This weekend China’s
President Xi Jinping is meeting with our president at his Mar-a-Lago resort. A
key discussion topic will be trade between the 2 nations. This face-to-face
meeting represents a substantial test for Mr. Trump for several reasons. First, the US
and China are the world’s 2 largest economies. Second, each man has very
different perspectives on how to conduct international trade with each other, let
alone the broader features of their economic and political firmaments and
mutual interests. These challenges lead The
Economist to cleverly christen this inaugural meeting Spar-a-Lago.
Our golfer-in-chief
unfortunately will not be carting with Mr. Xi along his fairways, clubs at the
ready. Officially, the Chinese government takes a sub-par view of golf,
considering it a game for rich capitalists. Perhaps the 2 men can relax and create
personal connection during a game of bocce ball instead?
They have plenty of trade issues
to discuss. In 2016 the US exported $169.8 billion (B) of goods and services to
China. We imported almost 3 times as much; $497.6B of imported goods and
services from China. The US trade deficit with China isn’t recent. It has been negative
for 31 years ever
since Reagan was president, as shown in the figure below.
US-China Balance of Trade,
1985-2016 (109 $)
Source: Economist.com, DOC/BEA
Overall, the current US
balance of trade (BoT; exports minus imports) deficit with China is $309.8B. Mitigating
the US-China trade deficit would be useful for us, depending on how it’s done. The
president and Congress have power to change policies that can influence some
but not all aspects of our BoT. During the past 3 years the appreciation of the
US dollar relative to other key currencies like the Yuan and Euro – that
neither the president nor Congress can effect – has not helped US exports.
Beyond the US and the Middle
Kingdom, international trade anxieties are affecting other trading nations. The
largest concern is that trade growth has slowed; the high-output growth engine
of globalization-related trade has braked. As we already know, the political
winds are shifting, causing international trade’s sails to luff in the doldrums
of no supportive breezes. The World Trade Organization (WTO) expects that trade
will remain “sluggish” and grew just 2.8% in 2016, like it did in 2015. Over
the last decade, world trade growth has lagged world GDP growth. The world’s
real GDP grew
3.0% in 2016. Average annual world real GDP growth between 2000 and 2016 was
3.0%; between 2000 and 2010 it was higher, 3.9%.
The post-WWII orthodoxy of
increasing trade to improve nations’ growth and development is crumbling. Talk
of tariffs and other protectionist policies is cresting these days, as
individual nation’s economic growth has faltered and domestic-centered populism
rises.
In addition to the general reduction in
GDP growth mentioned above, there are more
specific reasons for this decrease in trade. First, growth of the BRICS
(Brazil, Russia, India, China and South Africa) has slowed. These nations are
the world’s largest emerging markets. Their collective economic growth has
slowed from 9% in 2010 to about 4% in 2015. By 2015, 3 of the BRICS (China,
Russia, and South Africa) had slower growth for at least 3 consecutive years
and Brazil remains in a significant recession. Brazil’s GDP dropped 3.2% in
2016, it contracted 3.8% in 2015. Long-term growth expectations in these 5 key economies
have been repeatedly downgraded since 2010. This lack of growth affects both
our exports and imports. Second, imports into developing nations stagnated,
growing only 0.2% in 2016, according to the WTO.
Mr. Trump has spewed several
ill-considered actions for dealing with the threatening, hostile world he sees
beyond our boundaries, including abolishing “unfair” trade agreements like the
North American Free Trade Agreement (NAFTA), placing punitive tariffs on
imports and restricting our borders.
The pre-election Trumpian
“action plan” included withdrawing from NAFTA that the candidate
called “The worst trade deal maybe ever signed anywhere, but certainly ever
signed in this country.” After becoming president, his extreme language has
become less bellicose. Now he’s apparently willing to renegotiate, but hasn’t
specified what that means; imagine our surprise. Time may tell.
In numerous public
pronouncements the president has said he’s considering large tariffs on imports
from countries like China and Mexico. Sometimes he’s mentioned a 45% tariff,
other times a 10% tariff.
Like all too many of his impulse-driven communications, they’re literally
spread all over the map without substance. These specious ideas characterize
his disjointed, no-dots-connected approach to creating policies that will
hardly enhance our nation’s greatness. They’ll probably have the opposite
effect. He seems oblivious to the likelihood that if he imposes tariffs on
Chinese, Mexican and other nation’s imports these countries will retaliate with
their own tariffs on our exports. In his fantasy world, US tariffs will only bring
back low- and medium-skilled manufacturing employment; not higher prices on imported
consumer goods and services, not curtailed exports from the ensuing trade war.
