Influencers Opinion

Trade wars stunt economic growth. And California is starting to feel the pain

Note to readers: Each week through November 2019, a selection of our 101 California Influencers answers a question that is critical to California’s future. Topics include education, healthcare, environment, housing and economic growth. One influencer each week is also invited to write a column that takes a closer look at the issue.

Get weekly updates on the issues that matter to you: Sign up for the California Influencers newsletter here.

There is evidence that President Donald Trump’s “trade wars” have resulted in significant negative effects not only for the U.S. economy and its consumers, but for the global economy at large.

A report just released this month by the International Monetary Fund emphasizes how the sluggish growth of 2019 is driven by the slowdown in manufacturing and global trade. Trade volume is at the weakest level since 2012, where there was just 1 percent growth in the first half of 2019. The report says a major factor explaining this global slowdown is the uncertainty created by Trump’s trade wars.

In fact, a recent economic analysis shows that the tariffs imposed on China by the U.S. fell entirely on domestic consumers and resulted in a “reduction of U.S. real income of $1.4 billion per month by the end of 2018.” Others emphasize how the trade war is hurting global supply-chain networks, where the tariffs affect intermediate goods that are later re-exported to third countries, leading to higher prices for consumers around the world.

Opinion

When it comes to global economic trade, it is impossible to substantiate the overtly simplistic views that the current administration has used to support this erratic policy. The world is simply too interconnected and too complex to think a “trade war” is something you can win or lose. In fact, it is broadly documented that protectionist policies more than likely result in everyone losing. The signs of global slowdown certainly seem to reflect everybody is losing, especially California.

The reduction of exports from California to China and capital inflows from China to California will lead to lower economic growth in the state. Trade theory emphasizes that countries should export the goods for which they have a comparative advantage. In the context of California, producers in this state have a comparative advantage producing certain goods because they have a lower opportunity cost than producers in other countries (an opportunity cost refers to the cost of what we give up in order to produce that specific good).

Differences in opportunity costs are explained by differences in efficiency (i.e. technology) and resource endowments. But the tariffs take away the comparative advantage of producers in California given that the price of their goods is increased due to the tariff.

Because Mexico, Canada and China are the top three destinations of California exports, according to data from the U.S. Census Bureau in 2018, and there are trade tensions between the U.S. and these countries, the future of California exports is uncertain. Exports from California to China were around 9 percent of total exports for the state in the last years. Thus, if trade tensions continue, we should expect to see a reduction on exports to China, which represent an important share of the total exports of the state.

LuisaBlanco.jpg
LuisaBlanco
one of the top receivers of Foreign Direct Investment US-China Investment Project

The future of California trade seems gloomy, and reaching a trade deal between Trump and Chinese President Xi Jinping looks a little more complicated now that the Asia-Pacific Economic Cooperation summit in Chile got canceled, given that the plan was to sign a deal there.

Trade theory and past experience tell us that trade wars are unlikely to result in an overall net gain for the parties involved. Thus, world leaders should make decisions on trade policy taking into consideration the unintended consequences that a trade war has on the wellbeing of the people they lead.

Luisa Blanco Raynal is an associate professor of economics and public policy at Pepperdine University. She is also a Jobs and Economic influencer for McClatchy’s California Influencer series.
Related stories from San Luis Obispo Tribune

  Comments