Tariffs are only one of many forces that affect the relative prices of goods and services. In practice, currency movements, concessional financing terms, and the labor share of income are often far more important, yet receive far less attention from ostensible trade experts.
Between July 2014 and January 2016, countries in the rest of the world effectively imposed tariffs of 25% on all U.S. exports of goods and services. At the same time, those countries effectively used the “revenue” from their tariffs to subsidize their own exports of goods and services to the U.S., lowering prices paid by Americans by about 20%. More than three years later, these effective tariffs and subsidies remain in place.
The unsurprising result has been a severe shift in the U.S.’s balance of trade. Between the middle of 2014 and the middle of 2016, exports of capital goods such as aircraft, semiconductors, motor vehicles, and industrial machinery fell by 7.5% in dollar terms. Over the same period, imports were flat in dollar terms. The trade deficit in these categories rose by about half a percentage point of gross domestic product.
In volume terms, U.S. exports of motor vehicles and other capital goods fell by roughly 9%, while imports rose about 8%. As of the first quarter of 2019, the real value of capital-goods exports excluding semiconductors remains below what it was in the middle of 2014, while the real value of capital-goods imports has grown about 20%.
The shift in the terms of trade had significant consequences for U.S. manufacturing production, which fell 3% peak to trough and did not return to its end-of-2014 level until the end of 2017. Manufacturing employment, which had been steadily recovering since the recession, was essentially flat between the middle of 2015 and the middle of 2017.
Despite these substantial costs—which so far have been far larger than anything currently attributable to the recent conflicts over tariffs—the U.S. government lodged no protests, even to its allies.
Part of the reason is that America’s trading partners did not literally impose discriminatory tariffs and subsidies. Instead, the U.S. dollar had become substantially more expensive relative to currencies in the rest of the world, including the euro, the Chinese yuan, the Canadian dollar, the Mexican peso, the Japanese yen, and the British pound, which together comprise about three-quarters of the broad dollar index.
The exchange-rate shift had many causes, one of which was a change in the stance of the Federal Reserve’s monetary policy relative to the world’s other big central banks. From that perspective, some of the U.S.’s trade woes since 2014 were been self-imposed, possibly deliberately.
There are many factors, however, that affect exchange rates. Brad Setser, a former U.S. Treasury official now at the Council on Foreign Relations, tracks many of these measures, including the more obscure ones such as the investment mandates of government-run pension funds and the regulation of life insurers. The most important since 2014 has been the European insistence on balanced government budgets, which, combined with the European Central Bank’s bond-buying programs, has crushed interest rates and encouraged an exodus of fixed-income investors from Europe to the U.S. (and some emerging markets).
Besides exchange rates, there are two other policies worth mentioning, both of which have particular relevance to the U.S.-China relationship.
The first is the willingness to use government resources to finance foreign purchases of domestic goods and services. For many customers, especially for big-ticket items, the headline price matters far less than the amount of money owed up front. Auto makers have long known that they can compete for buyers by offering loans at favorable terms, which is why they operate their own finance companies. The same applies at the international level, with state-run banks offering credit to customers abroad at more generous terms than the private sector. Even the U.S. does this, to a degree, with the Export-Import Bank.
China’s Belt and Road Initiative can be understood from this perspective. Among other things, it is a program of state-sponsored support for Chinese exporters of capital goods and construction services. Governments borrow from Chinese government-backed banks at concessional terms to pay for infrastructure provided by Chinese businesses. According to the China Global Investment Tracker produced by Derek Scissors at the American Enterprise Institute, Chinese companies have been awarded $463 billion in construction contracts in BRI countries since October 2013.
That figure vastly understates the extent of Chinese state support, however. China’s two “policy banks” currently have loans worth more than $530 billion outstanding to non-Chinese borrowers, on top of which the big commercial banks have lent hundreds of billions of dollars more. The Chinese government has also made bilateral loans directly to its allies, although there is less data available on this. Combined, this financing has meaningfully contributed to China’s total exports in the past few years, although future losses from extending credit to borrowers such as Nicolás Maduro’s regime in Venezuela will ultimately be borne by Chinese residents.
Finally, there is what the Chinese intellectual Qin Hui has called the “comparative advantage of lower human rights.” This takes a variety of forms, some of which I have discussed before, but the net effect is that investors earn a disproportionate share of the value created by businesses operating in China at the expense of workers (because of low wages and weak worker rights) and other residents (because of pollution and land seizures). Workers in China’s nonfinancial corporate sector earn about 40% of the value of what they produce, compared with about 65%-70% in the rich countries. That simultaneously subsidizes exports and suppresses consumption of imports.
International trade rules have little to say about these distortions. Unlike explicit tariffs and formal quotas, there are few constraints against governments that want to transfer purchasing power from their own citizens to foreigners. It should not be surprising that some countries have chosen to resort to tariffs and other measures in response.
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