Second in a three-part series, dealing with Canadian trade issues looking forward to next year and the second Trump administration.We all anticipate significant, perhaps dramatic, change across a range of issues in the New Year with Trump in the White House and Republicans controlling both legislatures. The massive tariffs proposed recently by Trump are hardly a surprise. In this, the second in a three-part review of Canada's trade issues, we look at the trade policies of the first Trump administration and delve into tariff dilemmas , and their connection to other important strategic and economic matters. (See the first article in the series at the link below.).PINDER: What's at risk, as Trump demands tariff talks.According to the November 13 issue of Geopolitical Futures — a daily publication by respected strategist George Friedman — “the central goal of Trump's trade policy is unchanged from his first administration: to reduce United States reliance on foreign supply chains (especially China) and shift more manufacturing to the US and friendly countries. Like his first term, Trump's preferred instrument is tariffs.” He also “aims to reduce the US trade deficit with major partners, especially the European Union,” with a blanket 10% tariff on all imports and 100% on all cars made outside of the United States. But are tariffs beneficial, and is a trade deficit a bad outcome? Friedman says, “US importers paid an estimated $32 billion more annually as a result of the tariffs” of the first Trump reign. This contributed to the rise of the damaging inflationary cycle and investment unfriendly higher interest rates — part of the economic dilemma.Former chairman of the Senate Banking Committee, Phil Gramm, made a similar point. Now a Senior Fellow at the American Enterprise Institute, he and a colleague wrote a November 14 op-ed in the Wall Street Journal suggesting caution with respect to tariffs. Acknowledging that Trump's pro-growth tax and regulatory policy in his first administration, “attracted a surge of foreign investment,” it also resulted in a stronger currency making “US exports more expensive and imports cheaper.” A self-defeating response then, which also tends to build a trade deficit.The writers further point out the significant reduction of American workers employed in manufacturing continues “to fall because of technological advances, not trade. American industry produces nearly 2.5 times as much manufacturing output as in 1974 with a fraction of the labour force.” Doesn’t that signify productivity improvement?They further estimate that “10% across the board tariffs would shave a full percentage point off US GDP growth.” The burden of tariffs “would be regressive considering lower income households spend a larger share of their income on consumer goods. Restoring the factories their parents left decades ago would also resurrect many old and unsavoury economic conditions”. They pose a valid question: “Who would fill the jobs of the 1960s if we could bring them back”?A further framing of the trade dilemma was pointed out on November 22 by regular WSJ columnist Greg Ip. One of the main planks of Trump's economic agenda is more tax cuts and deregulation to bolster economic growth. However, faster growth boosts imports and strengthens the dollar, making US manufacturers less competitive. “Tariffs dent consumer spending and business confidence and put upward pressure on inflation and interest rates, undermining growth”.So, tariffs address one objective and impede another. How will the significant component of Trump voters who feel economically disadvantaged feel about higher prices from tariffs? Will some blame lower GDP on tax reductions and regulatory reform, thereby potentially thwarting another important aspect of his agenda?As threats from China, Russia and Iran increase, military security presents yet another dilemma. The link between trade policy and US military decline is another example of the importance and complexity of trade policy, also suggesting a rethink of tariffs.One of the important contributions of America to the post-World War II incredible gains in prosperity is the protection of open trade provided by the US Navy. As China sabre rattles and collaborates with other enemies, will further strained U.S. military budgets result in deterioration of global trade? Already, missiles supplied by Iran and fired by the Houthis at ships headed to the Suez Canal, have disrupted an established trade route at considerable cost, sending ships around the Cape to reach the Mediterranean. The Biden response was tepid.The broader dilemma, which the above example illustrates, highlights the risk that tariff induced lower rates of growth also further limit military spending capacity. Ultimately the safety valve for the free world and its prosperity depends on US military strength, and its willingness to act. Trump and his closest advisors see a trade deficit as negative. But says Ip “if reduced regulation and taxes boost investment in household spending,” imports will rise and the trade deficit will expand, all else equal. That, and “foreigners buying the US bonds that finance a trade deficit will push the dollar higher, further widening the trade gap”. A trade deficit is the result of successful trade policy, which tends to rebalance over time as currencies adjust. For many, as illustrated by the informed opinion leaders above, the dilemmas resolve in favour of a higher standard of living including cheaper imports. This also supports more dollars for military spending. Consumers are voters, and Trump needs to acknowledge the incredible Walmart and Costco stories (as prominent examples of important facts,) significantly sourced by Chinese products, as an endorsement of that premise. In Part Three of this series tomorrow, we further consider Trump’s tariff strategy and expectations for Canada, especially our energy sector.
