Trade war tactics, Part 7: Reviving tariffs and quotas.

 

Trade war tactics, Part 7: Reviving tariffs and quotas.

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No. 174).

There are always countries which disregard social justice and international laws. Other countries cannot declare wars against them but they can engage in economic activities called “trade wars” that are also effective in putting pressure on the transgressors.

For example, some transgressor may use its economic strength to destroy domestic industries of other nations through predatory pricing, disregard laws on intellectual properties of other nations and give no reciprocity to its market access.

#trade war, #predatory pricing, #product dumping, #tariff, #quota, #Green movement, #conservation,

Trade war tactics, Part 7: Reviving tariffs and quotas.

1. Time line of current trade war.

2018 January 23:

30% tariff on solar panels (most of them are from China) reducing to 15% after four years. 20% tariff on washing machines for the first 1.2 million units imported during the year.

2018March 22:

President Trump relied on Section 301 of the Trade Act of 1974 to propose tariffs on additional 60Billion worth of Chinese export (over 1,300 categories including aircraft parts, batteries, flat-panel televisions, medical devices, satellites, and various weapons) to USA as “a response to the unfair trade practices of China over the years”, including theft of U.S. intellectual property.

2018 April 2:

China imposed tariffs on 128 products it imports from America: 25% on aluminum, airplanes, cars, pork, and soybeans, 15% on fruit, nuts, and steel piping.

2018 April 5:

Trump responded saying that he was considering another round of tariffs on an additional $100 billion of Chinese imports as Beijing retaliates. The next day the World Trade Organization received request from China for consultations on new U.S. tariffs

2018 June 15,

United States impose a 25% tariff on $50 billion of Chinese exports ( with “industrially significant technology”). $34 billion start July 6, with a further $16 billion to begin at a later date

2018 Sept 23:

USA imposed new 10% tariffs on $200 billion of Chinese goods, spanning thousands of products, including food seasonings, baseball gloves, network routers and industrial machinery parts.

China retaliated immediately with new taxes of 5% to 10% on $60 billion of US goods such as meat, chemicals, clothes and auto parts.

2. Argument against free-loaders.

A restaurant spent its effort to make fine food to attract eaters. It then sells beverage to those eaters at high mark ups. Is it fair to let customers buy and bring in their own beverage from the discount store next door ? Is it unfair for the restaurant to impose a surcharge on any “bring your own” beverage ?

A country spent its own money to build its national roads. Is it fair for any other country to make profits from the sale of cars driven on those roads, robbing the opportunity of making and selling cars by domestic industries of that nation?

America had been nurturing its democracy, innovation and free economy to the point that now its population has an actual need on digital technology. Is it fair to deny its domestic population the opportunity to establish its own digital technology and to enjoy its profits?

3. Has America oppressed China in the current trade war?

China may have said that it is being oppressed by a stronger American economy, with “a knife held to the throat” [3]. People should not forget that currently China is oppressing ALL its neighbors except Russia. [4, 5, 6, 7].

There are many Asian people supporting President Trump (openly or quietly) in this trade war.

4. Justification for tariffs and quotas.

Tariffs and quotas are used to reduce (wasteful and inefficient) consumption of some imported products (from the point of view of the ruling government). It is the right of each nation to define what is its desirable consumption pattern.

France had been criticized for placing virtual quota on its import of Video Cassette Recorders. With the benefit of hindsight, that restriction may have saved France a lot of money.

Currently the US may consider that solar panels and washing machines should provide an opportunity for American manufacturing industry. The current tariff are designed to give American solar panel and washing machine makers a chance to establish themselves.

The tariff on washing machines also put a brake on the wasteful short life cycle assigned by Americans on their washing machines. The Green and the conservation movement are now conspicuously absent in their protest against the wasteful American habits of retiring their washing machines early.

Tariffs and quotas can also redirect consumer and industrial spending toward supporting ally and friendly nations (who are imposed zero or lower tariffs than unfriendly countries).

