The reality is that this country’s economy is far bigger than all others and vastly more adaptable to changing market conditions
Why will President Donald Trump and America easily win a trade war? It’s simple: They need us more than we need them.
Free trade usually benefits both sides.
For instance, that is why the U.S. grows wheat and then trades for coffee from Colombia. The Midwest U.S. climate efficiently provides high wheat crop yields. The Colombian climate efficiently provides high coffee yields. If the countries specialize in what they can grow most efficiently and then freely and fairly trade, both countries benefit.
If they didn’t trade, but rather each country produced both coffee and wheat to satisfy their needs, total output would fall. And each country would be worse off. What is the problem?
Free trade works best when it is indeed free and also fair. That means neither trading partner places any tariffs or duties on the other’s products. It also means that industries are not subsidized. In addition, the means of exchange (money) is free to find its current market exchange rate.
Trump found that the supposedly free trade agreements with our trading partners are not completely free. Tariffs are included. Foreign industries are subsidized. And our largest trading partner manipulates its currency in its favor. Because of these unfair trade agreements, the U.S. is importing hundreds of billions of dollars more than we export every year.
Our trade agreement with Europe is an example of the unfairness. European-made cars sold in the U.S. pay a 2.5 percent duty. But American cars sold in Europe are charged a 10 percent duty. Trump wants to fix this. Now.
While chief executives as far back as President Bill Clinton spoke of the imbalances in trade agreements that needed to be fixed, nothing happened. Trump sees closed U.S. factories and closed foreign markets for U.S. goods. He wants to fix it. Now.
Creating a sense of urgency. As any astute businessperson who is trying to close a deal quickly knows, creating a sense of urgency will bring the sides together quickly. About the European Union, Trump says, “The EU has been particularly tough on the United States. They make it almost impossible to do business with them.”
Trump added that “We can put a tax of 25 percent on their cars and, believe me, they won’t be doing it for very long.” But then he assured us, “We’re going to straighten it out, and we’ll do it in a very loving way.”
By imposing tariffs, he has created a sense of urgency, and he is now dealing from a stronger position since our trading partners know he is serious. While the trading partners could retaliate, in a trade conflict the U.S. would come out way ahead. In other words, Trump would win.
Trump imposed a 25 percent tariff on steel, meaning that imported steel is more expensive than U.S.-made steel. That means U.S. steel mills will be able to make and sell more. Foreign countries, whose economy may rely heavily on U.S. sales, will have to shut down steel-producing facilities. That could be devastating to them.
But the Europeans will strike back. The Europeans and others may retaliate. They have said they will target products made in politically sensitive markets for Trump, such as many food products, Harley-Davidson motorcycles, Kentucky bourbon and Levi’s jeans. That would hurt manufacturers of those products. But there are two reasons the damage will be small.
First, the imposition of tariffs on food by European countries, Mexico, and Canada will mean the food will cost citizens of those countries more. This will probably not be well-received.
Most of the other products sold in Europe are purchased by people who can afford them and who seek out the American brands. As such, an increase in price from the tariff would probably have a small effect on the U.S. manufacturer’s total sales.
In addition, their citizens might complain of the price of American-made goods.
Secondly, the Europeans can’t completely manufacture a substitute product, as U.S. manufacturers can with steel. In other words, if the foreign steel is too expensive, then U.S. companies will buy the U.S.-made steel. That is not the case with food products, Harleys, Kentucky bourbon, or Levi’s jeans.
There are other manufacturers of large motorcycles, but no country can make a motorcycle like the Harley. There are plenty of alcoholic beverages, but nothing can duplicate the taste of Kentucky bourbon. And no foreign brand can touch Levi’s jeans.
The U.S. can easily substitute for foreign-made steel, but foreign manufacturers may have a difficult time substituting for American-made products that have strong brand equity.
Trump will negotiate fairer free trade deals for the U.S., and he will do it relatively quickly. In the meantime, if any country wants to start a trade war, remember they need us more than we need them.
Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years. @mbusler www.facebook.com/fundingdemocracy