Jul 3, 2018

We Have More to Lose From Trade Retaliation Than We Think

Trade Retaliation Could Target Not Only US Goods Exports, but Services and Foreign Affiliate Sales
Daniel Griswold Director of Trade and Immigration

Motorcycle maker Harley-Davidson has drawn fire from President Trump for its decision to move production offshore to escape retaliatory tariffs from the European Union. The episode exposes a new level of vulnerability for the US economy in the escalating trade wars that the president promised would be easy to win.

In President Trump’s view, the United States is bound to win a trade war because we import $800 billion more in goods each year than we export, and thus we have a lot more targets to shoot at with our tariffs. This approach assumes that US tariffs only hurt foreign producers, but in reality they inflict just as much (if not more) economic pain on Americans. US import tariffs are a direct tax on American consumers and producers—with Harley-Davidson being one of the many victims of the administration’s recent duties on imported steel and aluminum.

Another weakness of the president’s approach is his exclusive focus on goods. More than one-quarter of US two-way trade—and one third of US exports—are cross-border services. Foreign governments looking to retaliate against the United States can not only target the $2.4 trillion in goods we export each year, from motorcycles to soybeans, but also the $800 billion in services we export. In contrast to goods trade, the United States routinely runs an annual surplus in services trade of $250 billion.

Beyond exports, American multinational firms sell an even greater value of US-branded goods and services through their foreign-owned affiliates. In 2015, the most recent year that full data is available, US multinational companies sold $5.7 trillion in goods and services through their majority-owned affiliates in other countries. And only a small percentage of those sales were imported back to the United States. More than 93 percent of the goods and services produced by our affiliates abroad were sold to customers abroad.

Those sales abroad through US-owned affiliates produce profits for the parent company back in the United States. The Commerce Department, in an annual exercise, recalculates the US current account balance using what it calls “an ownership-based framework.” This considers not only the balance in goods trade and the balance in services trade, but also the balance in net income produced by sales through foreign affiliates.

Using this broader measure of trade cuts the US trade deficit by more than half. In 2016, the people of the United States imported $505 billion more in goods and services than they exported. But we also ran a large surplus in the income generated by sales of goods and services through foreign-owned affiliates. According to the Commerce Department, net income receipts of US parents from sales by their foreign affiliates totaled $430 billion, while net income payments to foreign parents from sales by their US affiliates totaled a much smaller $171 billion—for a US surplus on income from affiliate sales of $259 billion. By the president’s own mercantilist logic, the United States has much to lose if our foreign investments and the income they generate are put into jeopardy by retaliation by other governments.    

When we consider the totality of US commerce with the rest of the world, President Trump’s guarantee that we will win a trade war becomes a virtual certainty that we and our trading partners will all lose.

Photo credit: Nati Harnik/AP/REX/Shutterstock

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