US trade deficit

US-China Trade War: Collateral Damage in Asia

What has been missing from the analysis so far is much attention to the harm that will flow through to much of Asia as a result of these thunderbolts on trade.  Given the linkages between firms engaged in regional and global supply chains, it is increasingly difficult to even determine what is a “Chinese” product anymore. The original list of US$50 billion included a wide range of products subject to 25% tariff rate hikes.  Many of the products on this list are made with parts and components that come from all across Asia (and beyond).  For example, the list includes a range of televisions, various other types of heavy equipment, and machinery used in factories of all types.  However, just focus on one category of products now on the tariff list—buses for carrying more than 16 passengers.  The total number of parts and components on a bus numbers into the tens of thousands, including every element in the motor, frame, chassis, seats, dashboard and so forth.  Many of these items may be made in China, but others are likely imported from across Asia. 

What Happens If NAFTA Collapses?

The damage would be swift.  Businesses, farmers and consumers have become so accustomed to NAFTA over the decades that most have forgotten what benefits actually flow from the agreement.  But focus on just the problems faced by US agriculture.  Right now, nearly all agricultural products go duty free into both Canada and Mexico.  Most items flow with limited paperwork and little customs hassle. This will not be the case if NAFTA ends. US exports of corn into Mexico will suddenly face tariffs of 10-15%.  Soybeans, grains and flours jump overnight to 10-15% as well.  Mexico is one of the best markets for US red meat exports, especially for many cuts that Americans do not favor.  Many of these products could face tariffs as high as 234%.

When Abe Goes to Washington

This is where things rapidly get tricky.  Given the Trump team’s penchant for scoring countries with the crudest metric of all—the size of the bilateral trade deficit in merchandise goods—Japan is headed for a rocky road.  Japan has had a substantial merchandise deficit (viewed from the Oval Office) for a long time.  It will probably make little difference how many jobs come from Japanese firms in the United States, or how many services are sold by American companies into Japan, or how many parts and components are shipped back and forth, or how much is invested in either country.  The Abe team is apparently heading to DC with a long list of details to show exactly how much Japan matters to American jobs now and into the future.  They will have plenty of statistics on currency rates and investment portfolios and long-term metrics and pledges to buy lots more energy.  Most likely, none of it matters.  Not when the trade deficit stands at more than $60 billion and the guys that are in charge care about only one number.