WEBVTT - Who Actually Wins (and Loses) in a Trade War? 0:00:01.840 --> 0:00:07.480 Welcome to Brainstuff, a production of iHeartRadio, Hey brain Stuff 0:00:07.520 --> 0:00:13.960 Lauren Vogelbaum. Here, the economics of international trade are notoriously sticky. 0:00:14.720 --> 0:00:17.680 The World Trade Organization was formed for the express purpose 0:00:17.760 --> 0:00:20.200 of getting countries to play nice when it comes to 0:00:20.280 --> 0:00:25.120 the often dangerous and always intricate matters of global trade. 0:00:25.320 --> 0:00:28.440 But what happens when politicians don't want to play nice? 0:00:28.840 --> 0:00:34.360 Who actually wins and loses in a trade war? To 0:00:34.479 --> 0:00:39.000 investigate this question, we have to talk about tariffs. A 0:00:39.040 --> 0:00:42.560 tariff is basically a border tax levied on products coming 0:00:42.640 --> 0:00:45.640 into a country based on things like the country of origin, 0:00:45.960 --> 0:00:51.279 say China, or the type of product, say steel. When 0:00:51.440 --> 0:00:54.200 the United States implements a tariff, it is the US 0:00:54.360 --> 0:00:58.720 importer who pays the tax, not the foreign exporter. So, 0:00:59.000 --> 0:01:02.400 for example, let's say the Trump administration orders a twenty 0:01:02.400 --> 0:01:06.560 five percent tariff on Chinese steel. If an American company 0:01:06.600 --> 0:01:09.360 wants to buy one million dollars worth of steel from China, 0:01:09.680 --> 0:01:12.679 it would cost that American company one and a quarter million, 0:01:12.959 --> 0:01:16.840 including Trump's tariff. The extra quarter of a million goes 0:01:16.880 --> 0:01:20.440 to the American government, and again it is the American 0:01:20.520 --> 0:01:24.520 importer that pays this increasing cost. Not the Chinese exporter. 0:01:26.560 --> 0:01:30.040 The idea behind tariffs is that they should boost American business, 0:01:30.440 --> 0:01:33.080 with the hopes that instead of paying that quarter of 0:01:33.120 --> 0:01:36.240 a million dollar tax, American companies in need of steel 0:01:36.360 --> 0:01:40.280 will buy from American producers, thus helping this hard hit industry, 0:01:40.560 --> 0:01:42.920 which in turn will hire more workers to keep up 0:01:42.920 --> 0:01:45.560 with the increased demand. And sounds like a win for 0:01:45.600 --> 0:01:50.960 American business. But there's no guarantee that tariffs will play 0:01:50.960 --> 0:01:53.880 out this way, because none of this happens in a vacuum. 0:01:55.200 --> 0:01:58.640 Maybe Chinese steel is still less expensive than American steel 0:01:58.760 --> 0:02:02.640 even with the tariff. Maybe American steel producers aren't equipped 0:02:02.640 --> 0:02:06.560 to step up production fast enough to meet demand. If 0:02:06.600 --> 0:02:09.799 American companies in need of steel decide it's easier, for 0:02:09.840 --> 0:02:14.480 whatever reason, to just keep importing Chinese steel, consumer prices 0:02:14.520 --> 0:02:18.079 will go up on everything that contains steel, like cars 0:02:18.200 --> 0:02:21.839 or washing machines. That's because the cost of making those 0:02:21.840 --> 0:02:24.720 goods will go up, and companies aren't going to just 0:02:24.800 --> 0:02:27.000 eat the extra cost. They're going to pass it on 0:02:27.040 --> 0:02:32.240 to the consumer that in turn can have further reaching 0:02:32.320 --> 0:02:36.120 negative effects. Maybe consumers don't buy those products at all, 0:02:36.480 --> 0:02:39.880 which is bad for the companies. If