USA’s tariffs 4
USA's tariffs 4
We should explain a little better our position that USA should TARGET EU and HIT them VERY HARD with TARIFFS. We stated that for many of the countries there is a way out. Countries that have overall deficit or small surplus could fix their deficits with other countries and remain unharmed from USA's tariffs. This means that the will make up in other countries the decrease of their trade surplus with USA.
Also companies could make up lost USA sales in other countries. Countries and companies would have to make adjustments and this will require time. Instead of retaliating with tariffs, they should negotiate with USA and ask for some time to make adjustments. We do not know if USA will give them time and how much this may be but it is possible that they will give them adequate time.
Why did USA had tariffs become effective immediately? They could announce them and make them effective after one, two or three months. USA would have to answer that. It may be a negotiating tactic. Trump is supposed to have good negotiating skills. From what they have been saying, their approach had many countries in the world responding immediately and willing to sit at the table and negotiate.
It is a good way to bring countries to the negotiations immediately and put them under pressure to make a decision and do it soon. USA may also ask something in return for giving them time. A common sales tactic is saying to the potential buyer that there is one or more buyers interested as well. Sometimes this is the truth but often they are just saying it to put pressure on the buyers and push them to take the decision.
On the other hand, it may also be a negotiating tactic if other countries threaten to impose retaliatory tariffs. Threatening is OK but imposing them would be a big mistake. First of all, it is unjustified to use retaliatory tariffs if they have a trade surplus. Also this may lead to a trade war, where USA would respond with more tariffs and it will be an endless exchange of tariffs.
The most extreme situation that can happen is trade between two countries to become zero. In that case, the country with the deficit would have benefited because if there is no trade, there is no deficit. They would wipe out deficit but they would also wipe out trade. The country with the deficit would be the winner. It is wrong to claim that there is no winner in a trade war. The winner is always the country with the deficit.
It is correct to say that in a trade war both sides could get hurt. In a boxing match, in the end there will be a winner, even if the winner may get some very hard blows and fall down. The fact that he got hit hard and even fell down does not mean that he is not the winner. How hard both sides will be hit in a trade war, is a matter of time. Both sides may get minimal hits, if there is adequate time.
When there are tariffs imposed, imports are reduced. Let's take two hypothetical countries A and B. A has a trade deficit and B has a trade surplus. If country A imposes tariffs, imports from country B will be reduced. That does not happen immediately but takes some time. The process is as follows. When tariffs become effective, companies that sell the imported goods have to pay them. Usually this increases the price of the products. When the prices of the products increase, slowly sales will fall. When sales fall, companies of country B will export less to country A.
If they have found in the meanwhile new markets, they can keep the production to the same levels. If they have not been able to find new markets, they would have to cut production. If many companies cut production, the country's GDP will decrease and so GDP per capita. So the country B will become poorer. It is a slow process. That may be another reason USA made tariffs effective immediately. Even if the tariffs start immediately, the whole process may take some months.
If county B retaliates with tariffs, a similar process will take place in country B. If country A's companies have not found new markets, they would have to cut back production. But their new markets could actually be in their country. Let's say that country A imposes tariffs on cars. Car imports from country B will gradually decline. That will leave a share of the auto market in country A to domestic producers.
This is another reason the country with deficit will always win. That is probably what Trump meant when he talked about tariffs to Canada. He said that there is nothing imported from Canada that they can not produce in USA. USA companies will fill the market shares that Canadian companies will lose. There may be a problem for a country that does not produce the products on which it imposes tariffs.
Let's say that country C also has a deficit with country B. They impose tariffs on imported autos from country B. Since they do not produce autos in country C, imports from other countries will fill the market share that companies from country B lost. Country B may retaliate with tariffs on wine. Wine exports of country C to country B will gradually decline. If they have not found other markets, their wine production will decline and so will GDP and GDP per capita.
Let's take the extreme position that trade between USA and Canada becomes zero. USA's exports to Canada are 349,4 billion dollars and Canada's exports to USA are 412,7 billion. USA's trade deficit is 63,33 billion. For simplicity we will assume that Canadian exports will be replaced by USA made products and vice versa, USA exports will be replaced by Canadian made products.
We will also assume that Canadian companies will not find other markets for the market share they will lose in USA. In that case, USA's GDP will increase 63,33 billion and so will Canada's GDP decrease. Canada's nominal GDP is 2.331 billion. So Canada's GDP will drop 63,33/2.331 = 2,72%. For USA it will be an increase of 63,33/30.338 = 0,21%. Suppose USA has a trade war to the end with all countries.
USA's trade with the world will become zero. USA's GDP will increase to an amount equal to trade deficit, 2,99%. This will happen if USA made goods will replace all imports which is something very unrealistic. USA may be able to produce the products it imports from Canada but can't make all the products and services it imports from the rest of the world. Also, if the trade war is with some countries only, domestic producers may not be able to take all the market shares that countries in the trade war will loose.
USA will suffer as well because there may be products unavailable. Also time will be needed to make the changes and use production factors in different ways to produce different products than those currently produced. If USA focuses only on EU, with which it has the second highest deficit, a trade war will be manageable even if it goes to the end, till trade becomes zero.
USA should not go to trade war with China because they will need China for New Yalta Agreement. Most EU countries will be anyway excluded from New Yalta Agreement. If USA gets tough with EU, it will also send a message to the rest of the world. Nevertheless, USA's approach may work out. They may be able to bring many countries to the negotiations immediately and ask them to support New Yalta Agreement, in return for some time.