5. Ineffective retaliation measures by China.

China has imposed its tariffs on American soy beans. Note that soy beans are a basic staple food of Chinese people, from which they make soy-milk, tofu, bean sprouts and soy-sauce. The tariff cannot reduce soy beans consumption by Chinese people, it can only redirect their purchase preference. Can China buy soy-beans elsewhere ? If the trade war drags on for too long, American farmers may decide to stop producing soy-beans and China may be the ultimate loser for having to pay higher price to buy soy beans outside America.

Chinese tariffs on American luxury goods like hand phones, designer hand bags, airplanes, cars, etc…[5c] only turn them into items for “status symbol” and may ultimately promote their sale to Chinese super-rich people.

6. Naming winner and loser.

2018 March 30:

On Monday, Brussels launched a safeguard investigation into how it could combat surges of steel imports… from inflows of Japanese, Chinese, Turkish and Russian steel that would be diverted away from the U.S. [8]

2018 July 13:

“The S&P 500 on Friday hit a four-month high … the Nasdaq close at a record high. The S&P 500, Nasdaq and the Dow Jones Industrial Average were also tracking for their second straight week of gains.” [9]

2018 July 17:

“Since the White House announced the first tariffs — on washing machines and solar cells on Jan. 22 — the Shanghai Index of Chinese stocks is down nearly 20 percent, while the S&P 500 is off less than 1 percent… Since the end of March,..the yuan has slid nearly 7 percent, again demonstrating the impact the trade war…” [10]

As at 2018 July, America has been the winner in the current trade war.

7. Conclusions

Trade wars are bloodless and are preferable to military wars to put pressure on those countries that disregard international laws and social expectation.

a. Tariffs are not nice to advocates of free-trade but they are really useful to shape a national economy.

b. Tariffs are necessary, only their appropriate levels have to be determined.

c. Once countries enter trade war, there will be a reduction in international trade and a number of countries may enter their recession. Countries with self-sufficiency will outlast their competitors, free-loaders usually lose.

America is winning the current trade war and should prosecute its well chosen war to its end.

References:

[1]. https://survivaltricks.wordpress.com/2018/06/20/trade-war-tactics-part-1-predatory-pricing-and-tariffs/

[2]. https://edition.cnn.com/2018/09/23/politics/trump-trade-war-china/index.html

[3]. https://www.telegraph.co.uk/business/2018/09/25/china-says-cant-hold-us-trade-talks-knife-throat/

[4]. https://thediplomat.com/2015/08/pentagon-denounces-excessive-maritime-claims-in-the-south-china-sea/

[5]. https://www.bloomberg.com/quicktake/territorial-disputes

[5b]. https://superforest.blog/2018/10/08/blinding-consumers-to-the-true-cost-of-soy/

[5c]. https://wentworthreport.com/2018/07/02/the-china-trade/

[6]. http://www.abc.net.au/news/2016-07-13/rothwell-south-china-sea-verdict-explained/7624120

[7]. http://www.abc.net.au/news/2017-11-29/south-china-sea-why-is-australia-worried-about-chinas-stance/9206998

[8]. https://www.politico.eu/article/president-donald-trump-winning-the-trade-war-for-now-steel-aluminum-tariffs/

[9]. https://www.cnbc.com/2018/07/13/cramer-trump-winning-china-trade-war-and-the-stock-market-confirms-it.html

[10]. https://thehill.com/opinion/finance/397447-trump-is-winning-the-trade-war-because-china-has-more-to-lose

Added after 2018, Sept 26:

[11]. https://johnib.wordpress.com/2018/09/26/south-china-sea-do-china-and-the-u-s-know-each-others-intentions/

Sixty percent of all soybeans grown worldwide are now exported to China,

[12]. https://us-issues.com/2018/10/02/china-in-water-crisis/

Conservation requires an increase in soybeen prices: rising demand for meat has driven soy production to nearly 10 times what it was 50 years ago. A full 80 percent of the world’s soybean crop is fed to livestock.

