WASHINGTON, March 7, 2018. – It’s simple: they need us more than we need them. When free trade advocate President Trump first examined the country’s free trade agreements, he was perplexed. Trump recognized that true free trade benefits both trading partners because countries may have an efficiency advantage compared to another country.
For instance, that is why the US grows wheat and then trades for coffee from Columbia. The mid-west US climate efficiently provides high wheat crop yields. The Columbian economy 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. 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 US 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 US, pay a 2.5% duty. But American cars sold in Europe are charged a 10% duty.
Trump wants to fix this. Now.
While Presidents as far back as President Clinton spoke of the imbalances in trade agreements that needed to be fixed, nothing happened. Trump sees closed US factories and closed foreign markets for US goods. He wants to fix it. Now.
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,
“The EU has been particularly tough on the United States. They make it almost impossible to do business with them.”
“We can put a tax of 25% 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.”
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 US would come out way ahead. In other words, Trump would win.
If Trump put a 25% tariff on steel imports it will mean that imported steel is more expensive than the US made steel. That means US steel mills will be able to make and sell more. Foreign countries, whose economy may rely heavily on US sales, will have to shut down steel producing facilities. That could be devastating to them.
But the Europeans will retaliate
The Europeans and others may retaliate. They have said they will target products made in politically sensitive markets for Trump, like Harley Davidson Motor Cycles, Kentucky Bourbon and Levi’s jeans. That would hurt manufacturers of those products. But there are two reasons why the damage will be small.
First, most of these 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 sales the US manufacturer’s total sales.
In addition, their citizens might complain if the price of American made goods rises.
Secondly, the Europeans can’t completely manufacture a substitute product, as US manufacturers can with steel. In other words, if the foreign steel is too expensive, then US companies will buy the US made steel. That is not the case with Harleys, or Kentucky Bourbon or Levi’s jeans.
There are other manufacturers of large motorcycles, but no country can make a motorcycle like the American made Harley Davidson. There is plenty of alcoholic beverages, but nothing can duplicate the taste of Kentucky Bourbon. And no foreign brand can touch Levi’s jeans.
The US 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 US. In the meantime, if any country wants to start a trade war, remember they need us more than we need them.