Trump Could Trigger a Trade War
Which could badly damage the economy. A business exec looks at Trump’s policies.
It may prove to be a good thing for the nation that what Donald Trump said yesterday has little bearing on what he will say or do tomorrow.
He has morphed positions so many times over his career and campaign that people no longer expect him to stick to previous rhetoric. He is the ultimate Plastic Man who can change his political shape to fit the demands of the moment.
In the few weeks since his election, he has softened his hardline campaign positions on The Wall, deportation of illegal immigrants, Clinton criminality, Obamacare, water boarding and separation of his business interests.
His gift for reversing field and getting away with inconsistency could be useful on trade issues. He will learn shortly that he is playing with the possibility of triggering a trade war and a subsequent recession.
A recession would be an ugly way to start a presidency.
There are many tricky wickets as he launches into renegotiating NAFTA, the three-way trade pact with Canada and Mexico. Reality one: The North American auto and appliance industries have made themselves competitive with manufacturers in Japan, China, India and Korea through automation, lean disciplines and less expensive labor in Mexico.
Now, let’s say that President Trump jacks the tariffs on imports from Mexico to 40%. Mexico will surely respond by upping tariffs by the same amount. That means auto and appliance prices will rise sharply, and North American manufacturers will lose business to Asian competitors.
I have a clear window to that world. Our company employs about 500 co-workers in Wisconsin and about 200 in Mexico. (We once had plants in China and India.) We mix and match the advantages of the two North American locations to win contracts. A good number of the jobs on both sides of the border will be at risk if we lose contracts because of higher tariff costs. Trade wars have consequences.
Political ideologues, such as America Firsters (what American would put America second?) may argue that high tariff barriers will bring jobs back from other countries, like Mexico, in the long term. I doubt it, especially if sales volumes fall across the global trading world. They did just that during the trade wars that followed the Great Depression.
Further complicating a shift of production back to the states is the hardness of the dollar. Our company, for example, lost business to Canadian competitors as the dollar surged 30% against the Canadian dollar over the last two years.
If tariff walls rise across North America, the anti-trade advisors in the Trump Administration will almost have to raise tariffs on imports from Asia as well. In short, Trump can’t just deal with NAFTA in isolation.
Let’s step back and get some proportionality into the analysis of what steps to take on trade. Our 2015 trade deficit with Mexico was $49 billion; it was $15 billion with Canada. Compare that to a 2015 trade deficit with China of $366 billion. The China deficit, which is expanding in 2016, is six times higher than the NAFTA combined deficit.
The point is obvious. China is more than half of the nation’s total deficit, so should not the Trumpians tackle the imbalance with China first?
Warren Buffet once wrote that something like a chit system should be deployed with China so we can get to more balanced trade with our biggest economic competitor. Under his proposal, China could only export more to the U.S. to the degree that it allows more U.S. imports.
That would be a starting point for a long list of foreign policy issues that need to be worked out with Chinese leaders. Trump is reputed to be a master of the art of the deal. The China challenge should be right in his sweet spot.
Such a bilateral deal should be a lot more manageable than the multilateral deals that he has railed against.
The Trump people have bandied about a tax on U.S. businesses that move jobs out of the country. But what if those companies made those moves to survive or stay profitable? What if they made those moves to position themselves to capture customers in those countries, with some of the content still coming from U.S. factories? What if a presence abroad is necessary to enable job-creating exports?
Here’s an example: My company exports several million dollars of parts to an Eastern European customers. At one point, the customer wanted us to set up a back-up production facility there. Should we be taxed more if we do that? This contract has added about 20 jobs in Wisconsin.
Trump could walk the talk on these issues. Many of his family’s branded products are produced overseas. He could bring that production back home to put American jobs first.
Also, as American golfers head to his courses in Scotland, Ireland and Dubai, they are in effect sending dollars overseas. It is a form of exports. Should his companies be taxed for sending jobs abroad?
That’s ludicrous, of course. American companies need to be players in the world of global business. It is reality that we live in a global economy.
Before our next president makes any big trade moves, he needs to get pragmatic. He needs to sit down with the American exporters and importers and devise a smart way to keep jobs here, such as lowering the U.S. corporate tax rate, such as dealing with China as the first order of trade business.