No one wins trade wars. The notion is ludicrous. I have more on the "meaning of win" in a moment. But first let's consider the Eurointelligence view.
This is not a trade war the EU can ever win, as Wolfgang Munchau points out in his FT column. If the EU were to put up a big fight over this, with a long list of sanctions on Friday, the US would immediately respond with a tariff on car imports. It would be the equivalent of the Fool's Mate in chess, Munchau argues. Donald Trump is right in his assertion that trade wars are easy to win - if your opponent is sufficiently desperate and addicted to the export of manufactured goods, like Germany is. When we said that a current account surplus of 8% (or probably higher) is not sustainable, it was not meant as a statement of right or wrong. Unsustainable means that it will end at some point - through either adjustment or force.
Spiegel magazine had a story over the weekend that there is a glimmer of hope. It was one of those short Spiegel news stories, something they picked up from a single source, but not quite worthy of a full-length article. The story says the US will make three specific demands as a pre-condition for exempting the EU from the steel and aluminium tariffs. The first is that the EU caps steel output at 2017 levels. The story did not reveal the metric, whether in volume or value. The second is that the EU take anti-dumping measures against China, and agrees to cooperate with the US in questions of international trade policy. And, to top it all, the Europeans will have to deliver proof that they are on the way to meeting their Nato commitments on defence spending. The latter is an impossible demand to meet since no such proof can exist. The German grand coalition, for example, is making no efforts to increase defence spending. The priority of the new finance minister, Olaf Scholz, is to maintain the fiscal surplus.
OK, Where's the Win?
Eurointelligence never explained how this magical "win" occurs.
Instead, Eurointelligence linked to a report by Brad Setser: Forming an Alliance With U.S. Allies Against Bad Chinese Trade Practices Won’t Be Enough to Bring the Trade Deficit Down.
There are growing calls for a global coalition of U.S. allies to pressure China to change some of its most egregious commercial practices.
That makes some sense [Mish - actually it makes zero sense - explained later], even if it is much easier said than done. It is relatively simply to get agreement that China should change many of its policies. But China doesn’t typically respond to peer pressure alone. It is relatively hard to get agreement on what to do if China doesn’t change voluntarily.
After a useless diversion into complaints about China, Setser admits this interesting tidbit:
China’s current account surplus is well below that of the Eurozone. Or that of Japan. [Mish - It's simply high with the US].
Even at 2.5 percent of China’s GDP, it is smaller, relative to China’s GDP than the current account surpluses of the United States’ security allies.
U.S. allies generally have much tighter fiscal policies than China. That’s a big reason why they run larger current account surpluses than China. [Mish - Not really - the reason is that Nixon closed the gold window and this is the logical result.]
Korea and Taiwan (and neutral Switzerland) also put their finger on the foreign exchange market when needed to keep their currencies weak (Korea rather egregiously in January).
As a result, the combined current account surplus of U.S. allies in Europe and Asia is close to $800 billion—well over China’s roughly $200 billion. That sum would be a bit bigger if you added in the surplus of democratic but formally non-aligned European countries like Sweden and Switzerland.
A China that behaved better commercially would no doubt help many companies. And if China lowered barriers to actual imports, overall trade with China might expand. But better commercial practices on their own aren’t enough to assure a smaller Chinese trade surplus. [Mish - On that I strongly agree with Setser]
So long as Asia and Europe’s aggregate surplus remains high, someone in the world will still need to run a large external deficit, and odds are that will still be the United States. [Mish - Once again, this is a mathematical necessity!]
In Dollar Terms
See the Problem?
The US has its biggest trade deficit with China, but globally the imbalance is with Germany and Japan.
Placing tariffs on Chinese steel will do nothing but make the US more uncompetitive on exports.
Averting a Trade War
To stave off the trade war, assuming Trump sticks to his guns, the EU needs to do these three things.
- EU caps steel output at 2017 levels.
- EU takes anti-dumping measures against China, and agrees to cooperate with the US in questions of international trade policy.
- EU must deliver proof that they are on the way to meeting their NATO commitments on defense spending.
If not, we have a trade war.
Easy to Win
Wolfgang Munchau says In a Trade War Germany is the Weakest Link and "If your target is Germany, then yes, a trade war is easy to win."
Munchau bases his opinion on the idea that the EU, Germany in particular, is very dependent on exporting cars at a time when Germany's diesel technology is on the verge of being worthless.
Brexit poses an additional threat as Germany is a huge net exporter to the UK.
Here's Munchau' conclusion: "This trade war is indeed easy to win. It is going to be the equivalent of the fool’s mate in chess: the game could all be over in two moves."
Meaning of Win
What does it mean to "win" a trade war?
Donald Boudreaux at the Cafe Hayek explains in his post: An Oxymoron to Beat All Oxymorons.
No two human activities are as opposite one another as are trade and war. Trade is voluntary; war is coercive. Trade is peaceful; war is violent. Trade enriches; war impoverishes.
Trade is a mutually advantageous exchange of property rights; war is a bilateral destruction and confiscation of property rights – destruction and confiscation that never are mutually advantageous and that too often, in the end, are advantageous to no one.
When trading, each party improves his welfare only by attending to, and enhancing, the welfare of others; when warring, each party improves his welfare only by attacking, and diminishing, the welfare of others. Those who trade with each other have an interest in each other’s well-being; those who war against each other have an interest in each other’s annihilation. Trade enhances life; war ends life.
What are called “trade wars” are indeed wars, but they involve only war and no trade. Every so-called “trade war” is each government making war on its own citizens, coercing them not to trade as they would otherwise peacefully trade.
The term “trade war” makes no more sense than do the terms “good evil” or “peaceful violence.” We should stop using it. We must find a better term to describe governments’ waging war upon those of their own citizens who dare to trade with others.
Curious Way to Win
As Munchau, Trump, and Peter Navarro (Trump's trade guru) see things, it is remarkably easy for Trump to win.
In reality, the only way to win is to not play the game at all.
Please reflect on this: Shall we play a game?
Mike "Mish" Shedlock