On Monday this week the US triggered a 25 percent increase
in tariffs on $200b worth of goods from China. In retaliation China has also
said it will raise tariffs on $60b worth of US imports starting at the
beginning of June.
The trade relations between the two largest economies have
been contentious for years with both sides accusing each other of unfair trade
practices.
There will be real costs to the US and Chinese economies –
estimated in hundreds and billions of dollars, but also to other economies
around the world.
By definition trade wars affect the flow of trade across
borders and regions, this has the knock on effect of reducing incomes and
therefore the living standards of people on either side of the trade war.
As a trade war bites jobs are lost as businesses are shut
down and to add insult to injury, commodity prices go up pushing affected
populations deeper in the hole.
"In addition to encouraging inefficiencies in the market, with higher prices businesses that were previously uncompetitive are revived or started to fill the gaps. That would not be a bad thing – as they may create new jobs, but as soon as they are up and running the businesses then join hands to maintain the status quo – the trade war, so that they can continue to thrive. The consumer who pays more for often lesser quality, is always the loser in the end....
To illustrate the point imagine that Kampala introduced a
tariff for matooke coming from outside the city. The first thing that will
happen is that matooke prices will jump. While for a while people will pay
higher prices, they will with time more likely shift to other substitutes
unaffected by the tariff.
The matooke plantations of central and western Uganda will
be forced to lower the price of their price until it doesn’t make sense – when
the sale price is lower than the cost of production and they will look for
other markets or convert the plantations to grow maize or cassava.
This will have several repercussions for the matooke
connoisseurs of Kampala, not least of which the price of matooke will increase
even further as supply dwindles, but will also lead to many of the jobs in the
industry being lost – from the loaders and off-loaders, the matooke peelers and
cooks and even the livestock which will have developed a taste for the peels
will have to be fed alternatives, lowering their production as they acclimatize
to the new diet.
If the tariff is kept higher for longer some people will try
and convert valuable real estate in Kampala into matooke plantations, since the
higher prices of the food may make it a viable proposition to convert valuable
real estate to growing matooke.
These investors who will be making a killing, will
gang up and create a lobby group which will resist any attempts to lower or
remove the tariffs on matooke, dooming the good citizens of Kampala to more
expensive, poor quality matooke for the foreseeable future.
Is it conceivable that people of Kampala can ditch matooke
altogether for posho or cassava or sweet potatoes? Stranger things
have happened.
The truth is that trade wars affect the majority and benefit
a small minority, who then fight to maintain or aggravate the trade war in
total disregard to the plight of the everyday man.
Look around us, whenever a company or industry is supported
against competition, which is what a trade war is about, it is generally
inefficient – charges higher for lower quality goods and even the said benefits
of jobs and supporting suppliers go to a small connected population.
"In US President Donald Trump’s fight to shore up industry in his country, the higher tariffs are being paid for by his own citizens. The retaliatory tariffs that China has lined up target his key political constituents, who will suffer a double whammy...
China has emerged as a leading economy because it has found
a way to produce anything cheaper and in huge quantities, hence keeping costs
down, the result being an improvement in living standards even in the US.
The world is changing. Lower value manufacturing industry’s
have been moving east steadily, as more developed western economy go up the
scale of value addition, into the knowledge industries. Trump is trying to subvert this trend because it seems easier than to invest in retooling the
countries education system for the knowledge industries.
China too will suffer as the US is the biggest market in the
world with not even Europe able to suck up the surplus that would come with
such a war. One can expect jobs will be lost there as factories close or scale
down production.
They say that an eye for an eye makes everyone blind.