[13]. Blinding consumers to the true cost of soy?, https://superforest.blog/2018/10/08/blinding-consumers-to-the-true-cost-of-soy/

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Trade war tactics, Part 2: Exploitation of an economy by a foreign monopoly

 

Trade war tactics, Part 2: Exploitation of an economy by a foreign monopoly.

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No. 147).

#trade war, #predatory pricing, #product dumping, #tariffs, #monopoly, #exploitation, #security,

Trade war tactics, Part 2: Exploitation of an economy by a foreign monopoly.

This blog describes in details the exploitation of a market by a foreign monopoly.

1. Dumping goods to become a monopoly in a foreign market.

A country C with a larger economy can subsidize the production of its goods (for example steel) for export to another country A with a smaller economy. Country C would use its deep pocket to make very low sale prices so that all its competitors in country A cannot sell any of their products and had to go bankrupt.

This blatant method of grabbing market may work with compliant vassal neighbors of a country C but may not be viewed favorably by any other sovereign country.

A number of steel manufacturers in Vietnam faces the danger of bankruptcy by such method of disruption [1,2,3,4].

The method would certainly be prevented in the USA where there is a Federal Trade Commission [5,6,7,8,9].

(Other examples can be found with food processing in Vietnam).

2. Achieving a monopoly by subtle taking-over of competitors.

With a deep pocket and enough patience a large monopoly producer/manufacture can enter a foreign market and gradually reduce the prices of its products so that its competitors can just make very small profits. After a few years, it can offer a take-over on its own terms (acquiring assets and market shares at low costs) to become an even more powerful monopoly without much backlash of public opinion in country A.

This type of take-overs would be favorably viewed by Anti-competition Authorities as a form of desirable “rationalization in a crowded market” and is usually approved [10-19].

3. Exploiting monopoly grip without losing it.

If any competitor set up new facilities in country A to produce same goods at local costs, country C would use its deep pocket to subsidize its reduced sale prices so that the new competitor cannot sell any of its products and had to go bankrupt.

On the other hand, while there is no competitor, country C can sell its goods to country A at considerably higher prices than could be justified if using local costs. With this artificially higher level of profit, country C can build up a war chest to fight against any new entry to its monopoly market in country A [20,21,22].

(Other examples can be found with Australian food producer market, Australian energy distribution market, Australian recycling industry).

4. Supply concern for manufacturing industries caused by dependence on a foreign monopoly.

As country A is wholy dependent on country C the latter can cause artificially periodic draught and floods of manufacturing supplies to force the former to hold massive stocks for its manufacturing base or to divest out of that manufacturing activity.

(Other examples can be found with, Phllipino fruit export market,Vietnamese trade through China)

5. Technological concern caused by dependence on a foreign monopoly.

Besides giving country C the option to raise or lower prices at their convenience to exploit its citizens, country A also face the risk of having C setting the standards for its food and technology [23].

Country C may also throttle the economy of country A by supplying it with only some of its needed raw and specialty materials/products [24-34].

6. Security concern beside trade and finance concern.

A country A has to worry about its military security if its communication and information technology, electricity power and strategic materials are supplied by foreign companies owned by its potential adversary [35,36].

7. Conclusions.

In peace time, traders from each country may carry their goods across the borders to other countries to make their own profits from the difference in prices. This cross border trade supplies people in different countries with goods at lowest prices and benefits all countries.

Unfortunately, there are always aggressive rulers who want to use their dominant trading positions to disrupt their neighbors.

The inescapable position is that each vulnerable nation needs to have a self-sufficient economy so that in time of imminent war that nation can close its border (for fear of attack, infiltration and espionage from its neighbors). It has been an established practice of closing the border when there is any possibility of war (This has also been a teaching by Sun Tzu in his ancient text Art of War [37]).

