THE BOTTOM LINE

Trump's trade war is mostly about politics, not economics

Washington

YOU cannot understand US President Donald Trump's so-called "trade war" without acknowledging that it is mostly about politics and not about economics. He has embarked on a giant marketing campaign to convince Americans that foreigners - their exports - are to blame for our economic problems. It is a seductive appeal to nationalism whose main defect is that it is mostly untrue.

To be fair, Mr Trump's message has been consistent since the early days of 2016. He said that he would slap our trading partners with high tariffs, and so he has. The campaign continues. Here is a recent tweet: "The US has been ripped off by other countries for years on Trade, time to get smart!"

The standard anti-trade narrative is that US officials have botched trade negotiations, giving too much to foreigners and getting too little for US exporters. Massive trade deficits result, and American jobs are destroyed. The employment loss is aggravated by US multinationals relocating factories to developing countries with their dirt-cheap wages. Low-cost products are then exported back to the United States.

Now, all these statements contain some truth. After World War II, the United States was generous in granting trade concessions to Europe and Japan to help revive their economies. Similarly, many US multinationals do locate factories abroad. These statements are not blatantly false, but their effects are hugely exaggerated.

APPARENT PARADOX

Take the connection between trade deficits and job loss. Obviously, this occurs for individual factories. But it does not exist for the entire economy. Consider this: From 2009 to 2017, the annual US trade deficit for goods and services rose from US$384 billion to US$568 billion. Over the same years, the number of private US payroll jobs increased by 15.5 million, and the unemployment rate fell from 9.3 per cent to 4.4 per cent.

If trade deficits created huge job losses, this would be impossible. The main explanation for the apparent paradox is, as I have argued for years, that the US dollar is the main international currency. Foreigners and investors want US dollars to conduct global trade and investment. This keeps the US dollar's exchange rate high, making US exports costlier and imports cheaper. The resulting trade deficit is structural; but Americans' spending for domestic products is still the main determinant of US employment.

Or take the notion that US multinationals move factories abroad to exploit cheap labour - say, car plants in Mexico. This clearly happens, and is routinely reported by the media.

But it is not the main reason that US multinationals invest abroad: 71 per cent of their foreign investments occur in developed countries "where consumer tastes are similar to those in the United States", reports James Jackson of the Congressional Research Service. Europe alone accounted for 59 per cent of these investments.

Presumably, it is less expensive to service these foreign markets from local factories, warehouses and offices than to export from the United States. According to Mr Jackson's report, about 60 per cent of the sales of foreign affiliates of US multinationals go to local markets - say, France. (The other 40 per cent go to exports to other foreign countries or to the United States.)

None of this means that we do not have serious trade problems with some of our partners, most obviously China. But the idea that trade issues lie at the core of our economic shortcomings is somewhere between wild exaggeration and sheer fiction. Mr Trump's policies and rhetoric are meant to turn foreign countries - via their exports and trade practices - into a hateful scapegoat. It is "their" fault.

MISINFORMATION

The cost of this misguided exercise in misinformation is, as headlines remind us, steep. It has alienated our closest historical allies (including Canada, Mexico, Japan, the United Kingdom, France and Germany) and created enough uncertainty about trade policy to jeopardise worldwide economic growth.

At its best, the imposition of these politically motivated tariffs would raise domestic prices and trigger widespread retaliation against US exports. At its worst, it might result in the collapse of the post-World War II trading system and usher in an era of reconstruction that would be dominated by China as the world's biggest trading nation. THE WASHINGTON POST WRITERS GROUP