Not long ago, President Trump stated that trade wars were good and easy to win. However, the market never saw it that way and believes that in trade wars everyone loses, something that is also confirmed by historical evidence.
Today we will share with you our vision on an issue that has generated much interest and concern in recent times, both because of its international significance and because of the impact it could have on Latin America: specifically, we are talking about the possibility of a trade war between the United States and China.
In 2002, when the Bush Administration imposed tariffs on steel to protect jobs in the United States, the actual result was exactly the opposite of what was intended to be achieved. 200,000 jobs were lost and wages dropped throughout the economy. Both the return on investment and economic growth suffered. The conclusion from that experience is clear: trade wars are not won by anyone, there are only losers.
Given this, a key question is whether what we are experiencing right now is a trade war or not. The answer is simple, it depends on how we define it. In theory, perhaps it is, because we are witnessing not only threats to impose trade tariffs, but the actual imposition of those tariffs. However, in practice, the imposition of protectionist measures and the exchange of threats have not usually resulted in major global trade wars. The risk is that a miscalculation by one of the parties involved may result in a much larger dispute, with consequences not foreseen by anyone. In other words, what may simply start as a negotiating strategy could become a trade war that nobody wants. We have not yet reached that point, but the risk that we will reach it exists, if threats and retaliation from other countries were to intensify.
If everybody loses, then why did Trump start a trade conflict with China? One of Trump's campaign promises what to reduce the trade deficit of the United States, which he sees both as a sign of economic and political weakness. That deficit exceeded $800 billion last year, a very high level, of which $375 billion was with China. Seeing that the United States' largest deficit was with the world's second largest economy, and thus its most powerful economic rival, Trump looked at the terms of trade between the two countries and found that they were largely favorable to China, which charges an average tariff of 11% on U.S. imports, while the United States charges an average tariff of less than 4% on Chinese imports. The immediate conclusion was that the terms of trade between the two countries were not "fair" and that something needed to be done about it. But this was just the beginning. Perhaps an even deeper underlying theme is that of technology. The perception of the U.S. government is that the best technology in the world is produced in the U.S., imported, hacked, and distributed more cheaply throughout the world by China. In other words, China steals intellectual property from the United States and sells it for its own benefit, which is unacceptable and should be corrected. In that context, the trade dispute is a way to pressure the Chinese government to precisely control its theft of US intellectual property.
Finally, how could a global trade war affect Latin America? Although the effect would depend heavily on the specific products and sectors involved and the level of economic openness of each country, in principle the entire region would suffer, at least in the short term, as a trade war could generate even more uncertainty in international financial markets, negatively impact global demand and growth, and increase the level of consumer prices for some products. Countries such as Mexico, for instance, which sends 80% of its exports to the United States, would probably be among the most affected, especially now that the victory of populism in the recent elections is raising concerns about the direction public policy might take and the extent to which the renegotiation of NAFTA could be compromised. Paradoxically, a trade war could create opportunities for smaller countries to increase their share of trade in some products.
Clearly, a trade war as such would favor no one and Trump's main purpose would seem to be making the rules of the game fairer. Actually, his objective is not free trade, but fairer trade. The problem is that in order to achieve this, the stability of the global economy could be jeopardized, something that is generating a lot of anxiety at the international level.
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