Trade Wars

How Can New Zealand Deal with a Trade War Between Elephants?

I have thought that economists are especially passionate about international trade because it is an alternative to war. In order to acquire access to resources one does not need to invade, conquer and colonise a country. Voluntary trade is less costly with far fewer deaths.

Economists are almost as universally opposed to trade wars. The disruption precipitated by the US’s Smoot-Hawley tariff in 1930 gloomily hangs over the profession. Following retaliatory tariffs by America's trading partners, there was a reduction of American imports and exports by about 60 percent, only some of which could be explained by the depressed world economy. (The new tariff regime was not the cause of the Great Depression although it is commonly held so by some populist – ill-informed – commentators. But is deepened it and delayed the recovery.)

To see why a disruption occurs, suppose – all right then, as Trump intends – a swingeing tariff is imposed on steel and aluminium forcing users, (car manufacturers for instance) to seek domestic suppliers. That does not happen overnight and it is probably even more complicated today than the 1930s because quality requirements are more specific – think about the difficulties we have been having with Chinese building steel.

Presumably the price of vehicles or whatever increases, which makes them less competitive, with overseas-made alternatives (which are kind of smuggling in untaxed steel and aluminium). Next thing there is a tariff on vehicles. Even so, the exports of the vehicles are less competitive so manufacturers lose market share outside the country even if they gain it domestically. Typically, the mix which is exported is different from the mix sold locally, so there is another adjustment disruption.

It takes time to overcome such challenges. So in a few months – three, six, I dont know – things would be running smoothly again albeit with some reduction in productivity and consumer choice. (The US has fewer steelworkers than it has manicurists so Trump is precipitating an international trade war in the interests of very small groups.)

Except there will be international repercussions. Big exporters of steel and aluminium will select tariffs on products designed to cause the maximum pain to certain American producers. (New Zealand will probably keep its head down. We have some exports of steel and aluminium but are not badly exposed. Our serious cost would be if our third markets are oversupplied by others who have surpluses they can no longer export to the US and our export prices fall.)

One of the features of carefully designed retaliation is to products made in US states which the Republicans are fearful of losing in the end-of-year elections. Despite the ‘nation’ rhetoric, international trade is between businesses rather than countries and that those businesses are located in regions rather than an entire country.

So trade wars impact directly on particular (export) businesses and locations. There will probably be some layoff of workers – more disruption. In warfare terms, such businesses and their workers are kind of traitors for they are likely to be very vocal lobbyists against the war.

By now things are very messy, more so because the US’s trading partners will also be suffering adjustment difficulties. It will take a lot longer to get back to a new normalcy. We are now well past the point where we can predict outcomes (even if the US president was more predictable) but my impression is that November’s midterm elections may loom large in the domestic political calculations.

For decades the world has been aware of the possibility of trade wars. I shant go through the various measures taken (such as the creation of the EU) but a brief multilateral history is:

Under GATT (the General Agreement on Tariff and Trades set up in 1948) disputes resolution was essentially voluntary. It was worse than ineffective for agricultural products since they were hardly covered by the GATT. (One expert described it as a bit like the Wild West.)

Following the Uruguay Round (completed in 1994) the WTO (World Trade Organisation) moved to a rules-based system of international trade, which included a more compulsory disputed resolution system. Trade disputes happen all the time and generally get resolved without most people noticing them. But there are also ‘border skirmishes’ rather than total warfare.

Over 500 such skirmishes have gone to the WTO. New Zealand has been involved in eight:

            Australia – apples

            Canada – dairy subsidies

            EU – butter tariffs

            Hungary – agricultural subsidies

            India – quotas

            Indonesia – beef

            US – lamb tariffs & steel tariffs

For example, in 1999 the US slapped a tariff of up to 40 percent on our lamb exports despite an agreement that it was bound to (could not be higher than) only a few cents per kilo. The surcharge was entirely for domestic political purposes. Our redress against the bullying was to follow WTO procedures, which found in our favour. The US, telling the politicians in the sheep states that it had to follow international trading rules, reduced the tariffs to the bound levels.

The trade skirmish lasted three years, costing us over $120m, but ultimately we won. In fact, New Zealand, choosing its battles carefully, has never lost any of these skirmishes. So much for Trump’s tweet that the US always wins trade wars. (It is hard to believe that they won the one precipitated by the Smoot-Hawley tariff either.)

(Yes, under the WTO New Zealand loses some sovereignty to a rules-based system because there is the possibility of a ruling against us which we will be compelled to follow. But it is not the Wild West in which small countries get bullied.)

As it happens we took our Indonesian case jointly with the US (and Australia). So the US wins some too. Now it is undermining the system. Not only is there Trump’s current trade war but the settlements of skirmishes depend on a panel of judges. The US has vetoed appointments to the point where by the end of the year there will be so many vacancies that the panel will be unable to muster a quorum to make a ruling.

There is a backup. Embodied in FTAs, which are a part of the rules-based system, are alternative dispute resolution systems which we can fall back on. Our FTAs cover only 53% of our trade although with TPP11 it will get to 64% (mainly because Canada and Japnn are in). The big omissions are the EU (14%) and the US (11%). (In the case of the EU but also with a number of smaller partners we are negotiating trade deals although they will probably have no effect in the current kerfuffle.)

The world economy has much to lose in a full trade war. The effect on little New Zealand, dependent on agricultural exports which always seem to get a rough deal, is out of proportion to our size. Was it Lee Kuan Yew who reminded us of the African proverb that whether the elephants make love or war the grass gets trampled upon?