consumers do cough 0:02:39.960 --> 0:02:42.440 up the dough for the higher price, they'll have less 0:02:42.480 --> 0:02:46.800 money to spend elsewhere. That means other American companies could suffer, 0:02:46.840 --> 0:02:50.360 which could cause a pullback in those industries, actually costing 0:02:50.440 --> 0:02:56.240 American jobs overall. For the article, this episode is based 0:02:56.280 --> 0:02:58.760 on how Stuff Works spoke back in twenty eighteen with 0:02:58.880 --> 0:03:02.359 Charles Hankla, professor of political science at Georgia State University 0:03:02.360 --> 0:03:06.760 in Atlanta. He said, what trade does in the aggregate. 0:03:06.960 --> 0:03:11.080 It expands production, it expands jobs, it lowers prices. It 0:03:11.120 --> 0:03:15.840 benefits countries in the aggregate, but it has distributional impacts. 0:03:18.080 --> 0:03:20.080 What does he mean by that. Let's stick with the 0:03:20.080 --> 0:03:23.960 example of steel. The American steel industry has been hurt 0:03:24.080 --> 0:03:26.480 by the trade of less expensive steel coming in from 0:03:26.480 --> 0:03:31.239 other countries. But the industries that use steel, those car 0:03:31.400 --> 0:03:35.120 or washing machine manufacturers, have benefited because the price of 0:03:35.160 --> 0:03:38.520 steel has gone down, and these days there's a lot 0:03:38.560 --> 0:03:44.800 more Americans working in manufacturing than in production. Of course, 0:03:44.960 --> 0:03:48.600 tariffs were not invented during the current political cycle. They're 0:03:48.640 --> 0:03:52.720 a fact of international trading. The World Trade Organization provides 0:03:52.720 --> 0:03:55.680 a forum for virtually all countries. It has on one 0:03:55.760 --> 0:03:59.000 hundred and sixty four members to hammer out trade agreements. 0:04:00.040 --> 0:04:03.040 The WTO got started just after World War II with 0:04:03.160 --> 0:04:06.960 the General Agreement on Tariffs in Trade, and it implements 0:04:07.000 --> 0:04:10.360 and monitors trade agreements, which includes what could be described 0:04:10.360 --> 0:04:15.320 as tariffs or trade barriers or taxes negotiated by all parties. 0:04:16.960 --> 0:04:20.320 Other agreements could be struck among nations too, like NAFTA 0:04:20.400 --> 0:04:23.840 the North American Free Trade Agreement which covers the US, Canada, 0:04:23.880 --> 0:04:27.080 and Mexico, but again those are deals that have to 0:04:27.080 --> 0:04:32.520 be agreed upon by all parties. U S presidents normally 0:04:32.560 --> 0:04:36.560 cannot impose tariffs without first going through the US International 0:04:36.600 --> 0:04:40.599 Trade Commission, which is an independent, nonpartisan government agency that 0:04:40.680 --> 0:04:44.920 was established in nineteen sixteen that researches international trade issues, 0:04:45.080 --> 0:04:51.359 provides analysis to the President and Congress, and helps settle disputes. However, 0:04:51.600 --> 0:04:54.920 the Trade Act of nineteen seventy four gave presidents power 0:04:55.080 --> 0:04:59.719 to impose tariffs in response to matters of national security. 