Ichiro Suzuki
The next President of the United States shouts about imposing tariffs on all the goods coming into the U.S. Tariff rates vary depending on the country of origin, including 60% on imports from China and 25% from those on Canada and Mexico. Donald Trump thinks tariffs save American jobs, shielding workers from ‘unfair’ competition from foreign countries. With tariff revenues, income tax can be scrapped, he also believes though his proposal hasn’t gone that far yet. Trump’s Commerce Secretary pick Howard Lutnick blasts “125 years ago there was no income tax. There were only tariffs”, most unlikely words to be heard from the head of a Wall Street firm. (Income tax was introduced in the U.S. in 1913). With income tax and lower tariffs, the U.S. economy and those in the rest of the world experienced a meteoric rise in the 20th century, lifting hundreds of millions of people out of poverty and driving them into the middle class.
Without imports from other countries that are better at making certain goods than the U.S., American consumers would end up paying more for import substitutions in general. On top of it, trade enables other countries to thrive, eventually growing the number of foreign consumers that afford goods and services exported from the U.S. This is how the global trade system works over a long period of time, at least in theory. The basic workings of trade isn’t understood by the incoming President and his entourage, even if China may have intensely abused the free trade framework in recent decades. But that is not the main point here.
While insisting on goods that cross the U.S. border, Trump pays absolutely zero attention to services. For centuries, only goods crossed borders. Back then, trade of goods was almost the only thing that mattered for the health of the overall external account. Views fixated on goods is so archaic a thinking that they shouldn't be blasted loudly. Yet this is exactly what mercantilists do, and their argument appeals to a mass of people. Their thinking still resides in the 17th century when Spain and the Netherlands fought for naval supremacy. In fact, the U.S. has been doing spectacularly well on this front for decades, and especially in the 21st century. American tech titans have made their services de facto global standards in the age of the internet, where a small numbers of winners dominate the market. Profits in this field can rise exponentially, unlike goods trade. While East Asian and European countries run surpluses with the U.S. in trade of goods, they are all in deficit in service trade. Consumers in these regions shop at Amazon’s website, search on Google, listen to the music on their phones paying fees to Apple or Alphabet(Google). To many countries, the U.S.’s deficit on goods trade is made up for by service surplus, to a certain extent. Huge outflows of dollars into the coffers of tech titans are called ‘digital deficits’ by economists in Japan. In addition to tech, U.S. consulting firms have immense global presence, too, and foreign clients pay them for their service. On top of them, American contents are wildly popular outside the U.S., as a display of American soft power. Every time Japanese fans turn on their TVs to watch Shohei Ohtani, who was voted the NL MVP, playing, Guggenheim Baseball Management that owns the Los Angeles Dodgers is benefitting. The NBA’s soaring popularity around the world has made massive contribution to contents export from the U.S. Taylor Swift is also bringing in a huge amount of dollars to the U.S. So are Walt Disney and other Hollywood studios. (Of course, there have always been foreign contents that appealed to the American public, beginning with the Beatles in the old days to soccer’s Premier League today. Both of them made great contributions to the United Kingdom.)
Service trade, however, is obviously of no interest to Trump. This sector is doing so well that it’s not a problem, to begin with. Services essentially belong to Coastal elites, with little to do with red state workers. In the unlikely event of services facing difficulties in the future, it’s hard to expect much political noise. Few would say that American jobs are under threat because foreign countries are forcing the U.S. unfair competition, with contents created by U2, Korean dramas or Japanese anime (animated films).
Then there is tourism. Almost 100 million Americans left the country in 2023 on vacation, more than 50% higher than 66.5 million inbound tourists. The mighty U.S. dollar is making vacation abroad look very appealing to Americans. A huge imbalance in tourism, however, hasn’t become a political issue. No one in the hospitality industry has grieved that they are losing their business to Paris, Barcelona, Venice, Greek islands or Kyoto. Should they become vocal about the imbalance, would mercantilist politicians yell at the gap? To be consistent, they would have to try to close the gap by encouraging American people to have their vacation at home. There are no shortages of nice resorts in the U.S. though they don’t offer similar cultural experiences that foreign destinations do. Increased tourism at home would boost regional employment and consumption. To apply protectionism on tourism more consistently with goods trade, outgoing Americans might have to be charged a hefty exit fee at the border, on top of substantial duties on goods brought back from abroad. The U.S. might even subsidize domestic tourism as some countries did during the pandemic years in order to keep the hospitality industry from collapsing. Nothings, however, could be done on dollars they spend on foreign soil. On the other hand, no small number of hospitality workers are undocumented immigrants. Deporting them en masse could cause severe labor shortage that could make it harder for the industry to maintain the same level of service to the guests. Though Florida is a solid red state today, owners of hotels and restaurants wouldn’t be too happy to see their workers being deported.
There is no way China can be tolerated to Trump. China not only runs huge trade surpluses against the U.S., but also is independent of American tech titans. Alibaba, Huawei and Tencent account for 70% of cloud service market share in China. Worse, Google and Facebook are banned in the mainland. Chinese domestic competitors dominate e-commerce and cashless payment services on the mainland. They are solidly founded in the domestic Chinese market, leaving little room
for foreign competitors, American or not.
Offsetting goods and services surpluses very modestly, a disproportionately large number of young Chinese enter the United States to attend school at a time when the number of Americans visiting China is very limited. Chinese people visiting the U.S. are making great contribution to consumption in the U.S. Many of them pay full sticker price at an expensive school they attend. For the purpose of enforcing consistent protectionism, perhaps Chinese students might have to be barred from receiving scholarship.
With return of protectionism, there will be renewed efforts to build new factories on American soil. That doesn’t mean, however, sufficient job creation for those who voted for Trump. New factories and plants will be as automated as possible. While some are going to land a new well-paying job, new factories will have little to do with the vast majority of workers. On the other hand, persisting inflation caused by protectionism, even if it doesn’t go higher, is going to affect life of everyone regardless of whom he or she voted for.
About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.
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