US unilaterally imposing tariffs on many foreign imports in 2018

 In 2018, the American government began unilaterally imposing tariffs on many foreign imports.

This tactic was seen as a direct affront to the agreement that all trade disputes be settled around a table at the WTO.

The U.S. claimed it was only protecting national security, a claim that was hard to take seriously since the "threat" was coming from longtime allies, such as Canada and the U.K.

The European Union and Canada immediately responded with calls to limit U.S. imports.  

• They targeted Kentucky bourbon, Levi's jeans, an a vast array of other American products - not necessarily tied to national security but quite strategic in the sense that many of the targeted products were from the American Midwest, an area populated by many isolationist voters.

Multiparty trade system. Current account is balanced by the country's capital account.

Multiparty trade system

In any multi-party trade system, there will always be imbalances, deficits or surpluses in the monetary value of goods and services traded.

These imports, if not made up for in an equal number of exports, are "paid for" by sending something else abroad - usually paper assets, such as stocks and bonds.  

The purchase of U.S. dollar securities is the way most countries have compensated for the imbalances in trade with the United States.  

• Many countries, in Asia and the Middle East especially, have used their earnings from exports to purchase trillions of dollars' worth of U.S. Treasury bonds to use as a store against future uncertainties - or to buy U.S. goods and services in the future.

What gets spent never stays in one place

In the interconnected global economy, what gets spent never stays in one place. What India earns from its many call centers can be spent on South Korean televisions, and what South Korea earns from its exports can be spent on Brazilian chickens or American tractors.  In the end, it all adds up.

Deciding to start a trade war because you run a deficit against any one country is like saying you want to punish the country that sells you what you really want.

Trade deficits and Trade surpluses

The economic terms used by most politicians when beating the drums for trade wars are trade deficits and trade surpluses, which focus mainly on the trade in physical goods.  

But many countries are making more and more money exporting services like 

• banking
• entertainment, 
• tourism, and 
• technology platforms.  

A few lucky countries, such as U.S., have the privilege of receiving massive amounts of money every year in the form of investments from abroad.

Trade Balance:  Current account is balanced by the country's capital account

The obsession with trade deficits is misplaced because the deficit and surplus in goods and services is offset by monetary transfers.  

Most economists, therefore, look at the total trade in goods and services, referred to as the current account, which also includes such financial transfers as money sent home by citizens working abroad and interest paid on foreign debt.  

This current account is balanced by the country's capital account, which adds up all investments - mainly international purchases and sales of financial assets.  

These two measures, when added together, always add up to zero.  One balances out the other.  Which is why the total measure of trade is referred to as the trade balance.

The benefits of free trade outweigh the disadvantages

Politicians who speak of "winning" and "losing" in trade don't understand that all trade in goods and services is balanced by monetary transfers moving in the opposite direction.  

Essentially, all the global trade in goods and services and flows of money between countries add up to zero, but trade is not a zero-sum game, where one country's loss is necessarily another country's gain.

The benefits of free trade outweigh the disadvantages  

• While free trade does expose a country, and its workers, to foreign competition - which can lead to layoffs and idle factories - putting up barriers to imports from abroad can destroy far more jobs as the rest of the world's economies respond with trade barriers of their own.

All-out Trade War

All-out Trade War

An all-out trade war usually ends up hurting almost everyone in a given economy, even those segments the politicians say they are trying to help.

1.  2018 U.S. instigated trade war

Farmers and workers in the American Midwest were shocked to see that China and other countries retaliated to the opening salvos of the 2018 U.S instigated trade war by massively increasing tariffs of their own on American wheat, soybeans, and a variety of other goods produced in the Midwest, including Harley-Davidson motorcycles.

2.  1929 stock market crash massive trade barriers

The U.S. put up massive trade barriers after the stock market crash of 1929.  It led to a serious decline in economic activity and the loss of millions of American jobs when the rest of the world responded in kind.  The result was a worldwide depression.

The goal of free trade

The goal of free trade is ostensibly to provide a level playing field, permitting individuals and companies to have the opportunity to sell their goods and services in foreign lands.

In theory, when every country in the world is allowed to do what it does best, the world economy prospers, and almost everyone is better off.  

In general, trade increase income and with access to imports, companies and consumers have more of a choice about what to do with their increased income.  

But what happens when one country imports more than it exports, leading to job losses? 

Is the answer simply to close off the country to trade?

Trade wars in the past

 1.  Opium Wars

Trade wars in the past have sometime ended with actual military conflict.

The Opium Wars between the Qing dynasty and the British Empire in the mid-1800s.  This ended up forcing the Chinese to remove virtually all its onerous import duties as well as to give up Hong Kong to British rule.  By the time Hong Kong was returned to China in 1997, it was one of the most successful trading centers in the world.

2.  Banana Wars

The occurred between United States and several European countries at the end of the twentieth century.  These centered on removing European barriers to Latin American banana producers, which were mainly owned by U.S. companies.

3.  Pasta Wars 

In the mid-1980s, Reagan administration tried to open up markets for American lemons and walnuts in Europe by placing punitive tariffs on imports of European-made pasta.

Both the Banana and Pasta Wars disputes were resolved amicably with the warring parties gradually removing the disputed tariffs.