Friday, December 30, 2016

Economy: Should We Be Afraid Of Trump` s Trade War?

(Drivebycuriosity) - Will President Trump start a global trade war? He made a lot of threats against China, Mexico and other foreign countries and announced high tariffs to "protect" the American economy.  History shows that trade wars often escalate. In the year 1930 the US implied high tariffs on over 20,000 imported goods (Smoot-Hawley Tariff Act) which provoked countermeasures by England & France. As a result global trade imploded and the recession became the Great Depression (smoot-hawley).

I think that Trump could cause a lot of damage by implementing high tariffs and other anti-trade measures, but a return of the Great Depression has a very low probability. Today`s global economy is much more robust than in the 1930s because it stands on more pillars: US, European Union, UK, Japan, China, India & many more emerging markets. Today the rest of the world is much stronger - and better connected - than it was in the 1930s and it depends much less on the American economy.

I believe a trade war will harm the US most, especially low income groups. Americans would have to pay much higher prices for many goods. Low income families would have a lower standard of living because they would have to spend much more for apparel, hardware, toys and multiple other imported goods and could therefore purchase less other goods & services. A trade war would also reduce competition on the US markets. If American companies don´t have to compete with foreign companies they gain monopoly power. Then they could hike their prices further and reduce the quality of their products & services because their customers cannot change to foreign products.

China and other countries would certainly respond to new American trade barriers and would restrict their American imports as well. They did it before. Not long after Barack Obama took office, US trade and commerce authorities announced a 35% import tariff on Chinese tires. In response, China took retaliatory steps of imposing tariffs on US chicken and automotive products. Both China and the US suffered losses as a result. From then on, the Obama administration waged no trade war against China.

If Trump goes into a full fledged trade war, American companies could lose their oversea markets. Beijing could replace Boeing orders by Airbus, halt purchases of US cars and iPhones and reduce the massive imports of US pork, corn, soybean & maize. According to Bloomberg US multinational corporations - including Starbucks & McDonald`s - have more than $228 billion invested in China (bloomberg).  Many US companies & farmers would lose customers and would be forced to fire employees. Many Americans would lose jobs, income & purchasing power.

I assume that China, Trump`s main enemy, would be hurt much less.  China with about 1.3 billion people is much stronger than Europe was in the 1930s. The United States absorbs only 16% of Chinese exports (nytimes). The huge country is already transforming into a modern economy. China is reducing her dependence on exports & manufacturing and is becoming a modern society which is based on domestic demand and services like the US. Chinese retail sales are already growing 10.8% and will so compensate a part of missing exports at least. Alibaba (E-Commerce), Xiaomi (electronics)  and other companies, who cater the domestic market, are rising fast. A trade war would accelerate this transformation process. Beijing can compensate at least some shrinking US demand by stimulating domestic demand through reducing taxes & less regulation, lower interest rates and by pumping more money into the domestic economy (infrastructure investments).

If Trump really starts a global trade war the rest of the world could respond by reducing existing tariffs & other trade barriers and could trade more with each other. No country is a free trader. China could compensate reduced exports to the US by selling more to the rest of Asia, to Europe & to Latin America. Beijing is already talking with Japan & South Korea about a trade pact (reuters). A trade war inflicted by Trump could foster these attempts and Australia, European Union, UK, Mexico and other Latin American countries might join.

If Trump would start a trade war he certainly would throw a lot of sand into the gearing of the global economy. He certainly would dampen global growth. But the diminished global relevance of the US would limit the damage. And the rest of world could even limit the damage by trading more freely with each other, for instance by creating an European-Asian free trade area. America would lose this trade war, would weaken her economy, impoverish low income groups and get insulated.  Does Trump really intend to ruin America´s economy which would certainly cost him a second presidency?

PS On top of this post you can see an image by the American artist Richard Prince called: "Cowboy".

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