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Trump, Trade and Tariffs

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Bob Sicina
Bob Sicina. Credit: Will Diamond.

While on the campaign trail, Donald Trump put a spotlight on alleviating the country’s trade deficits. As president, he’s shaken the foundation of international trade by placing tariffs on billions of dollars' worth of goods from around the world.

Despite the promise of these tariffs helping lift up working-class Americans, they don’t actually benefit everyone. American farmers are struggling to sell their products, and, without a place to store the excess, are leaving crops in the field to rot. Even US allies like Canada and Mexico have retaliated by imposing duties on American exports.

In the midst of the trade war chaos, the administration and its many warring counterparts have been working to reach new agreements on how to press onward — the 90 day (possibly longer) truce with China currently one solution.

So, what are the implications of Trump’s tariffs and trade war truce, and what impact could they have on consumers? We spoke with Bob Sicina, Kogod international business professor, to gain some insight.

Kogod School of Business: What are your thoughts on the current tariffs and trade war so far?

Bob Sicina: The word that comes to mind is dangerous. So far, the skirmishes that have been fought like the US tariffs on steel and China’s retaliatory tariffs on soy beans, are at the fringe, rather than at the core, of the global trading system. This is an apparent effort by the Trump administration to deliver ‘messages’ to friends and foe alike.

He has been an “equal opportunity” imposer of tariffs. However, President Trump is a long-standing skeptic of free trade, in spite of recent protestations by him to the contrary. He appears to believe that the value he brings to the presidency is his artistry in crafting deals, be they trade deals or nuclear proliferation pacts. He consistently uses meat cleavers where many would call for surgical instruments. The treatment of Canada’s Prime Minister Trudeau, behavior towards the UK government favoring Vladimir Putin, and walking away from the Paris Agreement on the environment are just a few examples.

KSB: Trump recently agreed to a 90 day trade war cease with China. Any predictions?

BS: The bottom line is that this temporary peace will probably continue, slowing the global economy. He is already ‘trumpeting’ a big win for farmers (his base), who were hurt by China’s retaliation (soy beans). In 60 days or so, the high probability bet is that he’ll accuse the Chinese of betraying the deal and break it with them.

KSB: What are some pros and cons of his trade policies?

BS: Frankly, as a proponent of free trade, I don’t see anything in the pro column. History has shown the insidious nature of protectionism. Most would agree that Smoot-Hawley tariffs substantially exacerbated the Great Depression. Protectionism of one’s own markets defeats the principle advantage of free trade, comparative advantage. President Trump is a mercantilist and, in the words of my esteemed colleague Dr. Heather Elms, “I used to teach mercantilism as a footnote to history. Now it’s at the core of what I must teach on trade.” Most presidents have done some imposition of tariffs at some point, but I don't think we've seen anything like we have in the last few months with the current administration.

That’s because he brings with them a very strong bias towards bilateralism rather than multilateralism. That increasingly weakens our position in the global economy and opens the door for China to fill the vacuum he is creating. Of course, President Xi of China just smiles and slowly but surely walks through.

KSB: If given the opportunity, would you make any decisions differently?

BS: I would not have gone down this path. Trade wars will do far more harm to our economy than good. My earlier comments on Smoot-Hawley and the Great Depression illustrate that. I believe that resolving perceived inequities, such as China’s extraordinarily weak intellectual property rights, is best tackled at the negotiating table rather than through the exchange of tariff salvos.

KSB: Do any specific companies come to mind when considering the effect of these policies?

BS: I expect companies like Caterpillar and John Deere to be at a competitive disadvantage in the global heavy equipment market because of the tariffs on aluminum and steel. More importantly, the global auto industry’s supply chain will be disrupted with unforeseen consequences; likely the result will be higher cars prices globally. On the retaliation side, farmers in the Midwest are less competitive in the sale of their production to China. This is part of the ‘Trump base’ and puts his strategy under considerable pressure. It’s part of what gives me confidence that his policies will not be pursued sufficiently to do significant harm.

KSB: What impact could these policies have on consumers?

BS: We can expect to see higher prices, but again, the impact will be small because the numbers are small compared to the overall level of economic activity, so far. I think in the long run, the individuals most damaged are going to be consumers and that means all of us.

It's just the degree is going to depend on the market basket of goods and services that the individual buys. Cars are one example where supply chain disruption will likely cause higher prices. Perversely, it also is destroying jobs in the US, not just hurting soy bean farmers. Just consider General Motors decision to close plants in Detroit cutting over 14,000 jobs.

KSB: What should consumers be on the lookout for, particularly younger ones?

BS: The biggest danger is an economic downturn in the economy driven by a trade war. That will hurt the job market. I don’t think that there's a lot you can do about this except vote and I think that’s more important than ever.

KSB: Do you have any predictions for the future of the trade war?

BS: In considering the future, I find it useful to think in terms of probabilities. There is some chance that this blows over quickly and goes away. I think that has a low probability of happening, say about a 5 percent chance. There is the possibility that this ‘tit-for-tat’ gets more serious and global trades flows are impeded in an important way. Consumers will pay more for the products they buy. That’s where are today, and, I give that about a 25 percent probability that it continues in the medium term. What is likely to happen if the ‘tit-for-tat’ deteriorates into an all-out trade war? A global recession the likes of the one in 2008 could ensue. I would give that a 5 percent probability. Unlikely, but possible, and that is the scary part.

The 65% probability scenario is one where the issue ‘stinks up’ the global economy at the fringe, not at the core, through most of the Trump administration. What makes prediction difficult is that Trump is a deal maker and one can never be sure when he will feelshe has enough of a ‘gain’ in a negotiation to declare yet another victory in the battle to “Make America Great Again!”