Shaun McDade, MitonOptimal Group - Trade Wars

“Trade wars are good and easy to win”

(Donald Trump, March 2nd, 2018)

In 2009, in an effort to slow the growth in imports that the United Steelworkers’ union blamed for thousands of American job losses, President Obama approved a near nine-fold increase, from 4% to 35%, in the US’s tariff on Chinese-manufactured car tyres. According to official figures, in the previous five years, China’s share of the $1.7billion US tyre market had grown from 4.7% to 16.7%, during which time four American tyre factories had shut down and, at the time the tax was imposed, several more were threatened with closure.

After accusing the US of “rampant protectionism” and attempting, unsuccessfully, to overturn the tariff through the World Trade Organisation (WTO), China eventually retaliated with a penalty of its own: a 100% tax on the importation of chicken feet.

Yes, you read that right; chicken feet.

While Americans consume around nine billion domestically-produced chickens a year, their appetites don’t extend as far as extremities such as the feet. In parts of China, on the other hand, chicken feet are considered a delicacy. Accordingly, during the decade preceding this dispute, US chicken producers took advantage of a supply/demand imbalance and relatively frictionless trade conditions to develop a lucrative (and hugely margin-enhancing!) business with China, growing its exports of what was previously a virtually worthless by-product from zero to around $280 million per annum.

In trade terms, therefore, China’s action was a measured and proportionate response – roughly equivalent to China’s US tyre sales. In terms of its intended impact, however, it was far more effective. US chicken producers, who were already hurting from the combined effects of higher feed prices and reduced domestic demand due to the 2008/9 economic slowdown, saw exports fall more than 90% and their profitability severely dented. China’s tyre producers, meanwhile, merely switched their attention to other overseas markets. In time, after much effort on the part of US and Chinese negotiators, both parties agreed to back down and the dispute (well, that particular one!) went away.

As the foregoing example suggests, while President Trump’s recent pronouncements may have had the desired effect of boosting his popularity among the blue-collar demographic that represents a key part of his support base, targeted protectionist policies are rarely, if ever, as simple as they are portrayed and have a habit of backfiring badly.

In fact, thanks to the decades-long (in part, cost-driven) decline in US manufacturing, the biggest problem faced by Mr Trump is the lack of ammunition at his disposal when it comes to such matters. Simply put, and as highlighted during the recent furore over proposed steel and aluminium tariffs, there’s very little manufactured in the US that the world’s consumers actually want: aside from “Harley Davidsons, Kentucky bourbon and blue jeans” cited by the European Commission’s Jean-Claude Juncker, what’s left of the US manufacturing industry (excepting arms and aerospace) has little relevance within a global context.

That goes a long way to explaining why, in 2016, in an effort to slow the growth in imports that were threatening thousands of American jobs, the United Steelworkers’ Union called for tariffs to be imposed on car tyres manufactured in India and Sri Lanka…See what happened there?

DOWNLOAD: Weekly Comment -April 4 2018 – SmD

 

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