Tariffs Impacting Global Economy

China vs Trump

See also our original 2019 U.S. Trading Partners visualization charts.

The United States is the world’s largest economy and multiple trade partners all over the world are bearing the brunt of wild, new trade policy from the White House. The top United States exports are food and beverage; crude oil; airplane engines, automotive engines; industrial machines, automobiles, and pharmaceuticals.

In contrast, 80% of the imports are consumer goods like iPhones and clothing, with slightly less than 25% being industrial machinery and equipment. Interestingly, the United States also imports crude oil and cars, both of which it exports as well.

As the level of interconnectedness has increased in the global economy, the chance of a massive disruption in world trade has risen. Smaller economic zones have given way to centralized production centers, which are susceptible to demand-shocks.

Just about every vital product has been the subject of increasing trade regulations, which appear to be seriously impacting the international economy.

The Global Energy Web

The United States has a valuable bilateral energy trade with Mexico, in which Mexico exports its crude oil to the United States, and the United States exports refined petroleum to Mexico. This shines a light on how disruptive tariffs within the NAFTA zone could be, and why the US-led trade barriers have been so disruptive.

Canada is another key energy trade partner with the United States, with a consistent bilateral agreement for over a decade. Canada exports more energy to the United States than vice versa. Other countries involved with the US energy trade are Saudi Arabia, Venezuela, Iraq, Columbia, and Russia.

Together, these seven countries comprised 72% of the US energy imports in 2017. Canada and the United States have an electricity trade too, even though almost 60% of American electricity is generated in New England and New York.

Smooth Sailing No More

In 2018, the top three US trading partners were China (with $659 billion), Canada (with $617 billion) and Mexico (with $612 billion). The next trading partner is Japan, but the revenue significantly decreases to $218 billion, indicating the importance of effective and functioning relations with the top three countries.

However, the US-China trade war was disrupted this scenario.

Since the beginning of 2018, The United States and China have been engaged in an economic stand-off that involves a series of imposing tariffs on each countries’ imported products. For every ban the United States enacts, there is an opposite and equal reaction from China. The result of this tit-for-tat engagement has been severe global economic instability.

Although Donald Trump had wanted to “put America first”, demanding that business owners and manufacturers leave China, and “make America great again”, this has not happened.

In fact, the United States has suffered more from the trade war than China, the intended target. It is reported that the United States has lost $4,300,000,000 in revenue.

However how impactful to the economy this is within the trillions of dollars that the U.S. trades every year remains to be seen. Some would argue that the current tariff issues certainly does not help the economy in the short term but probably is not sufficient to be the sole responsible of starting a new recession.

Stagflation Might be Coming

The price of consumer goods has increased, negatively impacting the retail market, since consumers could not afford the new higher prices.

A recent GDP report shows that gross private domestic investment fell 5.5% in the second quarter, the worst quarterly performance since 2015. In early 2019, trade actually decreased and the stock market plunged. In August 2019, US Class 8 truck orders have collapsed by 80%, due to economic uncertainty and the trade tariffs with China.

China has experienced its own problems, with shrinking manufacturing and job losses for the fourth quarter in a row. However, because the world is so intertwined, it is not merely the giants of capital, the United States and China, who are suffering economically.

Nine other countries, including Germany, Russia, UK, Brazil, and Singapore are on the brink of recession. Germany, once a flourishing economy and the backbone of the EU, saw a decline in their cars sales in China.

The 2018 tariffs Trump placed on metal imports from Canada, Mexico, and the EU has contributed to the situation, with Canada also retaliating by placing tariffs on American imports of everything from metal to bourbon and ketchup.

No Simple way to Substitute China

Although there was an initial flurry of excitement about the prospect of finding alternative manufacturing locations, this has been replaced by uncertainty and unease. It is obvious to many observers that no country will be able to actually replace China in economic terms because no other country has the geographic size and available population.

Therefore, companies will have to divide their holdings among a variety of smaller countries. Thailand, Malaysia, Taiwan, Vietnam, India, and Mexico are the leading alternatives for relocation, even though Trump has already started economic sable rattling with Vietnam.

Indonesia is taking advantage of the situation, attempting to attract businesses to relocate there. However, the cost of relocating businesses to new countries and new markets with less efficient workforces, higher risks of work strikes and complicated tax and business policies are serious issues that must be considered as well.

Ironically, in 2019, Mexico has surpassed China to become the top US trading partner, strange in many ways, considering the current administration’s socio-political policies towards their Southern neighbor.

Burning the Bread Basket

Another important aspect of this debacle is the impact on food and farmers. The United States may import almost everything, except food, guns and fracked oil, but as noted above, it is a major exporter of food, particularly soybeans and pork to China.

With the tariffs in place, there is more grain and soybeans sitting on the ground in the United States, while the farms that produce them are forced into foreclosure and the farmers who own the land are faced with unprecedented debt as their credit is not renewed.

Trade networks that have been established for thirty years have collapsed, leading many to believe that there is little hope for future trade. As a result of these mounting tensions, and farming at the lowest point since the 1980’s farm crisis, the suicide rate among farmers has increased significantly.

Destroying the Agricultural Capacity of Middle America

If the tariffs remain high on food, China will most likely seek cheaper sources for their staple dietary choices, further shifting the global economy and geopolitical relationships. The US agricultural industry has been one of the most important tools of US foreign policy, but the ongoing trade troubles have had an outsized impact on middle America.

The Trump tariffs have pushed China away from buying US-grown staple crops, especially soybeans. Exports of soybeans from the US to China fell to a little over $3 billion USD, down from more than $12 billion in 2018.

While China has exempted soybeans from their latest tariffs, this may have more to do with the current state of the Chinese agriculture sector, and the massive die-off of pigs in the Middle Kingdom because of an African swine fever outbreak.

The Potential for Improvement Exists

However, in the constant negotiations between China and the United States, China has agreed to suspend the tariffs on soybeans and pork for two weeks at the beginning of October, coinciding with the extended National Day celebrations.

This is a response to Trump’s delay on the imposition of new higher tariffs on Chinese goods. Perhaps this might be an indication of brighter days on the horizon or the chance for resolution.

Many experts think that the trade war really is thinly veiled political shenanigans, with each leader creating justifications and explanations for behavior that is having major repercussions on the average consumer and worker.

With the economy potentially on the brink of recession, and the middle class all but destroyed, many more people will be living paycheck to paycheck or using their savings for survival, if they are fortunate enough to have savings.

Where to Go From Here?

Since the Neolithic Era, trade has been a common economic practice. The pieces of obsidian, lapus, and gold in the archaeological records across the globe attest to the continuity of this basic human endeavor.

While ancient trade was generally limited by geography, we have built a modern economy that ties the globe together with a level of interconnectedness that brings both benefits and serious risks.

Trump’s gamble did not return manufacturing to America, but he keeps repeating that he is tough on trade, conveniently in time for the run-up to the 2020 Presidential election. Xi Jinping’s stubborn stance allows him to blame the US for China’s slowing economy and the problems in Hong Kong.

Perhaps the “peak escalation” has passed and more rational minds will rally to focus not only on a solution but also on the potential for a global recession, and the foolishness of exacerbating it with costly barriers to international trade.