Trade war

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A trade war refers to two or more nations raising or creating tariffs or other trade barriers on each other in retaliation for other trade barriers. Increased protection causes both nations' output compositions to move towards their autarky position.

Economists generally believe trade wars are very non-productive and decrease the economic welfare and total social surplus of all nations involved. However, political scientists may see the threat of a trade war as helpful in winning a concession of some sort from the other side.

Some economists would agree that some economic protections are more costly than others because they may be more likely to trigger a trade war. For example, if a country were to raise tariffs, then a second country in retaliation would similarly raise tariffs. But increasing, for example, subsidies, is difficult to retaliate against by a foreign country. Many poor countries, for example, do not have the ability to raise subsidies. In addition, poor countries are more vulnerable than rich countries in trade wars; in raising protections against dumping of cheap products, it risks making the product too expensive for its people to afford.

A series of articles by Henry C.K. Liu under the heading The Coming Trade War provides an analysis on current problems in global trade. Trade Wars are generally accepted to be international trade events where the government of one nation sees fit to deny the businesses, or other entities of a foreign nation access to its market by way of excessive or unequal taxation to the domestic trade entities.

In the USA however; the taxation system based upon an income tax which is quite high relative to other nations taxation and which unlike the EU's VAT is not rebated on export causes all of its domestic trade entities to embed the cost of this taxation into the cost of its products for both domestic and export trade markets.

As the European recovery after World War II began very slowly (about 1948) the USA saw fit to accelerate this condition by giving certain European states discounts on tariffs for importing goods into the USA. This gave the European trading partners a substantial advantage in trade over the domestic industrial concerns affected by these changes in US Tariffs. Essentially US Tariffs existed to provide a parity between US Domestic Income Taxes and the untaxed state of foreign trade entities entering the US market. The abatement of tariffs by the USA resulted in what was in fact a subsidy of European business. This was quite deliberate and was intended to stimulate recovery. Such subsidies have not stopped but have been raised greatly in recent years.

It is especially important in understand this that the US Income Tax is a muli-level multiplicatively affecting tax so the domestic rates actually as a compounded effect are often well into the 90% or higher range though the stated tax rates are well below this. This accrues to the fact that income is a fictional construct that exists more in law than in reality. (Example: One may sell a trade good and be denied a deduction against income for very real costs of production or operations, producing a falsely high income for taxation.)

As a result of the very high US Income taxes, the resulting tariff parity for a domestic product would be to tax the import would be very high. In many cases the parity is restored for the embedded taxation only with a tariff that rises well above 400% or higher. (This corresponds to a tax rate net of all levels of 80%)

With a tariff reduction to or approximately to zero as with the NAFTA, GATT and other major trade agreements recently, these have backed the United States of America into a trade war against its own citizens whereby they are denied access to their own markets while the foreign entities essentially own the US Market for these goods. This has essentially wiped out the US Textile, Steel and other similar manufacturing industries.

It is often claimed that this is the product of domestic wage disparities vs foreign wages. Analysis of this shows that US Labor costs per unit of production are often the lowest on the planet. Yet when the profit is applied to the US Income tax the reality is a completely upside down situation.

Here is a simple example: This is the standard accounting "Widget" so don't look for the specific good.

                      USA            VS            China

Widgets/hour 100 100 Wage per hour $10.00 $0.36 (Note the very cheap labor rate!) Labor Cost per Widget $0.10 $0.0036 (Essentially free for China)

Non Labor Costs of production

                     $1.10                         $1.10   (This is the stuff like materials  overhead etc)

Shipping costs $2.00 $3.00 (Remember international and domestic add) Typical Markup 150% Gross Sale Price $8.00

Gross Profit on Sale $4.80 $3.90 (This is per each) Net Income Tax Rate for Corp Income only 34.00% 0.00% Net Taxes Paid $1.63 $0.00 (This is per each) Net Income on Sale $3.17 $3.90 (This is per each)

Now reversing the income per each and driving to a wage rate that would produce the exact same result as the other country for the USA and China. The American would have to pay is employer $32.12 per hour just to produce the $3.90 per each as his China competition does.

Reversing for the man in China, he has to raise his wages to $73.20/hour just lower the yield to the after tax American cost of $3.17

Applying a taxation change like would be proposed for the Fair Tax as is being discussed in the USA at this time, the differential changes dramatically. Because the American now earns more for his employer than his competition in China the result is stunningly different. The Chinese man must pay his boss $90.00/hour to make the $4.80 that the American now makes as his Gross Sale Price, and the American must raise his wages to $100.36/hour to reduce his yield for his employer to the $3.8964/each that is the China gross.

