At some point in this crazy year the president was quoted as saying that trade wars are easy to win. My first thought was of Charlie Sheen’s meltdown as he was getting himself fired from the highest-paid gig on network TV and screaming “Winning!” over and over again all the way down to the bottom, which he hit in court last week, seeking relief from his child support payments. Or maybe this was similar to Secretary of Defense Robert McNamara suggesting nonstop that we had “turned the corner” in Vietnam — in 1966.
For the record, no country has ever really won a trade war; at least, not without the masses’ incurring sizable financial losses. No, trade agreements are how Western industrialized nations win; and those agreements often take years of hard negotiations to make sure both sides wind up with benefits for their citizens and corporations.
Trade War History 101
It’s been the subject of this column before, but in 1995 Bill Clinton took on Japan; he claimed that their automakers needed to buy more American parts and needed to open its home market to American automobiles. Clinton was very specific in focusing on just one country, not the entire world, and it still took forever to get virtually nothing accomplished. Like the current president, Clinton threatened Japan with a 100 percent tariff on imported Japanese luxury cars. We manipulated the currency exchange rate and jumped the yen to 79 to the dollar, forcing up the prices of cheap Japanese vehicles, such as the Mazda Protégé, by nearly $5,000 — and those of luxury cars, like the Infiniti J30 and the Acura Legend, by ten grand.
And finally the Japanese hollered oji and purchased one shipload of Saturns, one of Chrysler Neons, and 20,000 Chevy Cavaliers. They also promised to purchase more American parts. Of course, no one opened a Chrysler or Saturn dealership there as the first 22,000 American cars in Japan didn’t sell until their prices were slashed. Oh, and GM and Ford sold their parts divisions just a few years later; so obviously they hadn’t cared if the Japanese bought more parts from them, either.
So, what did Americans get out of that threatened-tariff war? Quite a bit — none of it good. Honda went on a company-wide cost-cutting move; one of the first things to go was its state-of-the-art, expensive double-wishbone suspension in the Civic car line. Americans also had to keep paying artificially inflated prices for imported Japanese cars for years, until newer and less expensive models could be introduced. Meaning, even after the yen-dollar exchange rate returned to a more moderate 116-1, those vehicles’ list prices never came back down. This is not unlike the 25 percent “chicken tariff” tax on imported trucks and commercial vans LBJ installed in early 1964. It’s still there, 54 years later.
Now, both LBJ and Clinton declared victory over their trading partners at the time. America had financially pummeled our trading partners into seeing things our way and, after declaring the cessation of hostilities, no one thought to tally up what those Pyrrhic victories actually cost American consumers.
Of course, we’re not noted for counting the financial costs of wars once victory is declared.
Forgetting the Lessons of History
Sadly, it’s happening all over again. The Wall Street Journal pointed out on June 19th that the president’s 20 percent tariff on imported washing machines had translated into a 17 percent increase in net pricing for those items in just three months. See, you can almost hear Charlie Sheen scream, “Winning!” after reading that last sentence.
The New York Times reported on August 5th that American companies have filed over 20,000 requests for steel tariff exemptions with the Commerce Department. As of the end of July, 639 of those requests had been denied; it appears that many of those denials are benefitting politically connected American steel companies.
What is true is that GM and others have already had to contemplate how the steel and aluminum tariffs might affect their products’ pricing during the balance of this year, and not just because they buy imported steel or aluminum. No, as in all trade wars, it’s not the tariffed items that cause the most price increases. It’s American firms’ hiding behind those tariffed competitors to raise their own goods’ internal pricing.
A reminder: Who gets injured in trade wars? The foot soldiers in the battles, the American consumer. This time around there’s a widespread protest going on in Canada to boycott any and all American products and buy only Canadian, as if you can get Molson beer anywhere else. To be fair, national protests tend to burn out when the passion of the moment dies. But hard feelings can remain, and according to the Office of the United States Trade Representative we actually run trade surpluses with Canada regularly; the administration might have looked that up before deciding to attack them financially. (Others have calculated that we run a small deficit with Canada of under $20 billion.)
On the other hand, some of the president’s complaints contain valid points — particularly about the high costs that foreign companies had to pay to do business in China. Automakers had to take Chinese partners in a 50/50 venture, transfer current technology to partners there, teach them modern vehicle production, pay for engineering and design classes in Chinese universities for a new generation of self-contained Chinese automakers, and so on. Like President Trump is doing today, I voiced serious concerns about the extreme high cost of admission for the world’s automakers to move into China — 20 years ago, when it was happening in real time.
Now, China had all the right in the world to make those demands. Business leaders, in America, Japan, and Europe just ignored the downsides of those brutal demands and built factories in China in huge numbers. Why? Because they were jonesing for the big bucks selling cars to potentially one billion Chinese buyers. And most understand you can’t put the genie back into the bottle decades after it was released.
Today most have forgotten that during his first campaign Bill Clinton slammed President Bush for coddling Chinese leaders and promised that he would force real change on that country. He even issued an Executive Order requiring better human rights in China or their favored trading status would not be renewed. Businesses forced Clinton to back down, and before it was all over he actually helped get China into the World Trade Organization. (And jumped into the previously discussed tariff war with Japan instead.)
Still up in the air are threats to place a 25 percent tariff on imported cars, and maybe NAFTA gets updated and renewed or maybe it ends. Prices of cars may go up because of steel and aluminum tariffs, but nobody has carved that in stone as of yet. So it’s time to ask the question, what’s the end game here?
Well, for one it’s probably not prudent to pick a fight with NATO, Theresa May of the UK, Angela Merkel, the EU, China, Canada, Mexico, the entire Pacific Rim, Iran, the G20, Harley Davidson, foreign automakers, LeBron James, and the NFL at the same time.
Now last month Marc Short, Trump’s legislative director, told CNBC that the president is trying to get to a world without any tariffs whatsoever. Sounds great, but nothing involved in the renegotiation of NAFTA suggests that’s true at all. No, it’s all held up on buying more stuff out of our neck of the woods for that treaty to be reaffirmed. So the idea of no tariffs and completely free and open trade, as Mr. Short suggests, is a bit disingenuous based on current discussions with trading partners.
What this atmosphere has created is chaos and uncertainty — neither known to be great for business long term. But don’t be misled, at some point the likelihood of the president’s declaring victory over all the issues currently up in the air and moving on to something else is close to a certainty. Just as LBJ declared victory for American poultry producers back in 1964 by forcing imported truck and commercial van buyers to pay thousands of dollars more in a tariff on their purchases. Just as Bill Clinton declared victory over Japan in 1995 and cost buyers of Japanese imported cars thousands more dollars on most of their purchases for years.
Frankly, I’m not sure how much more prosperity we can stand, winning all these trade wars. Then again, in the past we just took on one country at a time and paid dearly for it. Who knows what a worldwide trade war will end up costing? So far we do know washing machines are up 17 percent. But that was just the first breach of the line out of the trenches.
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: email@example.com