Donald Trump was very clear about his core economic policy before the election, when he argued that “To me, the most beautiful word in the dictionary is tariff”. At the time, many argued that either:
(a) “He doesn’t really mean it” or that
(b) Tariffs were only “a negotiating tool from the world’s greatest deal-maker”.
Unsurprisingly, however, it turns out that he did mean it.
Also unsurprisingly, the European Union has already worked out that US polymer exports could be a good target for retaliation.
A potential 25% tariff on polyethylene being discussed as part of the package.
US ETHYLENE-BASED EXPORTS HAVE SEEN VAST EXPANSION SINCE 2018
USA ETHYLENE EQUIVALENT TRADE FLOWS
2006 – 2024, MILLION TONNES
The chart highlights the potential scale of any tariff war, based on Trade Data Monitor data. It shows the vast expansion of US ethylene-based exports since the shale revolution began in 2018:
- They are up more than three-fold on a net basis, from 3.6 million tonnes in 2017 to 15.3 million tonnes last year
- And Europe has seen the largest increase in imports, in both tonnes and percentage
- Volume has risen more than five-fold from 0.5 million tonnes to 3.1 million tonnes
POLYETHYLENE EXPORTS HAVE BEEN LEADING THE CHARGE
USA POLYETHYLENE NET EXPORT/IMPORT TRADE
2006 – 2024
As the second chart shows, polyethylene (PE) accounts for 2 million tonnes of the increase, highlighting the rationale for the EU’s proposed retaliation.
Unfortunately, this imbalance means US producers stand to suffer if the trade war goes ahead.
President Trump is of course right that global trade has been increasingly unbalanced since 2008’s subprime crisis.
But this is not because of trade with America’s traditional allies in N America and Europe.
Rather, it is due to major policy mistakes in China and the USA:
- China responded to the crisis by ramping up export-based manufacturing, and its ’subprime on steroids’ property bubble to keep people employed
- The USA responded to the crisis with major stimulus programmes, to keep asset prices and consumption moving ahead
As a result, China’s export surplus is now >1.5% of global GDP, double 2007’s level. The US deficit is essentially its mirror image, at a deficit of 1.5%.
THE TARIFF WAR IS TREATING SYMPTOMS RATHER THAN CAUSES
The real issue is the structural imbalances in world trade created by these Chinese and US policies. Trade, after all, balances on a global basis, not bilaterally between individual countries.
On a structural basis, the core problems are easy to describe:
- China has become addicted to unrealistic GDP growth targets, which it meets by debt-fuelled, export-led growth in manufacturing
- The USA has become addicted to debt-fuelled consumer-led growth, and so its household and national debt has risen to unsustainable levels
These problems have built up over the past 20 years, and so tackling them is never going to be easy.
But ironically, the main positive aspect of a tariff war may be in Europe. It is creating the ‘once-in-a-lifetime’ shock that was needed to force through long-needed structural change.
Meanwhile from a US perspective, the tariff war will increase domestic inflation and reduce economic growth.
And producers may well end up having to pay the tariffs themselves, due to the absence of other markets.
They will also accelerate the move away from globalisation. This will directly harm the export-dependent US producers they were theoretically meant to “protect”.
European producers, however, may end up seeing major benefits. Local demand is clearly set for major expansion as a result of the recent massive German and EU spending packages, discussed last week.
And competition will move to a more ‘local-for-local’ basis as tariffs remove the basis for globalisation.
We may even see Europe thanking Trump for helping to ‘Make Europe Great Again!’