It is indeed true that the US has a deficit with the rest of the world – it imports more than it exports, to the tune of about half a trillion dollars. President Trump gave a larger figure of $800 billion, which is the deficit for goods only. It’s partly offset by a surplus in services.

He wrote some highly critical tweets which appear to be a response to comments from the G7 summit host, Canadian PM Justin Trudeau, who said that Canada would respond to new tariffs – taxes on imports – imposed by the US on steel and aluminium.

President Trump’s tweets complained about the defence spending of US allies (too low in his view) and the trade barriers they impose (too high).

The Group of Seven ended with an explosion — Donald Trump unloaded on Justin Trudeau and washed his hands of the summit. Trump spent much of the G-7 complaining about Canadian dairy tariffs:

“People can’t charge us 270% and we charge them nothing. That doesn’t work anymore,” Trump said during a news conference at the summit. “The United States pays tremendous tariffs on dairy. As an example, 270%. Nobody knows that. We pay nothing. We don’t want to pay anything. Why should we pay?”

Does Canada really charge 270% on milk imports? On some, yes. Canada essentially allows two avenues for these — those within quota, and surplus stuff. It’s the latter where tariffs spike, because Canada’s whole system is built to avoid a surplus — hence its name, “supply management.” Take milk, for instance. Within quota, the tariff is 7.5%. Over-quota milk faces a 241% tariff. Other over-quota rates include blended dairy powder at 270%. Duties rise to as high as 314% for other products, according to data from the World Trade Organization. Canadian officials argue that all countries subsidize dairy, including the U.S. – Canada essentially does so indirectly by closing its borders and capping production. If you’ve got a slice of the quota, though, tariffs don’t apply. Canada has high milk tariffs beyond the allowed quotas, with an average duty of 218.5% on dairy. But on most other products, the country is roughly in line, with a trade-weighted average of 3.1% overall according to WTO data.

Automakers- President Trump reportedly wants to push German carmakers back out of the US. German carmakers control 90% of the US premium auto market, and the Trump administration has opened a trade investigation into whether vehicle imports have damaged the US auto industry. It is certainly true that the US imports more cars than it exports. Last year, the US exported US$52 billion dollars’ worth of passenger cars but imported more than three times that amount.   Specifically with the EU passenger car imports from the US were worth 6.2billion euros, but the EU’s exports to the US were worth a staggering 37billion Euros.

It’s also true that the US tariff on imported cars is relatively low – 2.5% compared to the EU’s 10%, although Japan’s are zero.


To be sure, it’s often possible to pick particular products to make a point about how unfair a particular country is.

In the case of the US for example, you could take its tariffs of 25% on light vans or Canada’s 270% tariff on certain dairy products.

To get a better indication of how much a country protects its own industry it makes more sense to look at average tariffs. There are several ways of calculating an average but the general picture that emerges is that the US has tariffs that are among the lowest. Other rich countries do tend to have slightly higher averages, though not by very much. According to the WTO the EU charges an average trade weighted tariff of 1.6%, but that includes the customs union where there is free trade between states, so arguably this is misleading.  With the rest of the world where it is much closer to 3% similar to Canada’s 3.1%. According to the WTO China also charges a 3.5% average trade weighted tariff. Most countries even ones within trading bloc’s with the US seem to charge them double to triple what the US charges.

Non-Tariff Barriers These tariffs also pale in comparison to non-tariff barriers. (NTB’s) Non-tariff barriers to trade are government laws, regulations, policies or practices that either protect domestic industry or products from foreign competition or artificially stimulate export of particular domestic products. Quantitative restrictions, tariff quotas, voluntary export restraints, orderly marketing arrangements, export subsidies, government procurements, import licensing, antidumping/countervailing duties and technical barriers to trade are some examples of such non-tariff barriers. These NTB’s are regulatory roadblocks to trade that work similar to a tariff or duty.

General examples in China—China’s current banking, finance, insurance and taxation structures are bureaucratic and cumbersome. The goal of any supply chain or logistics manager is to create a seamless flow of product going one way and payment going the other way. Regional fragmentation of finance regulation, tax laws and other institutions has the same effect on the payment side of the supply chain as regional protectionism has on the transport and distribution side. For instance, a company with joint ventures in several locations supplied by one supplier may have to make a separate payment from each venture to the supplier. A specific example is China restricting the number of ports where foreign-made cars can be imported. Multinational car makers fear that the clause demanding separate sales outlets for imported and Chinese-made cars will make it much more expensive to introduce new brands.

General examples in the EU would be the adoption of a series of directives that establish essential requirements for a whole variety of equipment including telecommunications equipment. Equipment must be labelled with the CE mark to indicate that it has complied with all relevant directives. Other countries including U.S. and Japan have their own standards for telecommunications and equipment. The purpose of such regulations include electrical safety, electromagnetic compatibility, user safety and quality of communications. Direct examples of that are the 1999 EU ban on meat products treated certain growth hormones, almost all the hormones were in common use in American meat and dairy industry.

Evidence from available literature suggest that food safety standards and other non-tariff measures can act as trade barriers.

The question is what are these non-tariff barriers worth?