References:

[1]. https://en.m.wikipedia.org/wiki/List_of_countries_by_steel_production

[2]. https://en.m.wikipedia.org/wiki/History_of_the_steel_industry_(1970%E2%80%93present)

[3]. http://vietnamnet.vn/vn/kinh-doanh/dn-thep-pha-san-ma-khong-dam-cong-khai-89828.html

[4]. https://baodautu.vn/doanh-nghiep-thep-truoc-nguy-co-pha-san-d39873.html

[5]. https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/single-firm-conduct/predatory-or-below-cost

[6]. https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws

[7]. http://www.adcommission.gov.au/Pages/default.aspx

[8]. https://en.wikipedia.org/wiki/World_Trade_Organization

[9]. https://www.wto.org/english/tratop_e/adp_e/adp_info_e.htm

[10]. http://www.abc.net.au/news/2017-10-24/chinese-investors-sink-teeth-into-pet-food-company/9081298

[11]. https://www.theguardian.com/business/2013/may/31/chinese-takeover-smithfield-shuanghui-food-supply

[12]. https://dealbook.nytimes.com/2013/07/10/lawmakers-have-concerns-over-chinese-takeover-of-smithfield/

[13]. https://www.businessinsider.com.au/china-alarming-food-problem-2017-6?r=US&IR=T

[14]. https://www.ft.com/content/66802104-18d3-11e8-9e9c-25c814761640

[15]. https://www.afr.com/news/politics/national/chinese-bastards-want-to-take-over-australia-palmer-20140818-j8vpx

[16]. https://www.telegraph.co.uk/news/world/china-watch/business/chinese-takeovers-of-overseas-brands/

[17]. https://www.weeklytimesnow.com.au/agribusiness/decisionag/china-to-become-biggest-foreign-owner-of-australian-farmland/news-story/ba27742491380f55568bc3d5ada296cb

[18]. https://www.businessinsider.com.au/chinese-outbound-acquisitions-concerns-2016-2?r=US&IR=T

[19]. https://www.smh.com.au/politics/federal/china-now-owns-10-times-the-amount-of-australian-land-it-did-last-year-20170930-gyrxia.html

[20]. https://www.bbc.com/news/business-34513287

[21]. https://www.telegraph.co.uk/news/2016/09/17/chinese-farmers-take-over-former-white-owned-farms-in-zimbabwe-t/

[22]. http://www.politicsweb.co.za/news-and-analysis/chinese-take-over-farms-stolen-from-whites-in-zimb

[23]. https://www.independent.co.uk/news/world/asia/china-fake-food-sector-unlicensed-products-knock-offs-supply-chain-contamination-public-health-a7880341.html

[24]. http://mobile.abc.net.au/news/2016-08-21/chinese-investment-in-the-australian-power-grid/7766086

[25]. http://fortune.com/2015/06/18/china-is-utterly-and-totally-dominating-solar-panels/

[26]. https://www.theguardian.com/environment/2017/jan/06/china-cementing-global-dominance-of-renewable-energy-and-technology

[27]. https://theconversation.com/gas-crisis-or-glut-why-japan-pays-less-for-australian-lng-than-australians-do-74438

[28]. https://www.bloomberg.com/news/articles/2017-09-27/now-one-of-the-world-s-energy-powerhouses-has-a-coal-squeeze

[29]. https://www.nytimes.com/2018/05/23/business/canada-china-aecon-block.html

[30]. https://www.cbsnews.com/news/china-u-s-m-a-its-a-one-way-street/

[31]. https://www.forbes.com/sites/douglasbulloch/2016/10/27/why-foreign-companies-are-increasingly-resistant-to-chinese-takeovers/#2734aa21145f

[32]. https://www.pbs.org/newshour/show/whos-behind-chinese-takeover-worlds-biggest-pork-producer

[33]. https://finance.yahoo.com/news/china-kill-qualcomm-takeover-nxp-030100535.html

[34]. https://www.bloomberg.com/news/articles/2018-03-27/u-s-said-to-weigh-use-of-emergency-law-to-curb-china-takeovers

[35]. https://www.businessinsider.com.au/national-security-issues-flagged-with-huawei-for-australian-5g-network-2018-6?r=US&IR=T

[36]. https://abcnews.go.com/International/wireStory/huawei-executive-warns-australia-risks-economy-5g-ban-56191847

[37]. Sun Tzu, The Art of War. First published in Chinese before 200BC.

