The Clear Case Today for Globalization Preserving National Security: Part 2​

By John D. McCown

Figure 1: Containers being loaded onto first Containership IdealX in 1956

The Ideal X experiment was just the beginning of more globalized, postwar world. The aftermath of World War II brought with it a growing view that the world needed to move towards freer trade.  In addition to the collective economic benefits that drove this, IBM was not alone in associating trade with peace.  As one would expect from IBM’s slogan, it was one of the first truly international companies.  The U.S. led in pushing for the establishment of a rules based trade organization that was focused on eliminating discriminatory treatment.  The General Agreement on Tariffs and Trade (GATT) was formed with 23 nations in 1947.  GATT was also thought to assure a better chance for peace in the aftermath of the war, a view affirmed by an actual catalyst to the war we will detail later.  GATT’s goal of minimizing barriers to trade and providing a system for arbitrating disputes was largely successful and it was expanded and refined over the years.  Its functions were absorbed into the World Trade Organization (WTO) when that successor organization was created in 1995 with 125 nations as signatories.  A key addition in 2001 to the WTO was China.  When the WTO was formed, the average global tariff rate was 6.4% and it consistently declined in subsequent years to 2.6% in 2017.

In 2017 we were close to the free trade world that President Wilson advocated for more than a century ago.  The volume of trade and the collective benefits it was producing were far more than David Ricardo could have ever envisioned more than two centuries ago.  In 2018, a leading conservative Washington DC based think tank began the Human Progress project, an effort geared towards documenting the major advances throughout history.  A part of that was announcing what their research called the Heroes of Progress whose individual efforts meaningfully advanced humanity.  Over two years on a biweekly basis they profiled fifty such individuals.  People such as Johannes Gutenberg, the inventor of the printing press, along with medical innovators Jonas Salk and Louis Pasteur were among their Heroes of Progress.  Their 17th Hero of Progress was Malcom McLean.  In his profile they said his invention of container shipping sharply reduced shipping costs and that significantly increased world trade that in turn lifted hundreds of millions of people out of poverty.  The only other businessperson listed among the Heroes of Progress was Bill Gates.

The near free trade environment that existed was disrupted in 2018 when trade tensions between the U.S. and China erupted.  President Trump had campaigned on the need for more tariffs to reduce imports from China.  Additional tariffs were imposed by the U.S., which kicked off a series of further tariffs and retaliations.  I followed this as it developed in my monthly reports on U.S. container volume, as China is the origin for more than 40% of our containers.  After some initial reductions, my analysis is that it is difficult to see much impact today, as inbound volume is higher than before trade tensions increased but outbound volume is lower.  My interpretation of the actual data is that the tariffs have been largely ineffective at reducing imports from China, but they have taken a bite out of what were previously exports to China.  In other words, they have worked the opposite of how they were intended to work.  This is affirmed in part by the revenue the U.S. is now collecting from tariffs.

Today, the overall effective tariff rate on U.S. imports from China based on the average rate times the goods subject to tariffs is 12.8%, more than four times the 3.0% average for rest of world imports.  Federal government revenue from tariffs in 2023 was $99 billion, an increase of 183% from $35 billion in 2017 and 2.2% of total federal government revenue of $4.440 trillion.  All of that difference can be ascribed to higher tariffs on imports from China.  President Biden has maintained the tariffs enacted by President Trump.  In addition to political considerations, it is easier to maintain the status quo given the larger deficit that would occur without $64 billion of annual tariff income related to imports from China.

China’s export of goods and services represents 20.7% of GDP.  Because exports are heavily skewed to goods representing 89.4% of the total and that industrial activity represents 38.3% of GDP, that translates into exports of goods representing 48.3% of industrial activity.  Anybody who thinks that additional tariffs that put a meaningful dent into that significant part of the Chinese economy would never result in actions that go beyond retaliatory tariffs is not performing a complete analysis.

