in Chief come up with next? And anyway, so far nobody with the authority to do so has approved raising the tariff barriers.



  5. #5
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    Default Re: Free Trade or Trade Wars? The problem with Tariffs

    I read somewhere that the President is sympathetic to the idea, either from Wilbur Ross or Peter Navarro that the World Trade Organization is 'the problem' and that the US is thinking of withdrawing from it. This seems to me to fit the 'alt-right' economic dream of an international market composed of companies and entrepreneurs, the State having retreated from global markets taking its rules and regulatory bodies with them into the dustbin of history.

    In this context, the tariff wars that the President says can be easily won would not in fact win a war, but as with wars in general, be destructive of the present system, and the urge to destroy what it exists so that 'free markets' can rebuild them is a potent aim of the Bannon brigades in the US, Farage and extremist in the Tory party like Liam Fox and Daniel Hannan, and of course Vladimir Putin who would welcome the collapse of the EU, the WTO and those 'trans-partnership' previous US administrations wanted to create.

    How any of this is supposed to protect, let alone create jobs I don't know.



  6. #6
    filghy2 Professional Poster
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    Default Re: Free Trade or Trade Wars? The problem with Tariffs

    Those who cannot learn from history are doomed to repeat it - along with the rest of us unfortunately https://en.wikipedia.org/wiki/Smoot%...ley_Tariff_Act



  7. #7
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    Default Re: Free Trade or Trade Wars? The problem with Tariffs

    As markets tumble following the tariffs imposed by the US and China on each others range of goods -with the prospect of more to come- there is still time for both sides to negotiate their way out of this mess, someone -I can't recall where- has argued what the US really wants is a deal to protect its Intellectual Property rights and that if the Chinese agree to this the tariffs will not take effect. Not convinced by this, as it assumed the US will make the deal, but it does underline the indifference of the US to the WTO that could arbitrate in this dispute as this is one of the reasons it was created.

    As for the President's hysterical tweets-
    We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!

    One wonders if he has any understanding of global trade, if he has any recollection of the policies on trade pursued by President Reagan in the 1980s and why in a capitalist system it became cheaper to make computers in China than in the US. Or it could be that he doesn't believe in free markets but rigged markets; that he doesn't believe in competition but control. But then, who knows what this man knows or believes? But note that just as in a tweet last year he claimed it is only since he became President that the US military has won anything -'we always used to fail before' consigning McMaster, Kelly, Matthis, McChrystal, Petraeus to the level of losers, so he is now casting other Americans as 'incompetent' and 'foolish'. Maybe the longest wars start at home?

    Meanwhile, spare a thought for the Americans who have benefited from trade with China as reported by the US-China Business Council-
    https://www.theguardian.com/business...-business-live


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  8. #8
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    Default Re: Free Trade or Trade Wars? The problem with Tariffs

    A graphic was supposed to appear in the previous post- it is in the link above.


    Last edited by Stavros; 04-04-2018 at 04:18 PM.

  9. #9
    filghy2 Professional Poster
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    Default Re: Free Trade or Trade Wars? The problem with Tariffs

    There is a famous quote by John Maynard Keynes: "Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."

    He probably doesn't know it, but Trump's frenzy on trade is distilled from the long-discredited economic theory of mercantilism, which held that a nation's prosperity is derived from accumulating financial reserves through trade surpluses. https://en.wikipedia.org/wiki/Mercantilism This theory implies that trade is a zero-sum game, not an exchange from which both parties gain.

    Trump seems to view a trade deficit with another country as being like a loss-making business, so that cutting it off can only bring gain to the US at the other country's cost. Such simplistic analogies are the mark of the economic imbecile. I'm sure Gary Cohn quit because he got sick of trying to explain this for the millionth time.

    It's also odd that the professed believer in free enterprise has such a statist view of the world - the trade deficit is blamed on incompetent politicians and officials and not the collective actions of businesses and individuals.

    Perhaps one ray of hope is that Trump also seems to view the stock market as a measure of how well the economy is going. That's another simplistic analogy, but if the market keeps tanking then he might be dissuaded from ratcheting up the trade wars.


    Last edited by filghy2; 04-06-2018 at 02:37 AM.

  10. #10
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    Default Re: Free Trade or Trade Wars? The problem with Tariffs

    A perceptive post, filghy2, and one to set aside the comments of the President's new economics advisor Larry Kudlow who has pointed out that tariffs have not yet been imposed and that he is thinking ahead in terms of rainbows and a pot of gold (!)-

    “Don’t overreact, we’ll see how this works out,” Mr Kudlow said on Fox Business. “My view is, look, I’m a growth guy, I’m a Reagan supply-side growth guy. I think at the end of this whole process, the end of the rainbow, there’s a pot of gold.”


    Fair enough, there are a couple of months for the Americans and the Chinese to calm down and sort it out, but when the deputy press secretary Hogan Gidley claims
    The president is the best negotiator on the planet

    one wonders if he is just angling for a raise and a better job-?

    https://www.independent.co.uk/news/w...-a8290866.html



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