It is difficult to calculate what non-tariff barriers are generally worth the way we do with trade weighted tariffs, because every non-tariff barrier would have to be figured out independently for every industry it affects and there is no general database for this. But recent studies can help us extrapolate what some non-tariff barriers are worth. Using an extension of the price-wedge method that takes into account imperfect substitution and factor endowment in monopolistic competition, a recent study provides ad valorem tariff equivalents of several international food safety standards and applied this method to panel data of European imports of fruit, vegetables and fish from Kenya, Tanzania, Uganda, and Zambia. Empirical results indicate that the tariff equivalent is about 36 per cent for avocados, ranges from 40 to 92 per cent for fresh peas and green beans and goes from 12 to 190 per cent for frozen fish fillet. In addition, we observe a strong home-good preference of more than 99 per cent for frozen fish fillet. [accessed Jun 18 2018].

It’s pretty damning overall.

If you add to that US defence spending you have a whole other subsidy. All NAFTA was essentially created post WWII to defend Europe from Soviet aggression. The United Soviet Socialist Republic no longer exists, it has been replaced with the democratic republic of Russia, and it might not be European democracy but it is democracy despite what Europeans would have you believe.

Defence-Germany pays just 1.2% of its GDP on defence spending, only Estonia, Greece and the UK pay the 2% they all agreed to pay when it was set up. America pays 3.6% and a total of 74% of the total NATO budget. NATO countries are estimated to save approximately 150 million euros by not paying in for their own protection and safety.  This looks to us to be a very clear example of a subsidised and unsustainable arrangement.

The Euro. Germans have benefitted greatly from the euro — it’s given them an artificially weak currency. Normally, one would hate to be paid in a weak currency — among other things, it makes their vacations abroad more expensive. But for Germany, a weak currency has been its ticket to prosperity.

Consider that Germany, which has a generous social safety net, relatively high wages and just 80 million people, is the world’s second-largest exporting country. The euro has played a significant part in this. German exports have more than doubled since the creation of the euro in 1999, going from around 469 billion euros to well over one trillion euros in 2010. The rate of growth was also twice as fast as other nations in the zone. While there is no doubt that the Germans make quality stuff, a key reason they are able to export so much at competitive price points is because they are operating with a relatively cheap currency.

Last but not least there are IP issues and China. US trade negotiator Robert Lighthizer has just completed a seven-month investigation into China and intellectual property at Trump’s direction. The $50 billion figure is based on U.S. estimates of the lost corporate earnings caused by China’s alleged IP theft or forced technology transfers. U.S. officials were said to find strong evidence that China uses foreign-ownership restrictions to compel American companies to switch technology to local firms and that China supports and conducts cyberattacks on U.S. companies to access trade secrets.

How do non-Chinese companies lose money? Besides missing out on possible sales to counterfeited goods or to Chinese products using their know-how, non-Chinese companies also are forced to lower their prices to compete in China. They spend billions of dollars to address possible infringements, according to a 2011 report by the U.S. International Trade Commission. That report said trademark infringement was the most common form of IP violation in China, but copyright infringement was the most damaging.   Of 50 countries in the U.S. Chamber of Commerce’s International IP Index, which measures a country’s commitment to fostering and protecting innovation through legal rights, China ranks 25th. (The U.S. is No. 1 and Venezuela last).

So the US$50b in tariffs is actually according to the US what they have already lost due to Chinese IP theft.

In total, between IP theft, a low Euro, non-tariff barriers, average trade weighted tariff barriers that are double or triple their own and defence spending, suddenly the US$500bn trade deficit with the rest of the world starts making a lot more sense, and it isn’t down to American inefficiencies, it’s down to unfair policies…..Trump might be right.

In total, between IP theft, an undervalued Euro, non-tariff barriers, average trade weighted tariff barriers that are double or triple their own and defence spending, suddenly the US$ 500billion dollar trade deficit with the rest of the world starts to make a lot more sense.

Let’s try to add up the potential value?- the global average tariff difference on goods exports, 1.5% with the rest of the world, and they imported US$2.1trillion dollars in 2016, if they had charged an average global tariff that would be US$32billion dollars. The US estimates they have lost a total of US$50billion to IP theft with China, but let’s straight-line average that over 10 years to US$5 billion a year. Europeans also have a US$17.1trillion dollar GDP in 2017, the 0.7 percent average they are not paying into the NAFTA budget and the US is US$12billion dollars.  The EU exported to the US US$435billion in 2017;  concluding conservatively the euro is undervalued to the tune of at least 5% that’s another US$22 billion dollars.  The US in 2016 exported US$1.32 trillion in goods. If you assume they could have increased those imports by at least 10 percent without non-tariff barriers, that is another US$132billion. If you add all those up you get US$200billion dollars.  That would go a long way to righting the US$500billion dollar trade deficit.

The question is why do we care? Barriers to trade are costing the US conservatively at least US$200billion dollars, 40% of their deficit, that is a huge distortion. Barriers to trade also distort real factors of trade. As investors it’s impossible to figure out the distortions to true and fair competition. Levelling the playing field and making true and fair competition means that we as investors can make far more accurate calls, and that the best companies will rise not the most subsidised.

So what are interim effects on a trade war?  Interestingly the U.S. is a fairly closed economy and hence a trade war probably would not have severe effects on growth, being that up to 80% of their market is internal. We could probably still quite successfully invest in non-exporting parts of the US economy. It’s why Trump is willing to risk a trade war, the US will hurt far less than export driven economies like China and Germany, and scaling back 40%-50% of his trade deficit will do wonders for the American economy. The resultant inflation these tariffs will cause will also help him, as the economy will nominally grow, and the effects of the inflation won’t truly be felt until he is out of office, and will likely be offset by the longer-term export growth and fairer trade terms. This is a gamble that works in his favour in the short and long term.  The challenge for us is picking the winners and losers.

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