0:05:00.279 --> 0:05:02.680 That's how Trump was able to push tariffs through in 0:05:02.720 --> 0:05:06.360 his previous term, during which his administration hit China with 0:05:06.440 --> 0:05:09.680 ten percent tariffs on two hundred billion dollars worth of imports, 0:05:10.120 --> 0:05:13.960 then increased that to twenty five percent. These penalties affected 0:05:14.000 --> 0:05:17.160 the prices that US consumers paid for scores of products 0:05:17.440 --> 0:05:22.440 ranging from computers to luggage, and Chinese officials responded by 0:05:22.520 --> 0:05:26.120 stepping up border inspections of US goods, holding up licenses 0:05:26.120 --> 0:05:29.200 for US companies to do business in China, and adding 0:05:29.200 --> 0:05:33.279 their own tariffs on US products. That kind of retaliation 0:05:33.520 --> 0:05:39.720 the cansteiny business is common in a trade conflict. In 0:05:39.800 --> 0:05:43.520 early January of twenty twenty five, Trump spoke about expanding 0:05:43.560 --> 0:05:48.479 tariffs by declaring a national Economic emergency, instituting global tariffs 0:05:48.480 --> 0:05:51.279 of as much as ten percent, a tariffs on Canadian 0:05:51.320 --> 0:05:53.800 and Mexican products of up to twenty five percent, and 0:05:53.920 --> 0:05:57.880 on Chinese products of up to sixty percent. Experts say 0:05:57.880 --> 0:06:00.440 that that would invoke a different act, the Inner National 0:06:00.480 --> 0:06:05.040 Emergency Economic Powers Act of nineteen seventy seven, though there's 0:06:05.200 --> 0:06:08.240 argument about whether that act would actually legally allow the 0:06:08.279 --> 0:06:12.120 Trump administration to do that, and furthermore about whether Trump 0:06:12.240 --> 0:06:16.840 was even making a serious threat. But this is hardly 0:06:16.880 --> 0:06:19.279 the first time that the US and other nations have 0:06:19.320 --> 0:06:23.520 become involved in conflicts over trade. Trade wars can happen 0:06:23.560 --> 0:06:26.920 for various reasons. It could be that one nation decides 0:06:26.960 --> 0:06:30.120 it's getting a raw deal because another nation provides subsidies 0:06:30.120 --> 0:06:33.040 to its manufacturers so they can export goods that are 0:06:33.080 --> 0:06:36.479 priced too low to compete with. Or it could be 0:06:36.560 --> 0:06:39.000 that a nation decides it wants to nurture its own 0:06:39.000 --> 0:06:45.400 industries by hindering their foreign competitors with protective tariffs. Trump 0:06:45.400 --> 0:06:48.719 has spoken extensively about wanting to lower the trade deficit 0:06:49.000 --> 0:06:54.320 and bring back American manufacturing jobs. However, many economists don't 0:06:54.360 --> 0:06:57.360 see the US trade deficit, which occurs when a country 0:06:57.440 --> 0:07:00.640 imports more than an exports, as that big of a deal. 0:07:01.720 --> 0:07:04.840 Some consider it necessary to the strength of the global economy, 0:07:05.920 --> 0:07:09.680 and many economic experts say that reviving manufacturing in America 0:07:09.760 --> 0:07:13.360 is a lost cause, that advancing technology is driving the 0:07:13.440 --> 0:07:20.040 industrialization here, not bad trade deals. Centuries ago, trade wars 0:07:20.200 --> 0:07:25.200 often involved actual violence. In the seventeen and early eighteen hundreds, 0:07:25.240 --> 0:07:29.000 for example, China sold a lot of tea and porcelain 0:07:29.040 --> 0:07:32.040 to the British Empire, so much so that the British 0:07:32.120 --> 0:07:34.640 got worried about the outflow of silver to pay for it. 0:07:35.640 --> 0:07:38.800 They decided to fix the trade imbalance by getting China 0:07:38.840 --> 0:07:42.160 to import large quantities of opium that the British produced 0:07:42.200 --> 0:07:46.840 in India. When the Chinese government eventually bulked at this arrangement, 0:07:47.240 --> 0:07:50.080 the British sent in their warships and forced the Chinese 0:07:50.120 --> 0:07:53.080 to sign the