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World trade: It matters

As global supply chains become increasingly interconnected, trade becomes increasingly important.

All is fair in love and war. And if you search that phrase you’ll find various interpretations relative to the meaning. In general, though, when the stakes are high, there are no rules -– the only thing that matters is achieving your objective (winning a war, or protecting the ones you love).

Given the events of recent weeks, some might contend the same could be said for international trade. Perhaps that’s over-stating the importance of trade. But whatever your stance, the talk of new steel and aluminum tariffs has put people on high alert.

Watching all this play out in the media mandates some balance and filtering of the rhetoric. On one hand, there’s the high alert crowd; from them we hear about immediate escalation to an all-out trade war. On the other hand, there’s the pundits; they reassure us the tariffs are no big deal. The back-and-forth can be noisy; the truth probably falls somewhere in between -– especially when it comes to agriculture.

First, there’s consideration of fundamental principles. Government action of any kind, fundamentally establishes a system of winners or losers; it’s a zero-sum game. Whenever one group or industry is favored, inevitably another ends up getting punished.  

Further to the principles, justifying tariffs because of concern about trade deficits is misplaced. Marc Chandler (Making Sense of the Dollar, c. 2009) provides my favorite illustration addressing the worry about trade deficits:

Although Apple Computer makes a hefty profit selling iPods, each one sold increases the U.S. trade deficit by $150. Yet the iPod sells for about twice its cost of goods, which means that $150 accrues in profit to an American company for each iPod sold. That doesn’t get factored into (nor is reflected by) the trade deficit. Who would argue that America would be a more competitive nation if Apple had never developed the iPod?

The same principle applies here; focusing strictly on the deficit of any good or industry overlooks added value and benefits derived for U.S. businesses at all levels of the value chain including producers, processors, purveyors, distributors, retailers and restaurants –- that results in economic growth and job creation.

And finally, we also need to remember why we’re importing goods. Daniel Griswold (Mad About Trade, c. 2009) reminds us that trade occurs on the behalf of consumers:

“When we import more of a certain category of good than we export, say shoes or shirts, by definition we are buying and consuming more of that type of good than we produce. More Americans have more money at stake as consumers of the good than as producers. So when a tariff raises the domestic price of an item, we have more to lose collectively as consumers than we have to gain as producers.”

That’s especially true when putting tariffs on up-stream raw materials –- like aluminum and steel.

Okay, enough with the principles. There’s also real, practical considerations when it comes to international trade and pushing ahead with new tariffs. The concern about retaliation is a serious one. Agriculture is an easy target and the stakes are high. Ag exports are a significant contributor to the U.S. economy. USDA estimates the economic impact to exceed $300 billion annually (including both direct and indirect effects) and underpinning nearly 1.1 million full-time jobs.

Moreover, the U.S. knows how dicey all this can be. We learned that lesson the hard way during the Obama Administration following imposed tariffs on tires imported from China. The backlash resulted in major hiccups for the poultry industry.

And we all know that international trade doesn’t always make sense –- principles aren’t always applicable. To be sure, free trade doesn’t always equal fair trade –- we don’t always deal on a level playing field. That’s particularly apparent when it comes to U.S.-sourced meat products.

For example, one only has to look at China’s long-standing policy towards U.S. beef –- regaining access has been painfully slow. Meanwhile, the U.S. faces stiff tariff rates in many countries around beef -– including Japan and Korea (38% and 24%, respectively).

So, all of this is somewhat like walking a tightrope: there’s principles and there’s reality. It’s all tough and messy. Where it all goes is anyone’s guess. Looking ahead, there’ll undoubtedly be more tough issues around international trade.

That’s even more true as global supply chains become increasingly interconnected. But one thing’s for sure: it does matter. That said, the current debate has never been more important.





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