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American trading policy – protectionism hurts US industries

13.08.2018

Since running for a candidate for the Republican party, president Trump has had very negative opinions about free trade. Ever since he has attacked strongly against current trading system. People have been wondering what USA is going to do - what president Trump’s administration is up to? What makes the task for finding answers for these questions more challenging is continuously changing opinions of president Trump e.g. concerning the trade between EU and USA. Sometimes EU is ‘good’, sometimes ‘bad’, but usually ‘bad’. President Trump has even mentioned that EU was ‘set up to take advantage’ of US.

There is however a big challenge which USA is facing and which might be the actual reason for somewhat chaotic US trading policy. This is the rise of China as an industrial power to challenge the position of USA as a leader of industrial world. China is the only country which could in the near future challenge the position of USA. One example has been recently the entrance of Chinese businesses in the area of robotics through acquisitions. China is at the moment a real challenger for USA in many knowledge intensive industrial sectors. Maybe tariffs were seen as a way to slow down the progress of China or even prevent the development of China in some industrial sectors.

Why these same tariffs have been partly also applied to EU countries and e.g. Canada and Mexico? NATO countries or NAFTA countries are not threats for USA in any kind of situation. These countries have traditionally been their closest allies. In terms of balance of trade Germany could be blamed to have large trade surplus with USA. EU trade balance with USA (if we exclude Germany) does not look so bad at all from US perspective. If we think about steel and aluminum exports and imports from Finnish point of view (to USA) there has been a trade surplus in steel but a deficit with aluminum. Finnish companies have been exporting special steel to USA which are not even manufactured in USA. So is this trading so bad for USA? It does not seem to be so. President Trump just pushes his idea about ‘Powerful Trade’ forward … whatever this concept means. It definitely includes tariffs set for foreign products entering US markets.

What have been the consequences of steel tariffs? We all know what Harley-Davidson has been planning. Motorcycles built in USA are going to be too expensive for European markets after the tariffs set by EU. It makes perfect sense to manufacture motorcycles exported to EU in some other countries. Caterpillar has similar experiences. Their products which are manufactured in USA are going to be more expensive due to the higher prices of steel. The same phenomenon is facing car industry. Another strange thing with car industry is that it is so international nowadays … e.g. both BMW and Mercedes-Benz cars are built in huge manufacturing plants in USA. There are no winners in trade wars in car industry.

We have already seen what happens in many areas of industries with USA setting higher tariffs for imports. Counter tariffs have been set by EU for e.g. above mentioned motorcycles, peanut butter, bourbon whiskey and orange juice. Farmers in USA are in big trouble right now due to these counter tariffs. E.g. soybean producers are facing huge problems. This is due to the counter tariffs set by China. China is a big importer of soybeans. There are many industries in USA which have been hit hard by tariffs set by president Trump’s administration. Hopefully something happens before this trade war escalates. There will be midterm election in USA on November. Consequences of the tariffs set by USA might be one factor influencing the decisions made by voters during midterm election on November. Based on the result of this election there might be consequences related to decisions about tariffs set by USA. One issue to remember is that there are no winners in trade wars even though other kind of claims have been also made.

Text: Ville-Pekka Mäkeläinen

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