If trade wars are easy to win, can Italy have its share?

May 27, 2019

Claudio Colacurcio, Elena Salmaso

For a country with a strong international vocation like ours, the new course is certainly an element of concern

 

14 months and almost 50000 tweets ago, a post by now popular [1] by President Donald Trump pulled the trigger of a new season of the American trade policy. Since then, the Twitter account of the US President devoted roughly three tweets per week to US-China trade relations and to the difficult negotiation process involving the two governments. The controversy went beyond threats on social media (in this particular case, tweets), moving rapidly from words to deeds.

The American administration imposed new tariffs on $ 250 billion worth of Chinese goods (accounting for 46% of total import) in three different tranches. Following a typical tit for tat scheme between countries, it did not take long before Beijing’s response arrived, and $ 60 billion of American goods to China (39% of the flow) experienced rising tariffs to the same extent. A closer look at the sectors involved reveals that composition reflects the export specialization of the two countries, with a remarkable weight of electronics and electrical equipment for Chinese flows to USA, and machinery and chemicals for the American ones to China. 

 
Figure 1 Chinese exports to USA subject to new tariffs, by sector (2018 values in million dollars and share on total amount)
Chinese exports to USA subject to new tariffs, by sector (2018 values in million dollars and share on total amount)
 
Figure 2 US exports to China subject to new duties by sector (values 2018 in million dollars and share in total)
US exports to China subject to new tariffs, by sector (2018 values in million dollars and share on total amount)
 

Many times in these pages, it was highlighted how the confrontation on trade hides a much wider rivalry, which concerns the development and the protection of cutting-edge technology, the procurement of raw materials, the representation in multilateral organizations, and, more in general, the strategic competition between the two most powerful economies on the geopolitical scenario.

Other studies stressed the questionable effectiveness by tariffs themselves, and investigated who bears their burden. Despite President Trump proudly defined himself the tariff man, referring to the increase in income through the tariffs, it seems that tax man would probably be a more appropriate nickname; indeed, according to these sources, it appears that the tariff incidence has fallen largely on American firms and consumers.

Potential gain of market shares by countries at the edge of the Chinese-American conflict is a topic that raised less attention. Indeed, the underlying idea is that only a small share of the Chinese exports subject to US tariffs will be captured by domestic firms (UNCTAD  estimates about 6%), and, therefore, the increase in tariffs towards only one competitor would offer growth opportunities to the others. For instance, the substitution effect in both markets is estimate to be worth 10 billion dollars for Italy (almost 2% of the national export in 2018). This (hypothetical) value would imply a full-fledged competitive displacement of production from the competitor subject to the tariffs, to the others in accordance with their relative shares in each sector. Machinery, fashion, furniture and construction materials would benefit the most from the deprivation of the Chinese competition in the American market, reflecting the yet considerable competitive positioning of Italian producers and the fierce competition with the Asiatic power. The same sectors, together with intermediate sectors (metals, chemicals, rubber and plastics), would benefit from a similar displacement of American producers in the Chinese market.  

 
Figure 3 Potential gain of italian export in USA, by sector (2018 values in thousands dollars)
 
Figure 4 Potential gain of italian export in China, by sector (2018 values in thousands dollars)
 

Nevertheless, just as the idea that international trade is a zero-sum game between foreign and domestic producers, the idea that distortive factors to free trade may translate into opportunities represents an optical illusion. Perfect substitution among suppliers is, as a matter of fact, a very simplistic hypothesis of trade relations in the modern economy. Indeed, the flows of goods follow a value chain- based logic, with production and distribution that are organized on a global level and where the final price is only one of the many factors determining the geography of trade.

Moreover, an analysis on Italian average unit value of exports with respect to the competitor subject to tariffs in both countries, reveals how the new trade barriers would hardly fill their respective gaps. Especially on the American market, the Chinese average unit values in sectors such as fashion, furniture and building products, range between 1/10 and one half of the Italian ones. Thus, an increase of 25 points would barely level out values, which in reality reflect huge differences in quality and in segments coverage between the two competitors. As far as regards the opportunities on the Chinese market, Italian firms compete on similar quality levels with the American ones only in furniture, while the differences in the other sectors seems to signal a mismatch in terms of specialization and hence a competitive positioning hardly influenced by relative prices. 

Before providing quantification, a more general consideration is required for a full understanding of the effects on Italy in a trade war scenario. The US-China tension is not an isolated case, but instead it is only the most salient trickle of a river in flood. In the same sectors penalized by the tariffs, Italian firms are experiencing non-tariff barriers in both markets, to some extent even more distortive than customs duties (non-tariff measures are especially penalizing for small and medium exporters). According to the archive of non-tariff measures recorded by the Global Trade Alert since 2009 financial crisis, the trade-discriminatory actions are globally on the rise; in the American market, European producers faced new barriers in the value chains of metals, fashion, and agri-food; on the other side of the Pacific, machinery and fashion are the most penalized sectors.

Not only these artificial barriers to free trade might jeopardize the Italian potential on the two markets, but, also, their growing number on a global scale (long before Trump's rise to power) is clear evidence that the threat of protectionism cannot be confined to the initiatives of an individual (country or president). However, the role played by the first world power in this process is a critical factor, for both the absolute value of the flows involved, and its signaling value. Using the words of the Nobel Prize-winning Joseph Stiglitz, the United States has moved from a position of leadership in the creation of a rules-based international system to a position of leadership in its destruction and the creation of a regime of global protectionism. A new controversial view on trade is emerging. Instead of a natural outcome of the modern specialization process, trade unbalances in one industry appears (wrongly) as a mistake to change; with a correction that implies barriers to trade rather than active industrial policies aimed at strengthening producers’ competitiveness. 

 
Figure 5 Number of products subject to non-tariff measures in USA in 2019, by sector
 
Fig. 6 Number of products subject to non-tariff measures in China in 2019, by sector
 

A country with a strong export oriented economy like Italy (exports account for 1/3 of GDP and Italy ranks 6th in terms of trade surplus in manufacturing) is certainly concerned by the new direction taken by the debate on trade. The extent of this new course does not only attains to the direct effect of individual initiatives, but especially on the indirect ones resulting from a perspective on trade as such. Focusing on one of the most debated matters in the confrontation between United States and Europe, the automotive sector, a forced reduction of imports would not only iron out the direct export on the American market (amounting to nearly $ 6 billion for Italy in 2018), but it would also penalize over a thousand firms that through supply relationships with European producers contribute to the EU automotive value chain, responsible for over $ 60 billion worth of exports. 

Thus, the hope for Italian businesses is that American Administration and his followers worldwide will act somehow similar to the beloved social network. By allowing more characters, Twitter has recently chosen a more complete information over sensational posts. Similarly, new protectionists should overcome a too simplistic perspective of global mechanism. They might instead respond to the factual unbalances of modern globalization through solutions that, even though less effective in terms of communication, will keep promoting the positive-sum game that the free movement of goods, people and ideas is able to produce on the economy, and most importantly, on global welfare.

 
 
[1] “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”
 
 
Read All