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IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
MARCH 14, 2018
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We continue our discussion of Trade and Tariffs this week in IntelDigest, emphasizing the ramifications of the Trade Wars which would be the likely result of Donald Trump’s actions.
Last week, the Director of the National Economic Council, Gary Cohn, resigned in protest of the Trump Administration Tariffs on the importation of steel and aluminum. We reported that Cohn is viewed as a “globalist” by many in the Trump Administration, putting him at odds with those, including Trump himself, who see themselves as “economic nationalists.”
His replacement is Larry Kudlow, a conservative pundit and raconteur of long standing. Kudlow’s decades of experience in finance have included stints at the Office of Management and Budget in the Reagan Administration, chief economist at Bear Stearns, and many years as a contributor at CNBC
Interestingly, you may recall that we reported this last week:
In an op-ed entitled, “Tariffs are Taxes,” three Trump-supporters and well-known free market advocates … Larry Kudlow, Arthur Laffer, and Stephen Moore … wrote:
“… even if tariffs save every one of the 140,000 or so steel jobs in America, it puts at risk 5 million manufacturing jobs and related jobs in industries that use steel. These producers now have to compete in hyper-competitive international markets using steel that is 20 percent above the world price and aluminum that is 7 to 10 percent above the price paid by our foreign rivals.”
So, Mr. Kudlow assumes his new post having already expressed his opposition to the Trump Tariffs and Trump Trade Wars.
Trade Wars
Trump’s top trade adviser is Robert Lighthizer, a veteran of the Reagan Administration. Back in the 1980s, Tariffs imposed by Reagan and Lighthizer on vehicles made in Japan forced Japanese auto manufacturers to build plants in the United States. This created thousands of good manufacturing jobs for Americans
It would seem that Lighthizer plans to run the same playbook today, this time against the Chinese.
Lighthizer is part of a hawkish “Trade Troika,” which includes Wilbur Ross, Jr., the Secretary of Commerce, and White House trade adviser Peter Navarro. They have urged Trump to impose the Tariffs on steel, aluminum, solar panels, and washing machines, which we discussed last week.
Their ultimate goal is to reduce the trade imbalance on a wide range of products … especially with China. More importantly, they want to stop the ongoing theft of intellectual property from American companies … especially by the Chinese. However, the “shotgun” approach of all the Tariffs announced this year is concerning to our friends, allies and trade partners around the world.
We discussed last week the retaliatory actions proposed by the European Union (EU). Trump reacted to those threats by threatening (via Twitter) new Tariffs on European auto imports.
Trump has famously stated that he thinks that Trade Wars would “.. hurt them, no us.” However, most people view a global Trade War with trepidation … fear of the economic slowdown, stock market slide, and rising inflation which would result. Additional taxes … in the form of Tariffs … on imported consumer goods would hit consumers’ pocketbooks, and cause prices in general to rise. That could cause a slowdown in consumer spending, which would hurt corporate profits.
Tariffs intensify uncertainty and volatility in markets. Add that to Federal Reserve policy, where the Fed has already committed to raising short-term interest rates over the next 24 months and unwinding its balance sheet. Add that to general concern that stock valuations are very high by historical measures.
A full-scale trade war will hurt growth around the world. Given the Trillions in Dollar-denominated Debt in emerging markets, a full-scale foreign sovereign-debt-crisis could result if those emerging markets countries cannot earn Dollars from exports to pay their debts.
For these and many other reasons, Trump’s Tariffs spinning into global Trade Wars is a daunting prospect.
Perhaps that explains Mr. Trump’s walking-back some of his bluster in recent days. He has extended the “olive branch” to allies and neighbors, such as Canada, Mexico, and Australia. He has hinted at exemptions from some Tariffs before they go into effect later this month. Perhaps Mr. Kudlow can help him to identify better ways to address trade imbalances.
The China Problem
The reality is that the focus of Trump’s ire is China. His intention was to impose these Tariffs in the first months of his presidency … it had been a major talking point during the Campaign. But, he held off, hoping for Chinese help with the North Korea situation. Now, he has seen that China has done little to reign-in Kim Jong Un, and there is evidence that China is helping North Korea to cheat on existing sanctions.
Once China’s lack of cooperation on North Korea became clear, Trump saw no harm in confronting China on trade. However, this course is fraught with peril! There are a number of ways that China could retaliate against the U.S.
* China is one of the biggest producers of consumer goods for the American market, so prices for consumers would be driven higher
* China is one of the largest holders of U.S. Treasury Debt
* Our Federal deficit is expected to soar over the next few years, so the U.S. Treasury will be issuing lots of new bonds … large foreign buyers of our debt, such as China, will be needed to keep interest rates from soaring
* China could retaliate with their own Tariffs on American manufacturing, agriculture, and high-tech goods, and block U.S. companies from the Chinese market
* China could also threaten to diversify its reserves away from U.S. Treasuries
* China could devalue the yuan … when it did so in August and December of 2015, U.S. stocks fell more than 10% on both occasions
A Measured Approach
The irony is that Donald Trump has eschewed multi-lateral trade treaties because he preferred bilateral deals … one country at a time. However, his Tariff scheme is a shotgun approach, imposing Tariffs across the board.
If he truly wants to improve the U.S. trade position, he should begin to engage in bilateral discussions, and he should start with China.
The single most important issue with China is the theft of U.S. and European intellectual property. Imposing Tariffs does nothing to solve that problem. A measured negotiation on that topic is a better way to engage the Chinese.
And, the Trump Administration has shown that blocking foreign acquisitions of U.S. companies … as happened this week when Singapore-based Broadcom was blocked from acquiring Qualcomm on national security grounds … can be an effective negotiating tool when dealing with our competitors and adversaries.