eighteen forty two Treaty that not only 0:07:53.120 --> 0:07:56.160 opened up China to British trade, but gave the territory 0:07:56.160 --> 0:07:59.640 of Hong Kong to the British. This conflict became known 0:07:59.680 --> 0:08:03.640 as the First Opium War, and it's super complicated a 0:08:03.640 --> 0:08:08.280 different episode, but even a bloodless trade war can cause 0:08:08.360 --> 0:08:12.400 plenty of suffering. A lot of observers are seeing unsettling 0:08:12.440 --> 0:08:16.160 parallels between Trump's multi front trade warfare and the trade 0:08:16.200 --> 0:08:19.080 war that erupted in the nineteen thirties after President Herbert 0:08:19.120 --> 0:08:22.559 Hoover signed into law the Smoot Holly Act, which raised 0:08:22.640 --> 0:08:26.720 US tariffs by an average of sixteen percent. Other countries 0:08:26.800 --> 0:08:30.680 enacted their own tariffs in response, leading to a disastrous 0:08:30.800 --> 0:08:36.400 global decline in trade. Hastuffworks also spoke via email back 0:08:36.440 --> 0:08:39.880 in twenty nineteen with Douglas A. Irwin, an economics professor 0:08:39.920 --> 0:08:44.120 at Dartmouth College. He said Smoot Hawley was passed by 0:08:44.160 --> 0:08:46.800 the House in the spring of nineteen twenty nine, before 0:08:46.880 --> 0:08:49.320 the business cycle peak at a time when the economy 0:08:49.360 --> 0:08:53.080 was doing well and the unemployment rate was low. However, 0:08:53.320 --> 0:08:55.400 it got held up by the Senate, and by that 0:08:55.520 --> 0:08:57.520 time the stock market had crashed in the fall of 0:08:57.600 --> 0:09:00.720 nineteen twenty nine and the economy was moving into a recession, 0:09:00.880 --> 0:09:04.800 which later became the Depression. The economy continued to get 0:09:04.800 --> 0:09:07.800 worse after the passage of Smooth Holly, and the retaliation 0:09:07.840 --> 0:09:10.240 against US exports that occurred because of it is thought 0:09:10.280 --> 0:09:13.520 to have contributed to the severe economic difficulties at the time. 0:09:14.679 --> 0:09:17.400 So there is a cautionary tale here. Just because the 0:09:17.440 --> 0:09:20.360 economy is doing well and close to a peak does 0:09:20.400 --> 0:09:23.120 not mean that things cannot go badly if one moves 0:09:23.160 --> 0:09:29.400 in a protectionist direction. Smoot Hawlly also helped stimulate a 0:09:29.440 --> 0:09:34.400 surge of angry nationalism in other countries. Irwin said, if 0:09:34.440 --> 0:09:37.600 one country slaps tariffs on your goods, the usual response 0:09:37.679 --> 0:09:40.240 is to take offense and retaliate, rather than to turn 0:09:40.280 --> 0:09:44.880 the other cheap. Nationalists gain strength on perceived slights. And 0:09:45.120 --> 0:09:48.120 just think about how China still remembers being humiliated by 0:09:48.160 --> 0:09:50.960 Western powers during the Opium Wars of the nineteenth century, 0:09:51.200 --> 0:09:54.280 and it's vow to never be so weak again, when 0:09:54.280 --> 0:09:58.120 the Trump administration bullies countries today on trade, it naturally 0:09:58.200 --> 0:10:01.640 leads other countries to stiffen their resild to resist the US. 0:10:03.320 --> 0:10:06.520 Another big problem with trade wars is that, again, there 0:10:06.520 --> 0:10:10.040 can be a lot of collateral damage. Poor people tend 0:10:10.080 --> 0:10:13.920 to suffer disproportionately since basic necessities that they already struggle 0:10:14.000 --> 0:10:18.480 to afford, like food, shoes, and transportation, can become more expensive, 