If This Is What “America First” Means, Then Prepare for Global Economic Collapse
When Donald Trump started talking about enforcing tariffs and rebuilding trade barriers during his presidential campaign, few believed him. That is starting to change now, and the world fears he will do just that. By rewriting the rules of international commerce, Trump is navigating uncharted waters.
The world economy could grind to a halt and investors will respond with fear. They will trigger a trade war and a massive stock market crash as the world economy will inevitably take a dip on both sides of the Atlantic and the Pacific.
Trump focused on Mexico and China at the time, but now he’s concentrating on Europe. His warnings appear to have fallen on deaf ears. Indeed, most world political and economic leaders may have missed one of the central tenets of Trump’s protectionism.
The U.S. president seems intent on breaking the very organizations and treaties that his predecessors helped set up. Trump is no fan of free-trade agreements like the North American Free Trade Agreement (NAFTA) or organizations like the World Trade Organization (WTO). Both—and others like them—promote the abolition of trade duties and tariffs. Trump wants to bring these back, reversing decades of U.S. trade policies. Stock markets and the global economy will experience shock.
The current focus is on Trump signing a law that would impose a 25% duty on imports of steel and 10% on aluminum. Though the initial areas affected appear to be Canada, Mexico, and the European Union (EU), the main target is clearly China—and possibly even Japan. As for Europe, the measures will have more of a warning effect. But there’s no telling how far Trump will go.
Trump’s Gamble Against the WTO
The U.S. president is demanding that Europe open itself more to American products, especially American food products like beef. The Europeans have laws banning the use of certain hormones, which make it all but impossible to agree to Trump’s terms. In turn, Trump can play a number of cards, imposing duties on EU-made automobiles, textiles, and foods worth billions of dollars.
Another area where a trade war is likely is aerospace. This could be damaging to the biggest U.S. exporter in that sector: Boeing Co (NYSE:BA). Trump’s focus on aluminum and steel would hit France and Germany the most—in the context of the EU. That’s no accident. Washington has long complained to the WTO about European subsidies to aerospace giant Airbus SE (EPA:AIR).
Boeing and the U.S. government claim that these subsidies have helped Airbus outmaneuver the Seattle-based company in key contracts. It does not matter to Trump that Europe can counter the argument, noting that the billions of dollars in military contracts in which Boeing partakes constitute a form of subsidy in themselves.
Meanwhile, as President of France Emmanuel Macron and German Chancellor Angela Merkel discuss Trump’s tariffs and the economic risks that they cause, the WTO risks disintegration.
How could the WTO survive if the world’s biggest economy should pull out? The United States is still the biggest importer of Chinese products. The only way the WTO would allow Trump to impose his tariffs is if Washington can prove that the tariffs are intended to increase fairness. Should the WTO prove that the tariffs intend to shut off their borders to trade, it would effectively terminate the organization and reverse decades of policy.
Would the United States Benefit from Trump’s Tariffs?
Whatever else it achieves, Trump’s trade war won’t leave any winners. It will, however, cause economic disasters in China, Europe and—most of all—the United States. Wall Street and other major stock exchanges will be the first to pay for Trump’s tariffs with a stock market crash.
Trump’s tariffs risk nothing short of triggering a new global recession. But there will be a period of confusion first. Nobody will know how to react, and that uncertainty will be the major obstacle that investors will have to face both in the United States and in the rest of the world.
Trump claims that he would prefer negotiating bilateral trade agreements. This is the opposite of what the WTO intended to achieve: an easing of trade barriers. China may have the most to lose from Trump’s economic provocations. Therefore, it would be foolish to assume that Beijing would simply take this in stride. China is a power on the ascendant; it will retaliate.
In effect, Trump’s steel and aluminum tariffs are salvos of the coming trade war with China. Trump’s principles are understandable. The president, as he has proven on more than one occasion now, intends to follow his electoral program to the letter. Restoring the almost-forgotten tool of the tariff represents Trump’s goal of protecting American national security from unfair—and unjust—trade practices (what he accuses China of practicing).
Trump accuses China of producing at costs that are too low, making it impossible for others to compete. Trump’s focus on steel and aluminum is hardly casual. He’s thinking of the 2018 and 2020 elections. Having failed to appease Hillary Clinton voters and the liberal establishment, Trump has decided to focus on those who voted for him. These included thousands of manufacturing and metal workers, who want to see a revived U.S. industrial manufacturing sector.
The blue-collar workers of Pennsylvania are among them.
In a similar approach, the pressure that Trump is applying against the EU aims to please U.S. agricultural workers and the massive food production sector. President Barack Obama himself demanded that the EU scrap the import regulations on hormone-filled meat. Trump has not mentioned this specifically, but the closer we get to the 2018 mid-terms, the more we can expect to start hearing about “bad EU regulators” blocking imports of American meats.
While China—which just approved much greater powers to its president—has yet to announce how it will respond to the U.S., the EU hasn’t wasted time. In response to U.S. tariffs, Europe will begin by imposing some $3.5 billion in duties on products made where Trump voters typically reside: the “red states.” The affected products are largely agricultural at first, from tobacco to cranberries. (Source: “Trump digs in on steel, aluminum tariffs,” Politico, March 7, 2018.)
Trump is taking many risks. The fact that both Republicans and Democrats disagree with the tariffs could create a split. In a rare example of bipartisan accord, many U.S. lawmakers fear that Trump is starting a trade war that could lead to economic collapse. The world could descend into a global trade war in response to Trump’s salvos.
Trade wars could produce some short-term advantages, but the White House’s unilateral approach is the wrong solution. Ultimately, the U.S. president could end up hurting the U.S. more than any of his foreign individual or multilateral targets. The United States risks being gradually isolated from the rest of the world.
This is where Trump’s risk-taking becomes literally a gamble. Trump can pull out of agreements, but he can’t prevent the EU, China, and Japan from responding in kind, coming closer through agreements that keep the U.S. out. Canada and Mexico can refocus their energies on dealing with the rest of South America, bypassing the U.S.
In fact, 107 Republican Congress members have written to Trump, expressing concern that his trade war will slow U.S. economic growth. (Source: “107 House Republicans send letter to Trump asking him not to do his tariff plan,” CNBC, March 7, 2018.)
It’s essential that the United States focuses on improving its gross domestic product (GDP). Growth is necessary to make sure that Trump’s ambitious corporate tax cuts work.
The risk is that many companies will use their tax savings to buy back stocks, fueling an artificial sense of optimism in the stock markets. Establishing the policies that slow growth, there will also be fewer taxes going to the Feds. In other words, Trump’s ambitious infrastructure plan risks sinking before it’s even launched.