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Saturday, 3 March 2018

What the world needs now… is not a trade war!


It was something that seemed inevitable from the beginning of the Donald Trump presidency in the United States: a trade war between the United States and the rest of the world.

Even though this trade war has not yet started fortunately, the odds for it to happen are quite high. This is because of the respectively 10% and 25% penalty tariff on the imports of foreign aluminium and steel, imposed by the American administration of President Donald Trump.

These sweeping tariffs on aluminium and steel should be a penalty for “all countries dumping aluminium and steel on the American market” to such a degree that the domestic steel mills in the United States could hardly sell their own products anymore, leading to massive loss of jobs in the US.

According to the Washington Post, it is quite obvious that Donald Trump is looking at China as the biggest suspect of dumping steel and aluminium on the American markets. China is also the usual suspect that European steel mills look at when it comes to dumping of steel and aluminium products.

However, the WaPo argues that other countries are much larger suppliers of steel and aluminium to the US markets, inclusing close allies like Canada. And they will not be pleased about these tariffs, just as China itself:

China, Russia and even Canada are likely to strike back. Trump likes to talk about how China is dumping a lot of cheap steel and aluminium into the United States, killing America’s domestic metal industry. But the reality is that Canada — a close ally — sends by far the biggest volume of these metals to the United States.

The top four countries that send steel to the United States are Canada, Brazil, South Korea and Mexico. The top four countries that send aluminium to the United States are Canada, Russia, the United Arab Emirates and China.

These are powerful nations that are likely to fight back. The traditional response is to make a formal complaint at the World Trade Organization, but that can take years to get a ruling. China, Canada and others could decide to retaliate right away by putting tariffs on some U.S. goods coming into their countries.

The most likely target is U.S. agriculture products and airplanes. These are top U.S. exports to other countries and would likely hurt Trump’s base in the Midwest. China is already discussing retaliatory measures. In short, a global trade war could easily unfold.

In The Netherlands the news about the imminent sweeping tariffs on aluminium and steel sent shockwaves through the Dutch subsidiary of Tata Steel in IJmuiden. The managing director of Tata Steel The Netherlands, Theo Henrar, was shocked and angry about these tariffs. In a reaction to Het Financieele Dagblad, he adamantly denied that Tata Steel has ever dumped steel or aluminium on the American markets:

“This all is done under the flag of national security, but these are just vulgar, protectionist trade measures”, according to Henrar who is very displeased about the American plans.

Contrary to China The Netherlands has never dumped steel, according to Henrar. “We don’t sell steel below the cost price. That is against the rules of the World Trade Organization (WTO). I understand that the US wants to fight against dumping practices, but they should do so with surgical precision and not in the form of ‘carpet bombing’ on everything that moves. I hope that The Netherlands, together with Germany and the European Commission, can forward this message to the US and prevent a trade war from breaking out.

It is an undeniable fact that large-scale dumping practices are extremely hard to prove: how does one calculate a fair cost price for steel products and aluminium, when it is fabricated in another country with other techniques and other costs of labour than your own?!

On top of that, every (large) country or area (hence: the EU) that is accused of dumping practices and punished for it, is reacting like being bitten by a viper. This means that China, Russia and perhaps even Canada, Brazil and Europe are already thinking about counter measures against the USA, to be imposed upon the products where it hits the USA the hardest.

But there is more. Trade wars are often rather based upon the PERCEPTION of being mistreated, than that countries are mistreated in reality. At least, that is my conviction. It is always much easier to look at another country for treating you bad than to look at your own flaws, when it comes to your competitiveness. 

Such flaws could be the obsolete state of your own industrial apparatus, your own derailing legal system or your own exploding costs of labour as a cause for higher cost prices and sales prices, less sophisticated production process or inferior quality of your end products.

Even when China dumps indeed steel in Europe and the United States, it is better practice to aim at better (i.e. more sophisticated) and more tailor-made quality steel and aluminium and a swifter production process than to start a trade war with China, Europe and the rest of the world. You win some, you lose some… 

And in the end there is nothing so good for innovation as having the hot breath of the competition in once’s neck.

Tata Steel IJmuiden, the aforementioned steel mill in The Netherlands, states for instance with authority that none of the American steel mills is capable of delivering the kinds and sizes of steel that they are delivering to their American customers. So the only effect that these sweeping tariffs will have on Tata Steel is - except for losing some valuable sales revenues - that their American customers will have to pay top dollar for the same products and will have to increase the prices of their endproducts, without any positive side effects for the American steel mills. Of course Tata could be preaching for their own parish here, but I am convinced that they have a point in their arguments.

The point is, however, that President Donald Trump has been elected on a wave of resentment, populism and nationalism coming from religious, ultra conservative voters in the South and the Mid-West (who hate the Democratic Party and everything that it stands for), but also from disappointed (relative) left-wing voters and blue collar workers from the rust belt states. People, who were sick and tired of the close connectedness of the Democratic Party with the big lobbyists and the industrial powers that be.  

In order to stay credible for these voters, the populist agenda of Donald Trump needs to be followed to a T, at any price and expense. This is probably the reason that Trump says that a trade war is a logical thing for thim and can be won easily, even though history proves him wrong over and over again.

Unfortunately these circumstances make that I’m quite certain that this emerging trade war could break out indeed and that it could become more nasty than already today, irrespective of who wins it eventually 

As stated by me in earlier articles, Donald Trump is a political amateur and on top of that one who believes he is the Kobe Bryant of politics. This is the reason that he is already trying to apply for a second term as president. And now he has thrown a massive rock in the pond and sees the waves it is causing all over the world.

What makes the current situation extra explosive, however, is that Trump’s opponents (or adversaries) in countries like China, Russia, Turkey and Brazil are either convinced they should remain president for life (hence: Xi Jinping, Recep Tayyip Erdoğan and Vladimir Putin) or they are involved in a battle for sheer political survival (i.e. Brazil, but also the EU). 

On top of this, the nationalist tsunami has hit the whole globe in an ubiquitous emergence of “our own country first” feelings and the notion that people all over the globe want to have a strong leader as president or head of state, in order to protect them against the rest of the world. These are not times for faceless apparatchiks, but for aggressive leaders.

This is not the situation in which a trade war is easily avoided, as the grassroots in all countries are screaming for revenge, when other countries impose trade tariffs upon them.

Deep in their hearts, everybody knows that such a trade war only has losers in the end and – to make things worse – could easily end up in a real hot war. But once you have pulled the lever, it is not easy to stop the whole process and make things right again. 

This means that we all have to buckle up and see how this situation plays out in the coming weeks or months. But it could become nasty indeed! And that is the last thing the world needs now!

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