Trade Wars and Systemic Crises
Trade war is an attempt to resolve, mitigate or delay the systemic crisis in one’s economy at the expense of the economies of other countries. Another financial instrument used to resolve a systemic crisis. Wrong tool for this purpose, isn't it?
In this case, a systemic crisis in some industry leads to its uncompetitiveness. For some fundamental reasons, domestic manufacturers cannot compete on equal terms with importers of similar goods.
The mechanism of a trade war is simple: put the importers at a disadvantage and thereby create preferences for own economy.
For example, government increases prices for imported goods in order to promote sales of goods of domestic producers and thereby increase their competitiveness. In this case, of course, it is important that the extra profit from sales of more expensive imported goods goes not to their producers, but, for example, to the state. To do this, customs tariffs on the imported goods are raised.
There are other ways to create an imbalance in trade relations “in the own favor”.
All this is done in order to create the conditions for development of domestic producers. Of course, another goal is declared: to provide our own consumers, citizens of the country, with the best goods on the best terms. Let’s see how the road to hell is paved with these good intentions.
Two Stories of Local Tariff Wars
In 1995, the owners of Russian automotive companies came to the President of Russia Boris Yeltsin and asked for help. The dominance of imported cars in the Russian market left the Russian automotive industry virtually without income: imports turned out to be cheaper, better, and more reliable. Companies did not have money to improve the cars. The domestic auto industry was at risk, it could not withstand fierce competition. They urgently needed help from the state! It would be great if the government could raise customs tariffs on car imports. This would make domestic cars more competitive in the market, and companies would have the funds to improve them.
Very logical arguments convinced Mr. Yeltsin. Tariffs were set, prices for imported cars jumped.
What did the Russian auto industry do? Immediately raised the prices of domestic cars in order to “equalize” them with imported ones. The owners of the company put extra money in their pockets. This money fell literally from the sky. No improvements were needed anymore.
Who paid for this feast? Naturally, the consumers did.
Well, yes, the smart reader could think, "Everything is clear: they were the corrupt oligarchs."
10 years later, in 2005, the CEOs of American automotive companies came to the US President George W. Bush and asked for help. The dominance of inexpensive and reliable Japanese and South Korean cars in the American market left the American automotive industry... Should I continue?
Quite logical arguments convinced Mr. Bush, and tariffs were set.
Alas, the American auto industry behaved in exactly the same way as the Russian one: they raised prices for their cars, and did not allocate a cent to improvement. The American consumer had to accept that and pay.
We, the Americans, have a special pride, no Russian corrupt oligarch is an example to us!
What to Do When Crisis-Caused Crash of Finances Happens? | Financial and Systemic Crises | USA: Systemic Crisis in Manufacturing