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Apfelthaler: Trade war is bad for the economy

By   /   Friday, May 24th, 2019  /   Comments Off on Apfelthaler: Trade war is bad for the economy

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Gerhardt Apfelthaler

By Gerhard Apfelthaler

It’s back! After months of negotiations with China, the pause button has been released and the nation finds itself back in the trade war. Fact is, it never went away.

Ask, for instance, the folks at Volvo’s plant in Ridgeville, S.C., which is running at a fraction of its capacity. Or ask the bourbon producers, whose exports declined in 2018. Or soybean farmers in Illinois who lost a combined $1 billion. The state of things isn’t pretty for manufacturers that depend on exports.

To what end, one might ask? There is some evidence that China is hurting just as much from the trade war as U.S. exporters. A clear win, right?

Not necessarily, because for now American consumers are paying the bill. Even Larry Kudlow, the director of the U.S. National Economic Council, recently acknowledged this, admitting that the Chinese do not pay the tariffs on goods coming into the U.S.

To cite just one example, economists from the University of Chicago and the Federal Reserve studied the tariffs that were imposed on washing machines in 2018. They found — not surprisingly — an increase in retail prices for foreign brands. One would expect that American consumers switched to cheaper American manufacturers, but those companies had also raised prices — simply because they could.

In the end, according to the research, U.S. consumers are spending an additional $1.5 billion a year on washing machines and dryers as a result of the imposed trade barriers. This can hardly be called a success.

In its April World Economic Outlook, the International Monetary Fund warned of further negative effects. Should the trade war between the two countries escalate, both the United States and China would see significant losses of manufacturing companies that would move to neighboring countries.

Therefore, it was even worse news when the administration’s attention recently turned to Europe, which it has called “just as bad as China” when it comes to trade with the U.S. The Trump administration threatened tariffs on anything from aircraft materials to wine or cheese from Europe.

Luckily, Europeans didn’t immediately retaliate, but decided to negotiate, thus preventing the opening of another front in the trade war.

In full disclosure, I share the view that China hasn’t been the most honest player in the global economy, and it needs to correct some of its behaviors.

Also, it is undisputed that the U.S. trade deficit is high, and that it increased by about 10 percent in 2018.

However, I don’t share the belief that restricting imports is the best way to fairer trade, and I believe that an unhealthy obsession with the trade deficit exists.

While economists rarely agree on anything, there is evidence that protectionism and import substitution policies harm the economy in the long run. There is also growing consensus that trade deficits don’t really matter that much — especially in a country like the United States where exports only make up about 12 percent of the gross domestic product.

Some economists  even believe that a U.S. trade surplus would lower growth in the global economy and ultimately harm the U.S. economy.

Most importantly, however, global economic competition will not be won by protectionism. It’ll be won through improved competitiveness. Often, this comes down to research, development and innovation. And, unfortunately, the U.S. is not doing too well on that front either.

According to the National Science Foundation, the U.S. government spent $66.5 billion in basic and applied science and technology research in 2017. A lot, right? Think again: The American Association for the Advancement of Science reports that total government research and development spending in the U.S. has declined from 1.22 percent of GDP in 1978 to a meager 0.71 percent in 2018. In 2018, China’s government spending on R&D amounted to approximately 2.1 percent of GDP. More importantly, spending on R&D by China’s government tripled since 1995 while that by the U.S. government has been declining for several consecutive years.

If this trend continues, no tariffs or non-tariff barriers can save the U.S. economy.

• Gerhard Apfelthaler is the dean of the School of Management at California Lutheran University and a professor of international business.

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