Predicting the Outcome of Trade Wars

I have written a series of novels that form a sort of “future history”, all of which, of course, were imaginary and in most cases I hope those futures won’t come to pass. I never intended to try to predict any future, because predicting the future is tricky and it seldom complies with our wishes. There are two basic approaches. The first is to be sufficiently general that with any sort of luck, you can say, “Yes, that complies with the prediction.” A classic example was when a king asked the Delphic oracle what would happen if he went to war with a neighbouring king and he got the answer, “A great kingdom will fall.” Overjoyed, the king went to war, overlooking the fact that it could be his kingdom that fell. Oops.

The alternative is to look at what has happened in the past and extrapolate. If you want to know what the weather will be like in two hours time, look out the window. In general, the chances of a dramatic change are not that great. If you look further to the future, the problems get more difficult. I recall in my youth, there was something of a drought in Westland, New Zealand, and since that is rather wet generally, the weather forecast consistently seemed to think that this could not last, so they predicted rain. The drought persisted for 48 days, when finally the weather forecast decided to yield and predict continued fine weather; a front arrived and it rained! The problem for New Zealand then was there were very few data coming from the Tasman sea. Now, with satellites, they can see what is coming, and follow its rate of arrival.

Anyone who has tried to predict sports game results will know how difficult that is. With some sportsmen (and women) form is transient to say the least. Only the bookmakers do well, and of course they don’t care who wins; they lay the odds so that they always make more from the losers than they pay to the winners, or at least they try to. That is why they like to offer “multiple choice” bets in big team games. So why are sports so difficult to predict? The problem involves random variables. Someone is not feeling very well, a key player gets injured, players have mental aberrations, the list goes on.

Anyway, the cause of this particular post is President Trump’s latest proposal to put tariffs on foreign steel and aluminium. This was totally unpredictable, but the question now is, how do you predict the consequences? It is no good extrapolating because there is nothing recent to extrapolate from. It is no good being Delphic, because that does not get anyone anywhere. The problem then is, how will other countries respond? They have two considerations. If they retaliate, you get a trade war and everyone loses. If they do not retaliate, then Trump will be encouraged and keep at it, and again most lose. They could try to persuade him not to, but so far he has not been particularly amenable to receiving advice and changing his mind.

The EU has stated it will impose tariffs on US products, but Trump has threatened to counter those with tariffs on European cars, which are more of a big-ticket item for Germany. I was unaware that the EU was a significant exporter of steel or aluminium to the US. A check on the EU statistics showed that “metals and others” came in at about 4% of trade, and the EU imported a little more from the US than it exported. In my opinion, a better strategy for the EU would be to shut up and see what happened. There are a lot of other countries far more deeply involved, so let them do the fighting. Unfortunately, politicians, when interviewed, feel they have to say something and cannot resist the chance to look important. Much better to “make a stand” and never mind the consequences, which in this case would be severe.

This raises the question, why has the US got such a big trade deficit? The answer from a US professor of economics at first sight seems of low relevance, but on thinking about it I suspect he is in part correct. According to him, a very important cause is the US government deficit. If you think about it, suppose the trade should be at equilibrium if there were no deficits. Now, when you borrow money, if that goes more or less in the same ratio to domestic and imports as before, the imports rise, but the government deficit is not going into exports, or, at present, into infrastructure, which would enhance economic growth. So the balance swings to more imports. There is a second problem. No industrialist likes to expand production or invest more to do it when there are frequent random changes to the rules. Good growth is encouraged by clear government rules that stay the same. Right now there is the threat of chaotic rule changes. All of which raises the question, what next? I don’t think anyone knows, but the worrying thought is that suddenly the world could fall back into trade wars and nobody wins.

2 thoughts on “Predicting the Outcome of Trade Wars

  1. The US government deficit is fundamentally caused by the exportations to China, Mexico, etc, of US production. So the slaves overseas are doing the work, while the upper class in the USA does not have to deal with pesky unionized workers. Increase profit, decrease labor, grow plutocracy. What isn’t there for plutocrats, our lords and masters, to like?

    Otherwise Trump is bluffing. Trump is trying to cut a deal about NAFTA/ALENA. That’s his negotiation mode. Europe should ignore him, but Europe, like Trump, is trying to make the peons believe it is doing something, when actually it’s doing even less.

    This is how the crash of Wall Street in 1929 was engineered. After the markets crashed, they recovered, as the US Senate hesitated. However, the situation became catastrophic in 1930. Then the Smoot-Hawley tariffs were imposed, and Europe retaliated in kind. It would have been better to keep European production in Europe, buying the cars from government money , and selling them at a loss. That would have been socialist, and only the USA would have suffered.

    There is a real problem with exporting production to China and their ilk: France becomes a museum, the USA where the homeless, health care-less bums are roaming, the UK sinks in Brexit oblivion, Mediterranean Europe is workless, Germany crazy, etc…
    Result?. In GDP at PPP, China has shot over the US and the EU28, and its rising exponentially, even capturing Africa in a sort of bad faith octopus strategy… Quite a bit the fault of the US, France, the UK, and especially the lamentable EU led by austerity queen Merkel… This is a strategic collision recipe…

    • One minor disagreement. What I meant by US government debt is the actual difference between government expenditure and taxation. What you re describing would be the US national debt (at least in my terminology). It too is bad, but its results are as you describe. The government debt, as I describe it, is somewhat more insidious because it is harder to see the effects.

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