Eber: Beware of Trade Wars

President Trump was clear when running for office—he opposed TPP and wanted to renegotiate NAFTA.  Unlike others, he actually meant that and in his first week in office, took us out of TPP and told Canada and Mexico NAFTA had to be re-done—with America’s interest being the priority.  He believes a strong U.S. makes the rest of the world economically strong.

“Adversely affected would be imports in billions with categories of machinery102, autos 74, medical devices 12, and fuel 14.  Not to be forgotten are 21 billion dollars worth of agricultural commodities which bring everything from lettuce to melons to USA markets 12 months a year. The 20% surcharge on these goods would be eventually paid for by consumers in the USA.  They in effect would be paying to build the wall. The expense to construct a barrier would be the least of the problems created by such a move.

Imagine if Sweet Tomatoes veggie buffet had to raise their prices because the cost of rabbit food had gone up so much. Seriously, if it becomes more expensive to bring in food and other essential items from Mexico, this would likely contribute to inflation. We would end up paying for Trump’s obsession in punitive ways hurting ourselves.”

Negotiations will go forward.  Instead of multi-lateral agreements, they will be bi-lateral—with the U.S. priorities being considered and approved.  No one could do this as needed, other than Donald Trump.  Trade wars always happen, but will the result be good for the United States?

Beware of Trade Wars By Richard Eber

Richard Eber, California Political News and Views  1/31/17

When Donald Trump proposed that a 20% import border tax be imposed on imports of food, medicines, and manufactured goods from Mexico, a major red flag was raised by the American business community.  This was not about paying for the construction of a wall to restrict the flow of traffic on the borders; but rather the impact on their corporate profits.

Currently Mexico is the second leading export market for the United States at 236 billion dollars per year. Import totals are 59 billion more. Most of this disparity comes from manufacturing plants in Mexico finishing USA goods by utilizing discounted labor costs south of the border. This trade imbalance is expected to fall in the future with American car companies recently agreeing to switch production back to the States.

What worries American business and likely the stock market would be that if a 20% tariff on imports from Mexico was imposed by Trump, this traffic could not be easily substituted by vendors in the USA. Imposing protectionist tariffs would likely turn the economies of both countries upside down into shock mode.

Adversely affected would be imports in billions with categories of machinery102, autos 74, medical devices 12, and fuel 14.  Not to be forgotten are 21 billion dollars worth of agricultural commodities which bring everything from lettuce to melons to USA markets 12 months a year. The 20% surcharge on these goods would be eventually paid for by consumers in the USA.  They in effect would be paying to build the wall. The expense to construct a barrier would be the least of the problems created by such a move.

Imagine if Sweet Tomatoes veggie buffet had to raise their prices because the cost of rabbit food had gone up so much. Seriously, if it becomes more expensive to bring in food and other essential items from Mexico, this would likely contribute to inflation. We would end up paying for Trump’s obsession in punitive ways hurting ourselves.

Before panic mode can be further pondered, it should be considered that the US Congress would be involved with imposing new tariff rates on imports. Also in analyzing Donald Trump’s threats to impose a 20% border tax, one must consider that he has a reputation for threatening Draconian measures to gain a better negotiating position.  However, in bringing the philosophy of his book Art of the Deal into the political arena, the stakes are much higher than constructing a hotel. We should all know this

As the impacts of imposing a protectionist tariff structure are much greater than any good that could be gained, perhaps Trump should resort to different tactics in attempting to strengthen his negotiating position with Mexico. These same concerns need to be taken into account with what transpires with the Trump Administration withdrawing from the Trans Pacific Trade Agreement (TPP)

 

Critics will likely say the price of imported merchandise will automatically go up if TPP is abandoned.  This is fiction because it does not take into account trade negotiations with China.  All of the other give-a-way items in the 4000 word document are trivial in relationship to whatever transpires in negotiations between the two super powers.

There are numerous bilateral issues to discuss including tariffs and restrictions on imports from the USA. In addition there are political considerations such as the One China Policy and China’s buildup in the South China Seas.  Even policy towards North Korea comes into play as we are dealing with a dictatorship that is very sensitive to all of these subject matters

For the last quarter century the USA has played out the part of Santa Claus with China. We are reminded of the wealthy maiden aunt with whom you are scared not to offend for fear that she might leave you out of her will. There has been minimal negotiating power to protect US interests.  As a result copy right infringement, currency manipulation, stealing industrial secrets and unfair trade practices on China’s part have been largely ignored.

It would appear that what Donald Trump is doing can be compared to the strategy of a labor union bringing a lot of issues to the bargaining table in order to get a better deal from management.  It is difficult for the President to undertake such a strategy when every comment he makes is micro analyzed and taken literally by the press.

One of the questions to be answered is how Trump will be able to pull off the art of the deal in his negotiations with foreign governments when he is always contending with the “art of the debate.” at home.

To deal with this problem President Trump might be better off doing his negotiations on trade matters in private rather than through the court of public opinion.  He may need to take on a similar strategy as was taken by Richard Nixon and Henry Kissinger in their dealings with China almost 50 years ago.

In tackling withdrawal from the TPP, Trump will have to contend with some of the same issues that he is facing with the ridiculous idea of putting in a border tax on goods being imported from Mexico.

 

Any sort of an import tax’s will result in trading partners taking retaliatory steps against the United States.  Depending on their severity, exports of Made in USA items can be adversely affected. All of the tax relief and reduction of environmental regulations will be meaningless for American business if there is no place to export their goods.

This type of scenario is not to be easily dismissed.  Trade wars caused by arbitrary taxation have historically lead not only to financial ruin, but also contributed to the other type of war where armies clash and soldiers die.

Let us not forget that the first blood spilled in our own war of independence was caused by taxation without representation from the British Crown that resulted in the Boston Tea Party.  It could be said that the “Stamp Act” imposed on the Colonists by King George, is alive and well in 2017. It just manifests itself in other ways.

This is why the English monarch’s modern equivalent Donald Trump should follow the axiom of “look before you leap” when it comes to unilaterally withdrawing from trade agreements that are thought to be unfair.  The ramifications on the economy’s of those affected are too great to take a cowboy approach where anything goes.

While a strong argument can be made that the USA has been getting the shaft in trade deals for the last 40 years, especially from China, this does not mean that things can be changed over night

Hopefully, Donald Trump is fully aware of this and is just bluffing to gain a better negotiating position when it’s time to make a deal with Mexico, China, and the rest of the world on trade matters. We shall see.