|Welcome to Econ 050: Economics and business that matters to the Netherlands and the world. In each episode, Northern Times editor Traci White interviews a new expert about everything from trade wars to the psychology in your shopping cart. This podcast is a co-production between The Northern Times and the Faculty of Economics and Business of the University of Groningen.|
Trade wars: Economist Tristan Kohl on whether anyone can win in the struggle between Trump and China
Who really wins in a trade war? Like with so much in era of Donald Trump’s presidency, things have already changed since this interview with RUG assistant professor or trade economics Tristan Kohl was recorded in early October. The ever-changing nature of Trump’s pronouncements and policies is exactly why Kohl and his colleagues wanted to get this research out there themselves as soon as possible, but a longer publication – “Sticks and Stones: Sanction Threats, Impositions, and Their Effect on International Trade” – will be coming out in early 2019. With that in mind, the discussion is more broadly about what it actually means to be in a trade war and just fair or unfair current trade deals actually are.
You can listen to the full interview above, and here are some highlights from the episode:
On what being in a trade war means:
Tristan Kohl: A trade war really is about two countries or multiple countries deciding that they don’t want to have that much trade with each other anymore and they impose all sorts of rules and procedures to try and prevent trade from happening. So the most common thing that they do is to spike their tariffs on goods in which they are exporters to a market. So China wants to export certain products, say steel, cars, technology, to the states. Trump doesn’t want that to happen, so he threatens to impose high tariffs on those goods.
On why raising tariffs is actually self-defeating:
Tristan Kohl: An iPhone is assembled in China, but all of the components in an iPhone come from places like Germany, South Korea, Taiwan, and the U.S. So in fact, what you’re now threatening to do is make goods that are assembled in China more expensive, but those goods contain inputs from your own economy. It simply means that you are shooting yourself in the foot twice, not just by making your final importable goods more expensive – people will want to buy fewer iPhone because they are more expensive because of this tariff – but you’re also hurting your own workforce because they’re used to producing certain computer processing chips or other technology that’s used in this good but there’s less demand for that good now. So they lose their jobs.
On who has the advantage between America and China in a trade war:
Tristan Kohl: The U.S.’s largest trade deficit is with China and most of its debt is also owned by China. So there’s a lot more political and financial stakes involved in this game. And of course China knows that it has a very strong market position in the U.S. economy and there are no apparent alternatives for Chinese products on the U.S. market. China just really has a very strong price competitor and it’s hard to think of an alternative for Chinese products on the U.S. market without substantially hitting U.S. consumers. And I think that any sensible administration knows this that they can try and wage this tariff war on Twitter. But at the end of the day, you know, if this war really gets out of hand, at the end of the day, the consumers are going to lose out on this.
On Trump’s claims that existing trade deals are unfair:
Tristan Kohl: What tends to happen is that people forget how many jobs are actually being created to sell goods to these countries, even though we are importing more manufactured goods from them. We’re not looking at what what’s the amount of services we may be exporting to them. Of course there is competition from foreign goods on our own market, and that’s going to cost us jobs, but at the same time, it forces us to specialize in other things in which we have a comparative advantage and that actually can create more wins for us than then the losses.
On the possibility of a trade war between America and Europe:
Traci White: There was also talk about tariffs being enforced between American and European trade as well and targeting specific products like peanut butter and Harley Davidson motorcycles and very symbolically American sorts of things that are also from the districts of quite a few prominent politicians in the U.S., like Mitch Connell and Paul Ryan. So could you comment on what is next for a potential trade war between America and Europe?
Tristan Kohl: It’s not new for countries to try and pick goods from states or provinces or areas where their voters are located. That’s a very old trick. So I wasn’t surprised when I saw that. But what is important in the negotiations now is that whenever there’s an election or someone new comes to power and has certain qualms about certain aspects of trade policy, you sit down at the table and you see how you can fix it. You don’t just stand up and threaten to walk away from everything and tear things up. Because if you do so – look at NAFTA, look at Brexit – those things can go horribly wrong.