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Overview of the Law
Countries
engage in trade with one another for economic benefit. The trade can be
an exchange for goods and services. Commercial activities are conducted
by individuals, companies and government agencies. As trade between
countries increase, the trade is formalized into trade agreements and/or
treaties. Treaties and trade agreements are essentially contracts that
regulate the flow of goods and services in certain directions. They
determine who gets to benefit from the trade. However, unlike contracts
that are enforceable in a court of law, there may be no higher entity
that can enforce treaties and trade agreements. Many countries object to
a higher body or agency outside of its jurisdiction that can tell the
people in a certain country what it can and cannot do. Many
international agencies, like the United Nations, the International
Monetary Fund, the World Trade Organization, and the World Health
Organization, are run by consensus subject to the whelms of a few
powerful countries. Countries, like human beings, will do what they want
to do when it benefits their interests.
Countries will assert the
consensus of the collective body (of nations) when it suits their
purpose, but will argue that the rule infringes on its’ sovereignty when
it doesn’t. The United States for example will tout the WTO when the
organization supports its position against the European Union on trade
issues but will reject the WTO’s rulings when the international trade
body rules in favor of China on other trade issues.
Sometimes,
when a country feels there is an imbalance in the trade exchange in a
particular area, it will try to remedy this by imposing tariffs and/or
quotas on imports. The imbalance can be real or perceived, it can be due
to internal political pressure from special interest groups, or it can
be part of the country’s broader policy for international engagements.
Certain business interests who wish to maintain the status quo or who
wish to change the status quo with another country, will lobby their
governments to force the other side to change its behavior for their
benefit.
A trade war occurs when one country acts against another
country by raising import tariffs or placing other restrictions on the
other country’s imports. The justification will be coated in words such
as fair, not fair, government subsidies, free trade, rule of law, etc., in an attempt to paint the other country as the source of the problems.
Trade
wars are not necessarily about balancing trade. The United States has a
trade imbalance with China amounting to several hundreds of billions of
dollars. The exchange appears imbalance on its face when you just look
at the numbers. What has been deliberately left out of the equation by
the politicians is that the US currency serves as the reserve currency
for the rest of the world. This means that other countries will hold
onto US Dollars instead of exchanging them immediately for other goods
and services because they have to pay for other goods and services that
they buy from other countries using US Dollars.
In the case of
China, this trade imbalance includes payments made to US companies for
its intellectual property rights. As an illustration (the numbers are
not correct): if an iPhone sells for $800 and its’ manufacturing cost in
China is say $110, the entire $800 is attributed to China as part of
the trade imbalance. What the calculation fails to take into
consideration is that there is another $400-%500 in IP that Apple
receives for licensing its IP towards the manufacture of the iPhone.
Apple, an American company, receives this money, not China.
The
trade imbalance doesn’t take into account the high costs of low prices
for the American consumers. To get the price point of an iPhone that is
acceptable to the American consumer, someone has to pay for the
difference. This is why multinational companies move their manufacturing
operations to lower costs countries where the labor is cheaper, there
are less labor rules, less environmental controls, and the like.
Trade
wars are about using a country’s economic might to get what it wants in
response to social, economic or political pressure from within or
without. Depending on the relative strengths of the two countries to
inflict economic pain on each other and their political will to endure
the economic pain, the results of the trade war(s) can have long term
lingering effect.
Reading Assignment
Please read the following articles. You can search the Internet for other examples.
Everything you wanted to know about the Canada-U.S. trade war but were afraid to ask;
https://www.thestar.com/news/canada/2018/07/11/everything-you-wanted-to-know-about-the-canada-us-trade-war-but-were-afraid-to-ask.html (Links to an external site.)
How the EU and the US Fought a Banana Trade War (Links to an external site.)
US widens trade war with tariffs on European planes, cheese, whisky to punch subsidies (Links to an external site.)
Discussion Assignment
After
reading the articles, discuss whether you think trade wars are
beneficial to the American consumers. Have consumer prices gone up as a
result of the US’s trade war with China, the EU and/or Canada? Who ends
of paying for the trade wars? How do trade wars influence the flow of
international goods and services through our country?
