[Editorial Analysis] Tilting at windmills

Mains Paper: 2 | International Relations

Prelims level: Trade conflict between US and China

Mains level: Donald Trump’s trade war ignores the complexity of world supply chains and glosses over issues within U.S. industry

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Context

• In U.S. President Donald Trump’s simplistic world-view, slapping tariffs on the U.S.’s main trading partners — Canada, China, the European Union, and Mexico.

• It will reduce U.S. trade deficits, bring back well-paying manufacturing jobs, and make America great again.

• This has such populist appeal — some 73% of Republican voters support the tariffs according to a PEW Research Center poll in July —

• The pro-trade Republicans in Congress have largely been silent on the issue.

Trade with China

• Since China, exported some $505 billion worth of goods to the U.S. last year but imported only $130 billion.

• Mr. Trump assumes that China could not match the escalation in tariffs since it has a weaker hand.

• This approach simply ignores the complexity of global supply chains.

• It also glosses over underlying problems with the U.S. industrial structure.

• These changes, rather than globalisation, are responsible for the stagnation of average U.S. wages in real terms for almost 40 years.

• Non-Chinese owned companies account for almost 60% of Chinese exports to the U.S.

• This consists of very specialised parts required by U.S. factories to make a variety of products ranging from out-board motors for boats to computer routers.

• Since these non-Chinese companies cannot easily relocate their operations to other countries, the net result is that the burden of the tariffs will be felt by consumers in the U.S.

• The Trump administration’s imposition of a 20% tax on washing machines in February led to its price going up in U.S. stores by 16.4%.

• U.S. imports from China also include products which contain parts made in other countries.

• 87% of computers and electronics, which constitute the largest share of Chinese exports to the U.S., includes parts and financing from other countries like South Korea, Japan, and the U.S. itself.

• So not only does this limit the negative impact on Chinese manufacturing practices, it also affects other countries.

• Even before Mr. Trump imposed a 10% tariff on $200 billion worth of Chinese goods in July, South Korea’s exports of cars and consumer electronics to China fell substantially.

What are the internal worries for US?

• No tariff can overturn the cost advantage Mexico has over the U.S. in labour costs.

• The national minimum wage there is a little over $4 a day while the average worker in the U.S. automobile sector earns $18 an hour.

• The focus on trade crucially ignores changes in the U.S. corporate structure and industrial relations over the last 30 years which have led to the phenomenon of extreme inequalities in income and wealth in the country.

• Ever since U.S. President Ronald Reagan launched an assault against the air traffic controllers’ union in 1981, trade unions have been in retreat.

• In the years that followed, legislation and the courts have made it easier to fire union organisers, to use scabs to break strikes and for employers to campaign against unionisation of workers.

• As a result, less than 7% of private sector employees today are unionised, compared to a third in the 1950s.

• Recently, Apple became the first company to have a $1 trillion valuation and today just 30 companies reap half of all profits produced by all publicly traded companies.

• Half of all the gains registered by Standard & Poor’s 500-stock index was delivered by just five companies: Apple, Amazon, Facebook, Netflix, and Alphabet, the parent company of Google.

• The greater concentration of capital allows the giant oligopolies to raise prices which takes more of a worker’s pay cheque.

• Fewer companies means workers have less choice of employers and so have less bargaining power.

• Anti-poaching and mandatory arbitration arrangements further weaken labour’s hand.

• Moreover, the focus on short-term profits leads firms to use their capital to buy back shares, driving up share prices to benefit shareholders and top managers who have an increasing percentage of their compensation in company shares.

The Germany example

• Between 2002 and 2008, when the U.S. lost one-third of its manufacturing jobs, Germany lost a mere 11%.

• Since most German firms are privately owned, rather than buying back shares, they invested their capital in boosting their productivity.

• German firms include worker representatives on their corporate boards, invest in apprenticeship programmes, and in relevant research and development projects.

• During the recession of 2008-09, instead of dismissing employees outright, German firms reduced work hours and helped retrain workers.

• They thus have a deep pool of skilled labour.

Conclusion

• When computers and numerically controlled machines are progressively inducted into production, constant upgrading of labour skills is vital to preserve well-paying jobs.

• Washington has made no systematic effort to upgrade skills.

• Tim Cook, the CEO of Apple, constantly emphasises that his company has shifted production to China not because labour is cheaper there but because it has a much wider pool of skilled labour than does the U.S.

• Mr. Trump has neither the vision nor the inclination to address these structural problems of the U.S. economy.

• It’s like Don Quixote, Don Trump is merely tilting at windmills.

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