American companies that have
used China and Mexico as a production base would struggle to revamp their
supply chains. If US firms brought production back home to escape the tariffs,
prices would increase dramatically and take considerable time to set up. As a
consequence of much higher tariffs, Goldman Sachs estimates that the cost of
producing clothing domestically would increase by over 40% and smartphones by
over 35%. None of these consequences seems to concern Mr. Trump.
His muddled, myopic mind
doesn’t see any connection between exports and imports. They are completely separate
from each other, not mutually bound by trade agreements and economic reality.
The president seems equally unaware
that the ultimate objective of bilateral and multilateral trade agreements is
to benefit every signatory and that the
negotiations to reach agreement will always involve trade-offs that need to be
recognized and made. Trade agreements are founded on the world being a
positive-sum game, where each party can gain. Should trade agreements be
reviewed and modified over time? Surely, but Mr. Trump’s world view is at best
zero-sum.
That zero-sum concept is not
supported by historical facts. For example, under NAFTA US farmers – who most
likely voted for Trump in large numbers – have exported significant amounts of corn
and other ag commodities. In 2016 these farmers sold 13.8 million metric tons
of corn to Mexico. Corn exports to Mexico have increased 5.5% every year since
NAFTA was implemented in 1994. Mexico has said if the US walks away from NAFTA
or imposes tariffs on Mexican goods, it will buy corn from other exporters
including Argentina, not the US. How are you going to explain that in Dubuque
or Omaha Mr. President?
Then there’s Trump’s Wall.
Building the Wall along the US-Mexican border was a prominent specter in
Trump’s candidacy. When mentioned in his campaign speeches, it wasn’t a
question of if, but how tall and how long it would be – and, of course, that
Mexico would pay for it. The Wall was only one piece of Mr. Trump’s actions to
close our borders.
Other pieces include his disastrous
2-part orders to stop people from 8 (then 7) principally Muslim nations as well
as other visa-holders from entering the US. To date, federal courts have
fortunately taught Mr. Trump that his actions are subject to court interpretation;
despite his protests (which themselves were cause for public astonishment and
distain).
But back to The Wall. The
total length of the US-Mexico border is 1,989
miles. It’s been difficult for anyone outside the White House to get specific
information about Mr. Trump’s plan for the Wall. Until Jan. 20, Mr. Trump's
border wall existed only as campaign rhetoric not supported by a real plan for
building or paying for it. Its length and height depended on to whom and where
he was talking. Now that he’s president, a plan appears to be arising. In
mid-March the Department of Homeland Security (DHS) issued a request that
stipulated the wall must be 30ft high, look good from the US side and be hard
to climb or cut through. It must take at least 1 hour to cut through. The request
apparently didn’t state how long the wall should be. Irony abounds beyond walls
because some of the firms that may submit bids are minority-owned, Hispanic
companies.
Others have speculated that the
Wall could be up to one-half of the border’s length, with natural barriers such
as the Rio Grande River taking up the rest of the length. Guestimated costs
range from $12 to $21 billion. The President’s draft budget, which was sent to Congress
last month and generated scathing reviews, indicates only about $2.9 billion is
now earmarked
for the Wall — most of which will come from sizeable cuts to key agencies within
the DHS, like the Coast Guard. Oh, will the bill eventually be sent to Mexican
President Enrique Peña Nieto, as Mr.
Trump proclaimed dozens of times? Nope, he was just kidding in trolling for
votes. US taxpayers appear to be on the hook, which is no laughing matter at
all.
The president’s international
trade policies are quixotic at best; they are misdirected and inconsistent. It’s
hard to see such policies as the product of reasoned, competent, coordinated analysis.
This goes beyond just trade. Such concern was reflected in a recent column by
David Brooks where he stated,
“Trump’s greatest achievements are in the field of ignorance. … It’s not so
much that he isn’t well informed; it’s that he is prodigiously learned in the
sort of knowledge that doesn’t accord with the facts of our current dimension.”
Trading places with Mr. Trump would involve more than relocating to 1600
Pennsylvania Avenue. Fasten your seat belts and resist.
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