Global markets initially reeled in response to Donald Trump’s victory in the U.S. presidential election. They have since recovered, but a preview of Trump trade policy helps to explain the initial nervousness.
In his trade platform to “make America great again”, Mr. Trump promised, among other things, to take the following steps:
- Strengthen trade enforcement by applying tariffs on goods from countries that his Administration would label “cheats”;
- Strengthen trade enforcement by labeling China a currency manipulator;
- Withdraw from the concluded Trans Pacific Partnership (TPP) Agreement with 11 Asian-Pacific countries; and
- Renegotiate the 20+-year old North American Free Trade Agreement (NAFTA) between US, Canada, and Mexico.
The “promise” of closed borders and raised tariffs is intended to “protect” U.S. manufacturers and jobs by limiting imports. Such steps are more likely to make U.S. trade partners retaliate by raising their tariffs against the goods they import from the U.S. Not only won’t this approach bring back long-lost manufacturing jobs, the potential ripple effect brings reminders of the Great 1930s Depression.
Mr. Trump’s commitments also indicate that current principles, policies, and practices could be drastically changed. Republicans have spoken of plans to repeal President Obama’s regulations.
The US-Cuba opening, for example, has been initiated by President Obama through Executive Orders and regulations even while legislation enforcing the US embargo remains in place. Mr. Trump has stated that he would reverse the openings unless he is able to pressure Cuba to give more political and religious freedom to her citizens. Through new Executive Orders or, with some time, by reversing existing regulations Mr. Trump can reverse any one or all of the actions that led to the opening.
Promises made on the campaign trail are not always upheld. However, Mr. Trump’s trade advisor on the campaign has been Dan DiMicco, former CEO of Nucor Corp., a steelmaker. Steel production, once viewed as a backbone of US industry, has faced continuous decline since its heyday in the mid 1970s. Rightly or wrongly, the US steel industry views excess production by China of subsidized steel as a major threat and cause of this decline. Mr. DiMicco labels China a “cheat”. In his books and blog posts, he enunciates the goal of bringing back manufacturing jobs to America through trade that is “free, fair, rules-based and enforced”.
There is particular concern therefore, about Mr. Trump’s intentions regarding trade relations with China, and more broadly with the Asia-Pacific partners of the Trans Pacific Partnership (TPP) Agreement. The threat of a trade war between the world’s two largest economies, particularly when they are so linked, is disconcerting.
The markets quickly calmed down after reassuring words from the President-elect with regard to his plans for the US economy. However, the uncertainty regarding his trade policies remains. His Cabinet selections, in particular for the US Trade Representative and Secretary of Commerce, will be important clues to follow.