March 20, 2018
Wilbur Ross, US Secretary of Commerce on CNBC this morning said of the the doomsday trade-war talk by the mainstream media (MSM) and economists as “Much ado about nothing”. What makes him so dismissive of all the negative tariff talk? How can he be so sanguine at a time when there is a real possibility of a trade war that could derail the US economy?
Wilbur Ross’ background prior to becoming the US Secretary of Commerce was as an banker and investor who specialized in buying distressed companies turning them around. When questioned during the show about tariffs and about a possible trade war with China, he responded that as a percentage of GDP, the tariffs may impact prices by as much as 2/10th of a percent which is not much at all. Steel and aluminum as an input cost, accounts for a very low percentage of the overall finished goods. Even with steel and aluminum intensive industries like auto manufacturing, the raw materials cost is a fraction of the total cost to produce.
As far as a trade war goes, The US is a primary low-cost producer of agriculture. China cannot feed itself with the agriculture produced in their own country and must import its agriculture. The Chinese obviously must get the food from somewhere and so if they shift their purchases to countries like Brazil, that means they will have to pay a much higher price in order to get Brazil to sell to them instead of their traditional customers. Their traditional customers must then buy their food elsewhere and where else but the US would they buy their food. The Chinese citizens would be hurt in any case having to pay more for food.
The point Wilbur made, and one I believe is a good point is that for all the fire and brimstone of the talk around a trade war, no one is looking to cut off their noses to spite their face. It is a negotiation. Even if the worst case predictions come to pass, it will not have a significant impact on inflation nor the goods available for sale. Yes, trade wars are counter-productive but that is not the end game of Trump Administration’s tariffs. The end game is getting the competition to level the playing field which they had stacked in their own favor.
What isn’t working is the current trade regime where cheaters do not get taken to task. There must be consequences for bad behavior.
