The American Casualties of Donald Trump’s Trade War

Written by Jason Simpkins
Posted January 27, 2017 at 8:45PM

In the first week of Donald Trump’s presidency, we’ve seen some splashy executive orders regarding his proposed border wall and Muslim ban.

I’m not going to get into the Muslim ban because I think that’s a social/religious/humanitarian issue that has nothing to do with finance.

As for the border wall, I addressed that months ago.

Simply put, it’s going to be a costly, inefficient eyesore. It, too, is a social issue, but unlike the Muslim ban, it has concrete financial consequences for every American.

I said back in November that there was no way Mexico would ever pay for what former Mexican President Vicente Fox called “that f#@%ing wall.”

The cost, estimated to be anywhere from $12 billion to $25 billion, will fall squarely on the shoulders of the American taxpayer.

Americans will pay the price one way or another. But alarmingly, the Trump administration is now floating the idea of a 20% tariff on Mexican goods.

This is an especially terrible idea.

The way it’s phrased, a tariff sounds like a tax on Mexican companies — but it’s not. It’s a tax on Americans who would be forced to spend 20% more on Mexican goods.

Mexico is our third-largest trading partner, sending $295 billion worth of goods our way in 2016. Given that, a 20% tariff would equate to $59 billion in added costs to the American consumer.

The largest U.S. import from Mexico is cars (totaling $74 billion in 2015).

Fords, Volkswagens, Hondas, Nissans, and others are manufactured in Mexico. If you aim to buy one at a cost of, say, $25,000, a 20% tariff would add $5,000 to the sticker price.

Such an added cost would surely dampen automobile sales, which would be unfortunate, since they’ve hit a record in each of the past two years.

Back in 2015, (again, a record year for sales) real spending on motor vehicles and parts fell a seasonally adjusted $5.2 billion in the fourth quarter. That wiped 0.58% off fourth-quarter GDP after robust sales added a full 1% to GDP over the first three quarters of the year.

That doesn’t include the downstream effects on America’s auto-parts supply chain, either. That means replacement parts, accessories, lubricants, tires, tools, and equipment for making repairs and more. Together with attendant services, those things represent a market of more than $300 billion.

And that’s just the auto market.

Mexico is also a large supplier of machinery, medical instruments, and mineral fuels, and it’s the second-biggest provider of agricultural products.

Given that, you can see why Tom Stenzel, President and CEO of the United Fresh Produce Association, felt compelled to make the following statement:

“It is very troubling for world food and agricultural markets for Administration spokespersons to bandy about terms like a 20% tax on all imports from Mexico or other countries. Consider the impact on American consumers of a 20% hike in the cost of foods such as bananas, mangoes and other products that we simply cannot grow in the United States. Consider also what other countries would do to block U.S. exports in retaliation. As the Administration looks to incentivize manufacturing jobs in the U.S., we urge President Trump to consider the unique nature of food and not place a new food tax on American consumers.”

Indeed, such a tariff may hurt the Mexican economy, but I can’t see how inflicting such injury on our southern neighbor is worth a 20% tax on cars and food in addition to the resultant damage to America’s GDP growth.

It won’t alleviate the cost of a border wall, either. It’ll just add to it.

Now, on to China…

A Trade War With China

Mexico isn't the only country to find itself in Donald Trump's crosshairs.

"We can't continue to allow China to rape our country," Trump said in May. "That's what they're doing. It's the greatest theft in the history of the world."

This statement is as untrue as it is repulsive.

It’s hard to unpack such an elegant metaphor, but Donald Trump’s website has three points directed at China:

Trump China Points

The first point relates to China’s treatment of its currency. There are two problems with it.

First, it’s outdated. It’s true that China has manipulated its currency, keeping it artificially low to boost exports. But not recently. To the contrary, China has actually been doing the opposite over the past decade.

China is no longer content to be the world’s manufacturing floor. It wants a modern, consumer-based economy. It also wants its currency, the renminbi, to be a fixture of global trade the same way the dollar is now.

So rather than weaken its currency, Beijing has been doing the exact opposite — defending it.

China’s currency has actually appreciated 30% against the dollar since the country ended its fixed rate in 2005.

The second problem is that labeling China a “currency manipulator” is unfair. Every country in the world, including the United States, manipulates its currency.

The Federal Reserve, through a combination of quantitative easing (buying Treasuries) and floor-level interest rates, has actually flooded the economy with dollars since the Great Recession. It’s the primary reason we’ve seen such insane rebounds in stocks and housing prices.

Meanwhile, some countries in Europe have deployed negative interest rates, and other major exporters in the Pacific (Australia, South Korea, and Japan, to name a few) have all devalued their currencies too. The countries all compete with China for their share of the global export market, but they do not absorb the same amount of scrutiny.

Quite the opposite, in fact. The U.S. has been cheerleading Japan’s great inflation for the past two decades.

Getting back to Trump’s second point, the United States has already lodged complaints against China with the World Trade Organization.

Here’s a list of settlements. You can find it, and the details of each case, on the WTO website…

WTO Complaints

They don’t all involve China, but a good many do. And when we do lodge some complaints, China typically hits back. After all, the United States offers a fair amount of agricultural and energy production subsidies. Most recently, on January 12 in the waning days of the Obama administration, the U.S. lodged a complaint against Chinese aluminum subsidies.

Finally, regarding the third point, I think we’ve already covered the damage tariffs can do. The problem here, though, is that China is a much bigger trading partner than Mexico.

China and the U.S. do more than $600 billion of bilateral trade each year and its central bank holds some $2 trillion in U.S. debt.

It’s easy to take potshots at China for its cheap currency and its poor working conditions, but those are the same reasons your iPhone costs $700 instead of $7,000.

As with Mexico, tariffs on Chinese products simply means paying more for clothes, electronics, and everything else that says “Made In China” on it.

It also means retaliation.

U.S. food exports to China are expected to hit $21.5 billion in 2017. And some 320,000 Chinese students accounted for 31.5% of international enrollments in U.S. universities last year. That’s a $30.5 billion market. China could easily keep its kids home and by its groceries elsewhere.

In fact, a trade war would benefit China by reducing U.S. competition in its home market. If U.S. goods are unavailable or cost-prohibitive to Chinese consumers China’s own brands will be more successful.

Chinese consumers spent $3.7 trillion in 2015 and more than $4 trillion in 2016. That’s a market U.S. companies would miss out on.

US china exports

I’ll also remind you that China has a monopoly on rare earth metals and substances like “Pure Carbon” that are absolutely vital to U.S. technology.

That Donald Trump flippantly tacked China onto his constantly growing list of adversaries — a list that includes immigrants, Muslims, the media, and Rosie O’Donnell — shows a foolhardy and dangerous lack of respect.

China is far more capable of fighting back than any other entity on this vast list of enemies.

It is a large, robust nation with a rich history and culture, a massive population, an increasingly capable military, rising global influence, the world’s second-largest economy, and no small amount of pride.

China is its own country, with its own ideals and ambitions, and in addition to being an adversary, it’s also a very valuable economic partner for the United States.

You don’t have to take it from me though.

Here’s what investing legend Jim Rogers recently told MarketWatch:

“[Donald Trump] very much wants a trade war. And if that happens, sell everything. I know trade wars have always been disastrous. It leads to bankruptcies and has led to real wars. History has shown that no one has won a trade war and very few people learned the lessons of history. They ignore them because people think they are more powerful and smarter than people in the past.”

That about sums it up.

Fight on,

Jason Simpkins Signature

Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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