The effect of this trade war by the US Government against its own citizens is stunning in world affairs. Over the past 6 years or so (from 2001) Americans have seen their personal debt rise dramatically. At the same time they have seen for the working people who actually work under these sort of conditions a wage drop of about $19,000 a year. The effects here on world financial markets are that Americans are defaulting on a massive number of loans and this is known as the Sub-Prime Crisis. At the same time this has undermined the value of the US Dollar and produced a Currency Collapse where the currency has seen losses of nearly 50% of its value in a few months. It is an undeniable fact that parties mortgaged highly who see their wages drop cannot sustain them. This has endangered many international investors positions as well as domestic USA investments. This situation as of 2007 has rendered world financial conditions into a very unstable condition.

If any party wishes to see just how awful a trade war is in its effect on trade this is but one side of the example. When one looks at world wide international trade, the situation is also quite dangerous. The example here of the man in China sees him earning a trivial wage. At the same time he destroys the high wages of his American counterpart. This is not in any way to say that he intends this effect. By destroying the US wages, he undermines the trade that made him is job. This situation destroys all trade.

(Posting Note) I posted on this earlier only to see some person try to deny these facts and deny that this is in fact going on. This trade war is no secret to working Americans. It is a known fact. It appears that some parties wish to deny that their behavior is causing severe damage to the world economy. (Most likely they are making money off of this situation or are deluded into believing some ideological position) This is a fact. (End Posting Note)

The situation is denied by some parties who attempt to make advantages in the trade situation out of this trade war that is going on. They attempt to induce people to believe that labor or other entities are causing the lack of American success industrially. The reality is that US Labor is vastly more productive than presented in the example. It is often that US Labor is up to 3 or 5 times more effective than its foreign competition on a per unit basis. The issue in the standard business calculation above is taxation applied to profit. The higher the profit the more likely a job is to suffer under this trade war.

A typical production rate in Sock Mills in Alabama was to make upwards of 720 pairs of socks per hour. It is likely that the foreign rate would not be substantially different as the devices used in the production are common. While the Alabama worker might get as much as $0.01/each the profit to his employer for the work would typically be as high as $0.50/pair of socks. The net result here is that the application of the US Income Tax on the profits would be approximately $0.175/each pair of socks or the effect on the decision to employ the American was about 17 times more the income tax than the wages. This is why most Alabama USA Sock Mills have been closed. People often mistake the cost of labor per hour as the issue it is nothing of the issue in most cases.

Taking a Steel Mill like in Decatur, Alabama the mill there can produce many thousands of tons of steel per hour. The labor effect on the price of a ton of steel is insignificant to the sale of steel. The issue is what happens to profits.

In Huntsville, Alabama Dunlop Tire operated a mill that produced 30,000 tires a shift with 300 employees. Their cost of labor per tire was about $2.50. The factory produced tires for a net cost of about $7.50/tire. The taxes on sale of the tires which wholesaled out for $50/tire were including State of Alabama taxes about $18.50/tire. Moving the factory to Mexico actually increased the cost of a tire for sale in the market to $8.50/tire. It eliminated the domestic taxation on income resulting in a net gain of $17.50/tire for Dunlop. The Huntsville, Alabama plant was closed for this reason. (the author here has talked in detail with Company management in this example)

Essentially American workers are in the stunningly awful position that if they make a profit for their employer, the job must be exported. If they don't make a profit, they go out of business for lack of earnings.

The US Immigration situation with Illegal Aliens is largely a result of this situation though at the payroll level. Typically a US Company in order to pay a domestic employee $8.00/hour must pay him about $11.50 per hour in reality. At the same time the US worker only sees in his paycheck about $5.50/hour net result. If an alien is paid $8.00/hour in the "Black Market" or "Sub Rosa", he gets $8.00. In order to raise the American's wages enough for him to see the same $8.00 the alien got, he must cost his employer about $14.00/hour. Naturally employers find it highly more efficient to pay under the table or black market wages. At the same time US Worker get the blame for refusing pitiable wages (Net) while the illegal alien happily accepts the truly higher (Net) wage. This illustrates the compounded nature of the US Income Tax system to some extent. Remember that the American earning $10/hour in the example above is actually being paid at about the US Minimum Wage and he sees less than that. The American in the example is seeing less than $5/hour net.

The US Treasury has attempted to blame this situation on China. China is not at fault. They are mere opportunists taking what opportunities have presented themselves. The US Treasury collapsed the value of the US Dollar in 2001 attempting to drive China to revalue its currency. Revaluation of the Chinese currency would have no effect on this situation. The lower the US Dollar goes, the businesses in China must accept the change and ride with the dollar or they close their factories and that is exactly what they faced with the drop in the dollar. As a result they chose to ride with the US Dollar and the net effect of the drop in US Dollar value was Nil in China trade.

It is profoundly important that people understand that trade wars are no good. It is also profoundly important that they understand that taxation disparities like this one produce exactly the same situation though they are prosecuted in reverse.

It is also profoundly important that nations outside the USA see what is actually going on. Many of the supposed industrial subsidies of the USA are at best inadequate rebates of the US Income Tax allowing for exactly the same situation as the EU's VAT rebate but with much less effect. ==See also==