Added after 2018 July 12:

[38]. https://asweetdoseofreality.com/2018/07/11/chinas-human-robot-labor-force-the-highest-rate-of-surplus-value-in-the-history-of-capitalism/

[39]. https://us-issues.com/2018/07/12/how-china-is-muscling-in-on-lithium-ion-batteries/

[40]. https://johnib.wordpress.com/2018/09/19/philippines-man-made-rice-crisis-worse-than-typhoon/

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Trade war tactics, Part 1: Predatory pricing and tariffs.

Trade war tactics, Part 1: Predatory pricing and tariffs.

by tonytran2015 (Melbourne, Australia).

Click here for a full, up to date ORIGINAL ARTICLE and to help fighting the stealing of readers’ traffic.

(Blog No. 144).

#trade war, #predatory pricing, #product dumping, #tariffs,

Trade war tactics, Part 1: Predatory pricing and tariffs.

1. Predatory pricing

Every company has to produce more than a minimum number of products to survive and any new company entering an established market may not have enough share in that market.

Rather than avoiding a crowded market, some company may adopt a strategy of selling well under its costs for a while to edge out all its competitors to capture the WHOLE market then using its newly gained monopoly to impose higher than previous (fair) market price to recover the expenditure incurred in knocking out its competitors. The method of selling under costs to knock out competitors is called predatory pricing and is an illegal practice in the US as well as in many other English speaking countries.

2. Known hard to enter established markets.

Most industries have minimum levels of productions. Some even need a whole national market to operate.

Example 1:

International airlines need to have 60% of their seats filled to break even and are usually backed by their own countries.

Example 2:

Railway industries are hard to profit from but are usually subsidized by their nations.

Example 3:

Steel industries can only operate their furnaces and machinery at production levels which are usually high.

Example 4:

Even a restaurant also needs minimum number of clients every day to pay its rent and outgoings.

3. Resisting predatory pricing.

A new enterprise entering an established market may sell under cost to introduce itself to customers, such practice is legal in the US.

“Pricing below your own costs is also not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses.” [1]

So it is difficult for affected competitors to argue against such practice using the antitrust law [2].

The difficulty is compounded when when the company selling below costs is a foreign company obtaining partially built products from oversea. The Federal Trade Commission of the US and of similar countries [3] may not have jurisdiction. The rules by World Trade Organization [4,5] may have to be relied on.

4. Predatory pricing between national economies.

Each nation wants to have a self-sufficient economy so that in time of imminent war the nation can close its border (for fear of attack, infiltration and espionage from its neighbors). It has been an established practice of closing the border when there is any possibility of war (This has also been a teaching by Sun Tzu in his ancient text Art of War [6]).

In peace time, traders from each country may carry their goods across the borders to other countries to make their own profits from the difference in prices. This cross border trade supplies people in different countries with goods at lowest prices and benefits all countries.

Unfortunately, there are always aggressive rulers who want to use the surplus capacity of their economy to disrupt the self-sufficiency of their neighbors. For example, a country C with a command economy (taking orders from the government regardless of profit or loss) may use its surplus capacity in its steel making to sell its (nationally subsidized) steel cheaply to its neighbor A. Such selling for a prolonged time will certainly destroys the steel production capacity of country A. After 20 years or so of selling steel to A, country C may suddenly cut off its steel trade with A and declare war against A. In such scenario, the country A would be totally defenseless against C as it has no steel to produce weapons and armament for its army.

