FELDSTED -- Trade wars employing tariffs are a bit like a sword fight where you grip your weapon by the blade. You will inflict damage but will be harmed in the process

G20 leaders meet as world order is rocked by a clash between giants ... trade and diplomatic friction between China and the US is forcing nations to choose sides - Canada included

Evan Dyer ~~ CBC News ~~ Jun 26, 2019

At the end of the week, the world's 20 most powerful nations are coming together in Japan at a time when the international system that binds them together is under heavy pressure from its two biggest players.

The world's largest trade dispute, between its two biggest economies, is affecting people who are neither Chinese nor American — like Canadian canola farmers.

"The whole world of trade has been turned upside-down," said Brian Innes of the Canola Council of Canada. "We were functioning in a rules-based system, where if we had problems we would try to work them out without escalating things and taking impulsive measures against other countries."

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This is not news to most Canadians and certainly not to people who have a grasp of basic economics. People living in developed nations demand cheap goods. We go to big-box stores in droves to get cheap goods and don’t care where they were made.

Cheap goods are produced where wages are low, manufacturing regulation are lax and workplace safety is a pipe dream.

Developed nations buy a lot of cheap goods from low developed nations. Those nations don’t buy their goods in similar quantities (or overall value) because they can’t afford them.

Ipso facto developed nation suffer a ‘trade imbalance’. The trade value of imports exceeds the value of exports.

Developed nation governments have ignored trade imbalances for decades because cheap goods somewhat offset the buying power erosion of inflation. The problem is that ongoing trade deficits erode the assets of a nation. There comes a point where trade deficits hurt, and action is required to correct the erosion.

Trade tariffs increase the cost of goods which leads to accusations of unfair trade practices and ... public discontent with increased consumer prices.

Trade wars employing tariffs are a bit like a sword fight where you grip your weapon by the blade. You will inflict damage but will be harmed in the process. The notion of other nations ‘choosing sides’ between the US and China misses the whole point of international trade.

The US  / China dispute involves every nation. Import and export markets shift to accommodate trading needs. Markets are displaced and replaced. The result is disorder in the trading community. Financial markets are affected as investment criteria changes, and futures markets face instability.

Governments try to control free enterprise but rarely succeed.

Retailers will find low cost products to import and vend.

Manufacturers will have components or entire products produced offshore where production costs are lower.

Manufacturers will import materials if they are cheaper than those available domestically.

Free trade agreements and international trade agreements have been touted as a solution to orderly international trade relations but entail the risk of perpetuating trade deficits. Trade agreements favour less developed nations with heavy exports and low imports. Like other socialist schemes, they are doomed to collapse.

Recent efforts to expand ‘trade agreements’ to include such issues as intellectual property and protection for investors are troubling. The international system of patents and trademarks should stand alone and separate from trade. Trade agreement investor protection allows investors to take risks they might otherwise avoid. There is no upside for the trading partners.   

The United States suffers criticism for tough talk on trade, and the imposition of trade tariffs to back up the talk, but without periodic resets, unchecked trade will implode with dire consequences. International trade and finances are intertwined. Unchecked trade can cause a financial crisis and depression when a nation with a severe negative import/export balance can no longer meet its financial obligations. That is when dominoes start falling and we discover how fragile our international monetary system is.

The sub-prime mortgage debacle should have taught us that banks and brokers have leveraged assets into high risk territory and, as a result, they cannot withstand insolvency of a major player. Collectively, they don’t have the cash assets to survive a severe hit.

Trade agreements infringe on the sovereignty of participating nations and limit their ability to act in the best interests of the nation. That limits a nation’s ability to respond to pending depression conditions. It is an area where nations need to tread very carefully.

The notion that a trade agreement with China will solve Canada’s dependence on the American market is fraught with risks. We need to trade with multiple nations to avoid the repercussions of having any nation upset our export markets for political reasons.

There is stability in export diversity. 

John Feldsted

Political Consultant & Strategist

Winnipeg, Manitoba