Trade and price wars

The US Presidential decision the impose tariffs on steel and aluminium imports at the beginning of March threw a rock into the still water. It would be convenient to deem the action as another short-sighted protectionist move, or as a part of the political agenda to favour the American Rust Belt. As no political move exists in vacuum, there is a high probability that those claims stand as well, and it was a ‘two birds with one stone’ action. However, there is an additional factor which must be weighted in to understand the circumstances and the lead-up to the imposition.

The clash of world ideologies is far from being over. Even though the number of democratic countries has more than tripled during the post-WW2 era, the political ideology rivalry – which shaped the 20th century – has arrived to yet another turn. The liberalization wave of the late ’80s and early ’90s brought another 1.2 billion people’s lives under democratic insititutions, and a similar number of people – not necessarily from the same groups – has entered the global labourforce as well.

The two opposing sides are the pluralist market economies and their centrally planned–or at least closely supervised–peers, with the difference also mirrored in their political institutions. During the second half of the 20th century it seemed that the trend will lead to the dominance of market economies. The inefficiency of central planning in adapting to external shocks made them fall behind in the arms-race and economic competition. These inefficiencies eventually rattled into the political system. The West saw an opportunity in this socio-economic connection. Supported by the Friedmanian perspective of economics, the political leadership’s new agenda was to trade with a broad segment of socialist and semi-socialist systems, which would create middle-classes who will push for economic reforms and pluralism from the inside.

The theory didn’t work out as planned though. China, the focus of this instance, has recently moved away from any form of democratization, and back towards complete authoritarianism. Unfortunately, this is not only a local political issue. It also affects world trade, and indirectly even domestic politics of other sovereign countries. Party leadership, cronyism, and state-planned economics all have their influence on supply chains and business decisions. It only makes the situation worse if the Party has a mercantilist ideology where they view the global economy as a zero sum game.

Let’s take the example of the Chinese steel industry. The Communist Party’s political agenda is to conserve jobs in the heavy industry to satisfy fullest employment possible, and to obtain foreign assets by exporting extra capacity. The leadership has several incentives – let it be personal or ideological – to subsidise the sector in order to meet its goals. However, direct subsidies are not allowed according to WTO rules, which China more or less tries to meet to create the illusion of a benevolent, inward focusing developing market. Hence an alternative way must be found.

This alternative is using political power to pressure the financial sector to issue below market rate loans for favoured producers. Historically the only form of savings were bank deposits, making cheap financing more easily available. However, nowadays with increased financial sophistication within the system more direct supervision is needed, bringing the central planning measures to the surface. Practically speaking, the banking sector passes a share of its profit to the exporting industries, which creates de facto subsidies. As China is not playing according to the rules, it is less of a surprise if the US wants to use its sticks where the carrots failed.

Even though it seems unfair in the short term, the long term implications are just as bad. Firstly, artificially adjusting market prices leads to longer term inefficiencies. The profits missing from the banking sector will obstruct credit growth, and reduce the loss absorbtion capacity of the financial institutions. Secondly, favouring certain sectors create a ‘Dutch disease’-like situation, where (unnaturally) efficient sectors absorb capital and labour from the system, thus creating a headwind for other industries. Lastly, such political agendas obstruct creative-destruction in order to keep employment high and ‘reliable’ businessmen in leading positions. Unfortunately we are all dead in the long-run, as Keynes wisely concluded before, hence waiting for these trends to take effect might not worth the effort.