Why Trade Wars Are Heating Up
Trade wars slow international commerce. The economies of the world are slowing. We keep hearing how governments and central banks around the world want to "stimulate" their economies. But we're starting to hear more stories about governments that want to impose tariffs and/or restrictions on imports. Doesn't that mean that governments are trying to stimulate their economies while, at the same time, pursuing policies that will slow international commerce?
It does, but there may be no contradiction here. Perhaps the idea is that by restricting imports the local economy will be bolstered because people will be forced to buy local goods, since imports would be more expensive. This policy is known as "mercantilism" and was pursued in various ways by the British and the U.S. governments in the 18th and 19th centuries.
During the Great Depression governments around the world engaged in trade wars for these same reasons - to protect and stimulate their home economies. These practices grew into international "trade wars." Some believe this was a major cause of why the depression of the 1930s becams what is known as the Great Depression. So
The prevailing wisdom does seem to make sense, that pursuing trade tariffs and embargoes isn't a good idea and, indeed, will lead to slowing economies - or worse - around the world. Doesn't it?
So this time around - even as they recognize the failure of the policies of governments in the Great Depression - today's central governments nevertheless pursue these policies. And, if you read any of the statements that accompany these policy decision, you find the use of the phrase "in retaliation." Retaliation for what? For some slight that they perceive has been directed at them by another government.
This is the sort of jaw-boning that accompanies trade wars.
A recent example is China's threatened retaliation against Euro nations. European nations claim the Chinese subsidize their own companies so that they can be more competitive - i.e., they can make goods that are cheaper than European competitors because the Chinese government gives money to the Chinese companies to make up for the lost profit they experience when they charge less for their goods than their European counterparts.
The Chinese don't like being threatened or bullied by the Europeans, and they have now threatened to take actions against them.
What's Really Going On
What's interesting here is the fact that this stuff goes on all the time. The way it really works is that countries look the other way as long as things are good. When the economy is growing and everyone's happy, politicians ignore things like another country subsidizing its companies to be more competitive. It's only when things aren't going well - like now, for example - that governments make an issue out of this practice.
Do you remember when U.S. Treasury Secretary Timothy Geithner was accusing China of "manipulating" its currency so that the Chinese currency would stay cheap relative to the U.S. dollar, thereby provided a competitive edge to Chinese goods being exported to the U.S.? Well, the U.S. government manipulates the U.S. dollar; indeed all countries manipulate their own currencies. So when Geithner was pointing the finger at China, he could just as well have pointed the finger at dozens of other countries - as well as pointed that same finger at himself.
What this tells us is that politicians will use any policy to their own advantage, including policies that they themselves have recognized as counter-productive or even destructive to economic activity. And that's not good news for the rest of us.
And, yes, the Chinese government is doing the same thing. They threaten Europe because things are tough right now in China and they want to be seen as protecting their own industries and helping their own people. Whether their actions actually do that is another matter entirely.
It does, but there may be no contradiction here. Perhaps the idea is that by restricting imports the local economy will be bolstered because people will be forced to buy local goods, since imports would be more expensive. This policy is known as "mercantilism" and was pursued in various ways by the British and the U.S. governments in the 18th and 19th centuries.
During the Great Depression governments around the world engaged in trade wars for these same reasons - to protect and stimulate their home economies. These practices grew into international "trade wars." Some believe this was a major cause of why the depression of the 1930s becams what is known as the Great Depression. So
The prevailing wisdom does seem to make sense, that pursuing trade tariffs and embargoes isn't a good idea and, indeed, will lead to slowing economies - or worse - around the world. Doesn't it?
So this time around - even as they recognize the failure of the policies of governments in the Great Depression - today's central governments nevertheless pursue these policies. And, if you read any of the statements that accompany these policy decision, you find the use of the phrase "in retaliation." Retaliation for what? For some slight that they perceive has been directed at them by another government.
This is the sort of jaw-boning that accompanies trade wars.
A recent example is China's threatened retaliation against Euro nations. European nations claim the Chinese subsidize their own companies so that they can be more competitive - i.e., they can make goods that are cheaper than European competitors because the Chinese government gives money to the Chinese companies to make up for the lost profit they experience when they charge less for their goods than their European counterparts.
The Chinese don't like being threatened or bullied by the Europeans, and they have now threatened to take actions against them.
What's Really Going On
What's interesting here is the fact that this stuff goes on all the time. The way it really works is that countries look the other way as long as things are good. When the economy is growing and everyone's happy, politicians ignore things like another country subsidizing its companies to be more competitive. It's only when things aren't going well - like now, for example - that governments make an issue out of this practice.
Do you remember when U.S. Treasury Secretary Timothy Geithner was accusing China of "manipulating" its currency so that the Chinese currency would stay cheap relative to the U.S. dollar, thereby provided a competitive edge to Chinese goods being exported to the U.S.? Well, the U.S. government manipulates the U.S. dollar; indeed all countries manipulate their own currencies. So when Geithner was pointing the finger at China, he could just as well have pointed the finger at dozens of other countries - as well as pointed that same finger at himself.
What this tells us is that politicians will use any policy to their own advantage, including policies that they themselves have recognized as counter-productive or even destructive to economic activity. And that's not good news for the rest of us.
And, yes, the Chinese government is doing the same thing. They threaten Europe because things are tough right now in China and they want to be seen as protecting their own industries and helping their own people. Whether their actions actually do that is another matter entirely.
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