Exposing the Real Threat of Trump’s Trade War

Donald Trump’s Presidential campaign has several different platforms but the most important was his stance on trade. Donald Trump is a protectionist. He views the U.S. foreign trade policy over the last 25 years as a failure. With the passing of NAFTA and other free trade agreements millions of manufacturing jobs that have been eliminated. Donald Trump’s main target for unfair trade practices during the election was China. At one point during the campaign he even claimed that China was raping the U.S.

“We can’t continue to allow China to rape our country and that’s what they’re doing, it is the greatest theft in the history of the world.”

History has shown us that trade wars do not end well. If the Trump administration continues to pursue actions against trade partners, then we should expect global conflict to escalate.

Since Inauguration

During the election, President Trump claimed that during his first day in office he was going to declare China a currency manipulator. This has yet to occur. President Trump recently committed to supporting the long standing One China policy but his stance on Chinese trade remains unclear. Given the promises that were made to his supporters during the campaign we expect significant trade actions against China.

Chinese Trade with U.S.

In 2015 the U.S. trade deficit with China was $336.2 billion, a $23 billion increase over 2014. This massive deficit is a net number, total Chinese imports to the U.S. were $659.4 billion. According to the U.S. department of Commerce every $1.0 billion of U.S. export supports about 6,000 jobs. If we apply this same logic to China, then that means exports to the U.S. support 4.0 million jobs in China. This is likely a low estimate as a billion of U.S. exports should support more jobs in China.

The amount of jobs created in China from U.S. exports has two important implications. The first is that these jobs have been taken from the U.S. or somewhere else and moved to China. This is primarily what Donald Trump was campaigning against. The second implication is that the existing U.S. foreign trade regime is supporting millions of jobs in China. If the U.S. were to dramatically change its trade relationship with China those jobs might disappear causing higher unemployment and civil unrest in China. When the global economy slowed down in 2008 and 2009 a wave of civil unrest swept across Chinese industrial cities. We think a trade war with the U.S. and subsequent job loss would cause the same type of response given that the Chinese economy is already very weak.

Smoot – Hawley Example

History if rife with examples of trade war leading to real conflict. The most obvious example is the Smoot – Hawley Tariff Act of 1930. This act was passed during the great depression in an effort to protect domestic industry. While the act was not the primary cause of the great depression it contributed significantly to its worsening. The Act and actions by other countries reduced American exports and imports by more than half during the depression. The reduction in global trade isolated countries like Japan who reacted to the economic deadlock with war. The Smoot – Hawley act helped stoke the flames for World War 2. Countries, including the U.S., have been going to war for millennia to protect their economic interests.

Other Targets for Trump

Unfortunately for investors China is just one example. In addition to strong statements against China Trump has also criticized Mexico, Japan and Korea. Mexico was a large beneficiary of the NAFTA agreement at the expense of U.S. manufacturing. While Mexico is less of a military threat than China the threat of a trade war with Mexico is real. The country is already suffering from lower petroleum revenues and a trade war with the U.S. would further exacerbate these issues.

Uncertainty Continues

As with most things related to the Trump Administration it remains unclear what the trade policy towards China will be. Trump threatened a trade war with China during the election. Since the election, he seems to have backed off from declaring China a currency manipulator. What remains clear is the impact that a trade war would have on the global economy. International trade would decline and the loss of jobs in China would cause civil unrest. Obviously, the financial markets would not react well to a trade war or real war with China.

Originally posted on Boom Bust Market.

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