0:10:19.360 --> 0:10:21.720 and working class jobs can take a hit as well. 0:10:22.600 --> 0:10:24.960 Let's continue with the example of steel, which the Trump 0:10:25.000 --> 0:10:29.280 administration actually did impose tariffs on in twenty eighteen from Canada, Mexico, 0:10:29.400 --> 0:10:33.360 and the European Union. Ast off Works spoke by email 0:10:33.400 --> 0:10:36.360 in twenty nineteen with Philip I. Levy, who's now a 0:10:36.440 --> 0:10:40.600 lead trade economist at the World Bank. He explained, if 0:10:40.640 --> 0:10:44.200 you are in a steel using sector, like an autoparts manufacturer, 0:10:44.480 --> 0:10:47.400 you are more likely to be hurt by the steel tariffs. 0:10:47.760 --> 0:10:49.960 If you're in the construction sector, you're likely to be 0:10:50.000 --> 0:10:53.520 hurt by terras on steel. These are hits to income 0:10:53.559 --> 0:10:56.400 and employment, which are in addition to the hits people 0:10:56.440 --> 0:10:59.920 take as consumers. To be fair, if you're a shareholder 0:11:00.160 --> 0:11:02.480 US Steel, you're pretty happy you don't have to face 0:11:02.480 --> 0:11:06.000 as much competition. True for workers as well, but much 0:11:06.040 --> 0:11:08.840 of the job loss has been to automation, not trade, 0:11:09.120 --> 0:11:14.760 so the tariffs don't fix that. The world economy and 0:11:14.840 --> 0:11:17.400 global trade are stronger today than they were in the 0:11:17.440 --> 0:11:20.640 early nineteen thirties, but a trade war today might be 0:11:20.760 --> 0:11:26.280 even more damaging. Letty said, there's this unusual argument about 0:11:26.280 --> 0:11:28.200 why this is a great time for a trade war. 0:11:28.559 --> 0:11:30.600 It's a little like saying that today is a good 0:11:30.679 --> 0:11:32.440 day for me to slam my hand in the car 0:11:32.480 --> 0:11:34.800 door since I don't have to give a piano performance 0:11:34.800 --> 0:11:37.520 in the near future. While that may be true, it's 0:11:37.520 --> 0:11:39.440 still not a good idea to slam my hand in 0:11:39.480 --> 0:11:44.320 a car door. He continued. Why might now be worse 0:11:44.360 --> 0:11:47.319 than the nineteen thirties for the United States? Back then 0:11:47.440 --> 0:11:50.360 everyone was doing it and we didn't really have global 0:11:50.360 --> 0:11:53.400 supply chains. And now it is not the case that 0:11:53.480 --> 0:11:57.240 all countries are raising trade barriers against everyone else. It's 0:11:57.280 --> 0:12:00.000 the United States that is carving itself out of global 0:12:00.080 --> 0:12:06.240 supply chains. All of that means that because most of 0:12:06.280 --> 0:12:08.520 the rest of the world is still playing nice with 0:12:08.600 --> 0:12:13.400 trade deals, American businesses could be uniquely disadvantaged by expanding 0:12:13.440 --> 0:12:21.000 tariffs in the United States. Today's episode is based on 0:12:21.040 --> 0:12:23.360 the articles who Wins and Loses in a Trade War? 0:12:23.440 --> 0:12:26.360 Written by Patrick J. Higer and who Wins and Loses 0:12:26.440 --> 0:12:29.520 If the US imposes Steel Tariffs written by John Donovan 0:12:29.679 --> 0:12:33.439 on HowStuffWorks dot Com. Brain Stuff was production of iHeartRadio 0:12:33.559 --> 0:12:35.880 in partnership with how Stuffworks dot Com and is produced 0:12:35.880 --> 0:12:39.360 by Tyler Klang. Four more podcasts my heart Radio, visit 0:12:39.400 --> 0:12:42.440 the iHeartRadio app, Apple Podcasts, or wherever you listen to 0:12:42.480 --> 0:12:43.360 your favorite shows.