Trump May Be Wrong About Winning a Trade War

This article was first published by me on Talkmarkets:

Donald Trump may be very wrong about the USA winning a trade war. Yes, the US imports the most, so it would theoretically win a trade war if it imported less. However, the impact of all this would fall upon the consumer. Producers could win in America, while consumers will surely lose.

America's Consumer Is Weak

The consumer in America may no longer be wealthy enough to withstand a major trade war. China and other nations have consumers who consume better quality products. They are simply not as austere as Americans are in their buying habits, as their savings rate is low, their debt is high, and their wages are weak.

Americans, as the decline in prosperity on mainstreet has hit hard since the Great Recession, buy based on price. Therefore, they will balk at higher prices. Companies may not be able to make it in America and expect Americans to buy it. Companies may not be able to make it completely in America and expect the Chinese to buy it.

China Has a Strong Consumer Base

China, on the other hand, has a consumer base that buys an incredible portion of world luxury products and American products:

Chinese consumers buy more luxury products than those in any other country, accounting for about one-third of global sales. But a decade of rapid growth stalled after 2013 amid President Xi Jinping’s government austerity and anti-corruption campaigns and an economic slowdown.  However, Burberry said this month its return to expansion in Asia was driven by “high single-digit comparable sales growth” in China, and Hugo Boss’s incoming chief executive Mark Langer said China had seen a turnround in the second half of the year.
And China buys a lot from the United States and that growth has steadily increased over time as the above chart shows. Last decade, Chinese consumers bought Chinese. They are starting to buy American. That could flip in a wave of patriotism. On the other hand, Americans are aware that there is patriotism and there is a higher patriotism that Donald Trump cannot grasp. That will likely not motivate most to buy American when they cannot afford it.

Apple a Real Loser

Jim Cramer has said Apple is the real potential loser. This is one of the most loved business by consumers in the USA. Apple's products will cost more if plants are located in the USA, or of tariffs are imposed on the company for Iphones made in China. The real loser is the American consumer, who is often constrained by price.

The solution is that American products are loved by the Chinese. And American goods have increased in flow to Canada and Mexico. It is because of cheaper car components, that the US auto industry is competitive. Tariffs on steel cannot be good for the auto industry.

Therefore, increasing markets for these products is more important than tariffs that would close doors. France's Macron has spoken of the G6 instead of the G7, willing to go it alone if necessary. The combined GDP of the G6 compares favorably with the United States. Going it alone would allow these nations to impose tariffs on Trump country, and will likely erode support from his base.

And the G6 plus China and India dwarf US GDP. Let's quit kidding ourselves.

Hostility Has Led to War

Trump has said at the G7 summit that he will not trade with nations that do not bend to his will. This is a very dangerous isolation. This isolation would remind us of Germany's isolation and Trump is a man who reads Hitler. This is a serious situation. Germany's only solution was to go to war and kill Jewish people and Americans and everyone else en masse.

Only in his wildest dreams would Donald Trump be permitted to go to physical war with Canada and the Euro nations and Japan. How silly would it be to even entertain that notion. Yet we can see that this subject of an invasion of Canada has been entertained extensively on the internet.

But the process of marking these nations hostile and threats to national security by the Trump Administration, even for a technicality to impose tariffs without congressional approval, makes a real trade war possible. And if Trump were to lose a trade war, he would love to get even. He gets even. We understand this.

How far would he be permitted to go by congress and the government? Know this: Trump views allies as sponges. He views China and Russia as guided by strong leaders. He may very well want to be king.

Acting on these desires is quite another thing. The odds are low, to be sure. But Trump nation is going to lose and feel the brunt of tariffs in any trade war, and POTUS may feel a need to force markets open and protect his constituency. It should at least be in the conversation that he may well back himself into a corner of his own making.

In the meantime, we have to watch how the rest of the G7 handles these tariff threats going forward.

Trump's Dangerous Game

David Henderson wrote a sobering article on the Econlog entitled Trump's Dangerous Game. He speaks to the assymetry between the consumer and the producer:

The producers who want barriers against foreign imports have a lot to lose per firm and per worker if imports are allowed and consumers have little to gain per person. It's pretty easy to show that the gains to consumers from reducing tariff barriers, in total, exceed the losses to producers in total. But the asymmetry in gains and losses per person or per firm cause producers to have a LOUD voice in the discussion and consumers to be very quiet or even silent. So we get a very distorted discussion and potentially distorted outcomes.
As Mish Shedlock as said, Trump is trying to protect 140 thousand steel manufacturing jobs while putting in danger 6.5 million American jobs in everything else. I would add plus consumer pain that could impact over 100 million people.

Professor Henderson, who is co-editor of Econlog, also speaks to the reason free trade has worked for so long. It tends to promote peace:

The kinds of tariff increases various countries imposed during the Great Depression were something that most countries' governments did not want to continue because of the bad consequences for world trade and for world peace. Various policy makers saw the potentially huge stakes in getting countries to trade more with each other, understanding, probably explicitly but at least subconsciously, that trade tends to generate peace.
Isolation leads to poverty. Poverty leads to war. While excess globalization that is irresponsible leads to isolation over time, forced isolation advocated by Donald Trump could lead to poverty very quickly.

Hopefully cooler heads prevail and hopefully Mr Trump realizes that economic speculation and asset inflation in America has done more damage to the American consumer than any free trade policy could possibly do.

But he does not understand this, wanting to ease the lending requirements that lead to unpayable mortgages which lead to crises in credit and Great Recessions and worse. 


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