There is a relevant historical example of a trade policy change that presaged something that went well beyond trade retaliation.  The U.S. was the main supplier to Japan of oil, steel and other critical commodities.  In mid-1941, the U.S. instituted a full embargo on exports to Japan.  The cutoff of oil, which was followed by U.S. allies, put Japan in an untenable position.  Less than six months later, Japan attacked Pearl Harbor and the U.S. was involved in World War II.  The motivation for the U.S. embargo is debated, but it is clear that it was a major catalyst for Japan deciding to go to war with the U.S.   That was evident in a communication from Japan’s foreign minister after the embargo went into effect.

It is extraordinary that in 2024 the presumptive Republican nominee for President has the illogical views that he has on trade.  You have to go back 128 years to William Jennings Bryan when a candidate was pushing as radical a change in existing economic policy.  At least there was some rationality in what Mr. Bryan was advocating.  President Trump believes that the exporting country pays the tariffs on products imported into the U.S.  He equates a trade deficit with a transfer of value from the U.S. to another country in the same amount, forgetting that in such transactions the consumer is obtaining a tangible product that he or she values more than the cash to pay for it.  President Trump’s positions have no support among economists and people that know trade.  In addition, the policies coming out of such wrongheaded views take away the freedom and right of U.S. consumers to buy the products they actually want to buy.

While there is a belief among some that the U.S. engages in too much trade and that activity has grown too fast in recent decades, neither of those suppositions are borne out by the facts.  Total U.S. trade is now equivalent to 27% of U.S. GDP, up 145% from 11% in 1970.  In contrast, world trade is now 63% of global GDP, up 152% from 25% in 1970.

President Trump has said if elected he would impose a 60% tariff on everything coming from China and a 10% tariff on all other imports.  Based on the actual numbers, in the event that such an action had a de minimis effect on trade volume, it would also be importing hundreds of billions annually in inflation.  Walmart, Home Depot and Target are the largest importers of containers into the U.S., so shoppers there would be among those absorbing the costs, making the tariffs a regressive tax in addition to being highly inflationary.  Tariffs at such a level, however, would effect trade volume and because of that guarantee retaliatory tariffs, while still importing significant inflation with the imports that continued.  The last round resulted in a more adverse impact on export volume and that may occur again.  One can run out of adjectives describing what sort of economic ramifications that this series of events could lead to.  The head of the WTO said earlier this week that Trump’s plan to raise tariffs would lead to a “free for all” with other nations retaliating in kind.

But as Draconian as the economic consequences could be, what concerns me the most is what the non-economic consequences could be.  Here we need look no further than what Japan did shortly after the U.S. cutoff exports of oil.  Would not action the U.S. took that put a significant dent into half of the industrial activity in China along with the jobs that entails put China in an untenable situation?

There is a sad irony in the fact that the country that informed the world about the advantages of trade and practiced what it preached for more than two hundred years itself recently lost its way.  In a new study earlier this year, Goldman Sachs concluded that Brexit damaged the U.K. economy with higher inflation and much weaker growth.  After the political chest-thumping there was over, all that they will have is long term pain.

The U.K. should have known better.  The U.S. knows better today.  Whether it is what experts tells us or what history tells us, there is clear evidence that ratcheting up tariffs makes no economic sense for the country doing so.  Even more experts need to come out and point out the circular firing squad aspect in terms of economic consequences from such action.  As bad as that would be, there is reason to believe the blunt irrationality of doing so could also be a catalyst for an actual shooting war.

If there was ever a “heads we loose, tails we loose even more” world stage situation today, it is the reckless idea of the U.S. imposing 60% tariffs on everything coming from China and 10% on all other imports.

 

John D. McCown is a Non-Resident Senior Fellow at the Center for Maritime Strategy.  Mr. McCown has four decades of experience related to the shipping industry and his analysis focuses on the intersection of merchant shipping and maritime commerce with national security.

 

 

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The views expressed in this piece are the sole opinions of the author and do not necessarily reflect those of the Center for Maritime Strategy or other institutions listed.