In a less dramatic scenario, the country C may sell its steel cheaply to another neighbor V to destroy its steel production capability then C throttle its steel supply to V (both with quantity and with types) to control the economy of V.

Similarly, country C may sell cheaply agricultural produces to agricultural neighbor V to destroy the agriculture of V. Country C then can dictate to V what crop and when to plant. In this way country V is totally under the command of C.

5. Assessing susceptibility to predatory pricing.

Chinese population is 1.500 millions while American is 326 millions, Australian is 22 millions.

If China produces clothing for all its citizen and export part of its clothing to Australia, Australian clothing industry has to go bankrupt (and it had).

If China produces hardware for all its citizen and export part of its hardware to Australia, Australian hardware industry has to go bankrupt (and it had).

If China produces steel for all its citizen and export part of its steel to America, American steel industry may go bankrupt.

6. Tariffs to the rescue.

Fortunately, sovereign governments can use tariffs to protect their vital industry such as steel, aluminum, defense, telecommunication.

The tariffs can be set at various levels suitable for the protection of the vital industries while still allowing other industries access to imported goods. The question is only what is an appropriate level.

Too low a tariff may not offer enough protection for the vital industries while too high a tariff may deny access to imported goods for other industries and weaken the overall economy.

7. Trade war by predatory pricing and tariffs.

Without tariffs aggressive countries may use predatory pricing to harm their trading partners.

The defending countries may use tariffs for their protections and the aggressor may accuse the defenders of engaging in trade war and the aggressor also put up its retaliatory tariffs. The others may again increase their tariffs and the tariffs level may increase without bounds [7,8,9,10].

The level of mutual tariffs may increase such that there will be any international trade left and a number of countries may enter their recession. The self-sufficiency of each nation will then be its survival factor.

8. Conclusions

a. Tariffs are not nice to advocate of free-trade but they are here to stay.

b. Tariffs are necessary, only their appropriate levels have to be determined.

c. Once countries enter trade war, there will be reduction in international trade and a number of countries may enter their recession. Countries with self-sufficiency will outlast their competitors.

References:

[1]. https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/single-firm-conduct/predatory-or-below-cost

[2]. https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws

[3]. http://www.adcommission.gov.au/Pages/default.aspx

[4]. https://en.wikipedia.org/wiki/World_Trade_Organization

[5]. https://www.wto.org/english/tratop_e/adp_e/adp_info_e.htm

[6]. Sun Tzu, The Art of War. First published in Chinese before 200BC.

[7]. http://theconversation.com/fact-check-is-china-dumping-steel-76916

[8]. https://en.wikipedia.org/wiki/Trump_tariffs

[9]. http://www.abc.net.au/news/2018-06-15/donald-trump-announces-tariffs-on-chinese-goods/9876356

[10]. https://www.afr.com/news/economy/trade/china-hits-back-at-us-tariff-hikes-raises-import-duties-on-us-products-20180616-h11gql

Added after 2018 June 21:

[11]. https://johnib.wordpress.com/2018/06/21/white-house-slams-chinese-economic-aggression-policy-as-threat/

[12]. https://johnib.wordpress.com/2018/06/21/u-s-exempts-certain-steel-products-of-japan-four-other-nations-from-25-import-duties/

[13]. https://johnib.wordpress.com/2018/06/21/trumps-lack-of-strategic-wisdom-may-spark-an-all-out-economic-war/

[14]. https://www.thebalance.com/steel-production-2340173

[15]. https://centinel2012.com/2018/07/09/did-tariffs-cause-great-depression/

[16]. https://www.bbc.com/news/business-44914145

[17]. https://economicprism.com/all-the-makings-of-a-major-economic-fiasco/#more-6159

[18]. https://theroperreportsite.wordpress.com/2018/08/05/we-will-have-tariffs-in-the-ethnostate/

[19]. https://theconservativetreehouse.com/2018/08/18/important-michael-pillsbury-china-has-new-respect-for-u-s-trade-strategy/

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