The unintended consequence of a trade war

By Sumantra Maitra
0 Comment(s)Print E-mail, January 6, 2017
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One question that has been vexing analysts will soon be answered. It's only a few days till Donald Trump signs his first executive orders. And it will be evident if he is indeed determined to break the established norm and the one defining principle of American policy since 1945 -- free trade.

Trade has been one of the key issues in Trump campaign, where characteristically he has taken multiple differing and often incoherent positions, but one thing that has always been remarkably straight forward, was his idea that the U.S. has always been on the short end of the stick when it comes to global trade. Trump thinks and continues to think that the U.S. has been victimized by foreign powers since the 1980s, first by rival Japan, and then by a rising China.

It is completely wrong, and displays a juvenile transactional understanding of modern global trade. However, it is what it is. The question therefore is, given his beliefs, how far can he actually go while keeping the structural constraints in mind.

Well, the answer is, that depends on two factors.

The first factor is how much the Americans are willing to suffer. A president can of course force and bulldoze his way to protectionism. He can radically alter and force companies to produce domestically, or put up tariffs on foreign imports. But at what cost? Imagine, for example, a situation where the 75 percent of iPhone spares which are manufactured abroad are forced to be manufactured in the U.S. The heavy labor cost will then force the iPhone manufacturer to either skyrocket the value of the phone, or increase heavy automation to reduce the burden on the workforce, or decrease the labor cost to make the U.S. as competitive as China. The laws of demand and supply will continue to exist. Almost all of the above options will be disastrous for American consumers.

In almost an inevitable retaliatory measure, there will be a heavy tax on Apple in China, therefore the productivity of the company will suffer and the market will go into a shock and slide into a renewed recession. It is unlikely, any prudent businessman will be able to continue with these policies, nor is it likely, that American consumers who are used to a luxury lifestyle will suddenly warm up to a life of austerity.

The second factor is even more important. Given Trump's protectionist tendencies, what will happen if his allies desert him? Let me give an example. Trade wise, two large allies of the U.S. are looking for more Chinese investment. The first freight train service between China and the U.K. started on January 8 marking a new phase of open trade. This train runs from Yiwu West Railway Station in Zhejiang Province, eastern China to Barking, London, taking 18 days to cover 7,400 miles. The train trade route will run through Kazakhstan, Russia, Belarus, Poland, Germany, Belgium and France, and finally the U.K. -- the eighth and final country and London being the 15th city. This is based on the old trade silk route, and has been a cornerstone of Chinese trade policy which hints at increasing free trade between the EU and China.

Similarly, Australia will suffer heavily if Trump forces a choice between China and the U.S., and frankly the Australian government is not prepared at all if indeed it needs to choose between a security alliance and trade with China. If the U.S. forces this choice on her allies, it is uncertain which way they will tilt. Importantly to remember, almost every ally refused the U.S. dictate on joining the AIIB.

In a certain way, Trump is correct in identifying that trade has caused an increase in inequality across the U.S. and millions have suffered due to manufacturing losses. No great defender of trade will defend that. However, the main difference is in understanding why it happened. Trump seems to think it has all been a conspiracy against the U.S. and everyone is taking advantage. The reality is different, and much though one wants, the U.S. cannot turn back time and go back to the lily-white manufacturing 1950s. It doesn't mean Trump won't try. But he will almost inevitably fail.

Sumantra Maitra is a columnist with For more information please visit:

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