Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Donald Trump’s trade policies become more shocking by the day

Posted by hkarner - 30. Dezember 2016

Trump’s strategy as conceived and stated so far is economically unscientific

Donald Trump’s assault on trade is escalating. First the foes were China and Mexico. Now it is the world.

The Trump transition team has mooted an import tariff of 10pc across the board, doubling down on earlier talk of a 5pc duty. This is a sobering demarche. Such thinking is of a different character to Mr Trump’s campaign rhetoric, which mostly hinted at trade sanctions to force concessions.

A catch-all tariff is a change of belief systems. It overthrows the free trade order that has been upheld and policed by Washington since the 1940s.

Congress cannot stop Mr Trump imposing his will by „executive action“ under existing US law. The historic irony is that Capitol Hill delegated powers to the White House in order to cut tariffs and reach deals, free from meddling by pork barrel interests. Few ever supposed that these same powers might be used to curb trade.

The president may impose tariffs of up to 15pc for 150 days without having to demonstrate any damage. All he has to do is utter the words “macroeconomic imbalances” or invoke „national security“ and he can more or less do what he wants.

These tariff warnings follow the appointment of a virulent Sinophobe to head the National Trade Council at the White House. Without wishing to caricature Peter Navarro, there is a relentless consistency to his work: „The Coming China Wars“, „Death by China: Confronting the Dragon“ and „Crouching Tiger: What China’s Militarism Means for the World“.

This is a man who thinks that the US is engaged in Hobbesian fight to the finish with a vicious and authoritarian China that has brought about the closure of 70,000 American factories through currency manipulation and mercantilist skulduggery.

By the magic of cognitive dissonance he also thinks the Chinese system is about to „implode„, and that the US should hurry this process along by tightening the economic noose and by launching an arms race in the Pacific – much as the Reagan Doctrine supposedly broke the back of the Soviet Union in the 1980s.

Markets are still behaving as if they will get the „good Trump“ (tax cuts and fiscal stimulus) rather than the „bad Trump“ (trade wars), despite mounting evidence to the contrary.

In fairness to the Trump camp, we should not be beguiled too easily by free trade pieties, or fall for the canard that the Smoot-Hawley Tariff Act of 1930 caused the Great Depression. It could not possibly have done the damage so often claimed.

The US economy was closed in the 1920s. Any trade effect was far too small to bring about a 26pc collapse in American GDP.

Few economists would dispute that the US Federal Reserve was chiefly responsible for the slump by allowing the money supply to contract, and that this was then transmitted globally by the deformed structure of the Gold Standard in the inter-war years. Protectionism was the response, a marker of stress.

What tariff barriers did do is to shift the relative advantage from surplus to deficit countries. Britain recovered quickly once it broke free of the Gold Standard, devalued, and conserved its precious demand behind the walls of Imperial Preference.

Personally, I have always been a free trader but there are self-evidently winners and losers. Nor is the raw ‚Smithian‘ measure of efficiency and comparative advantage –  or GDP growth – the relevant metric in a civilizational contest. What matters is power.

You can imagine how Mr Trump’s tariffs might play out in the global oil markets. A 10pc duty would instantly give shale frackers a cost advantage of $5.40 a barrel, undercutting the deal last month reached by Saudi Arabia and Russia to cut output.

It would take even longer for the petro-powers to clear the record overhang of inventories. They would have to contemplate a grueling attrition, ultimately made worse by a decline in shipping as tariffs lead to a shortening of global supply chains. Vladimir Putin would live to regret his cyber-campaign for Mr Trump.

Yet the Trump trade plan does not ultimately add up. His fiscal expansion will boost the budget deficit and this is turn will automatically reduce the US savings rate.

Such a policy must lead to an increase in capital inflows, and therefore to a greater trade deficit to offset them through the mechanism of a stronger dollar. There is no way around this accounting truism. „Contrary to what Trump wants or intends, the trade deficit will increase,“ said Nobel economist Joe Stiglitz.

The rising dollar would further aggravate the trade tensions, leading to further tariffs and trade curbs in a self-feeding vicious circle. The whole strategy as conceived and stated so far is economically unscientific, whether or not you are a free trader or a protectionist

As for Mr Navarro’s diatribes against China, they are a decade out of date. Beijing undoubtedly held down its exchange rate to gain export share early in its catch-up phase, gaming the global system with hard-nosed ruthlessness.

David Autor, Gordon Hanson, and David Dorn argue in ‚The China Shock‘ – now the seminal academic text on this theme – that the emergence of the country as a global power not only induced „an epochal shift in patterns of world trade“, it also discredited standard trade theory that labour markets adapt easily.

They do not. The study shows that the shock has been shattering for those workers and sectors in developed countries facing the brunt of the storm, just as political observation and common sense would suggest.

Earnings have been „significantly“ lower. Jobs have been „churned“. It has been traumatic. In the academic jargon, trade is not necessarily  a „Pareto optimal“ as long supposed, and so dogmatically asserted by the establishment. „These results should cause us to rethink the short- and medium-run gains from trade,“ they said.

But we are already in a different phase today. The one-off shock of absorbing China has largely occurred. The country is shifting from export-led growth to a consumer economy driven by internal demand.

Chinese wages have been soaring at double-digit rates. The yuan is no longer over-valued. Beijing has burned through $1 trillion of foreign reserves trying to stop the exchange rate falling as capital leaks out of the country.

The risk is that Mr Trump could detonate a crisis in China that spins out of control as capital flight turns into a torrent. We had a nasty foretaste of this in the global equity crash a year ago. Whatever Mr Trump thinks, China’s $30 trillion debt edifice has become a world problem.

As for those like Mr Navarro bracing for a superpower showdown, their grim vision may prove self-fulfilling. Some think that Mr Trump and his coterie in Washington are walking straight into the „Thucydides Trap“ in their handling of China.

The Greek historian argued that the rise of Athens was a mortal threat to established Sparta, and led ineluctably to the Peloponnesian War. A Harvard study of sixteen such rivalries over the last 500 years found that three quarters ended in war, with the clinching example said to be the Anglo-German battle for global mastery before 1914.

Whether or not the First World War really fits this schema is an open question. And note that the incumbent power won the Great War, just as Sparta – not Athens – won the Peloponnesian War. Precisely for that reason you might conclude that we are entering very dangerous waters.

 

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