At this point, suggesting that Donald Trump doesn’t understand global trade is about like saying “water is wet”.
In fact, the phrase “Trump doesn’t understand” is almost a tautology. The US president’s legendary imbecility is exacerbated by his disdain for reading, contempt for experts and generalized aversion to facts. Asked in February whether she believes Trump “has a grasp of macroeconomic policy”, Janet Yellen said simply “No, I do not.”
Of course folks like Peter Navarro are fully aware that Trump doesn’t, in fact, have a “very large brain”, which means he’s easily manipulated, especially when the people doing the manipulating share the president’s views.
Trump continues to talk about trade deficits in a way that makes almost no sense. Lacking even a basic understanding of global commerce, the president persists in a narrative that defines trade in terms of “winning” and “losing”, despite that making even less sense than his theories on deficits. “When I continually hear focus by the president and some of his advisers on remedying bilateral trade deficits with other trade partners, I think almost any economist would tell you that there’s no real meaning to bilateral trade deficits, and it’s not an appropriate objective of policy”, Yellen said, in the same February interview.
Alas, there’s no hope of Trump coming to terms with reality and even if there was, we’re now seemingly past the point of no return on the trade war. One of the especially pernicious aspects of the trade dispute is that it’s impossible for analysts and economists to predict how bad things will ultimately get, precisely because decades of globalization and trade openness have created unprecedented interconnectedness and interdependence. Making matters worse is the fact that uncertainty about the future can manifest itself in real economic outcomes now, something Credit Suisse has written about at length lately.
“While hardly uniform, company commentary in recent weeks offers reason to doubt the positive message from the early-month [activity] surveys”, Goldman wrote Thursday, adding that “over the last two weeks, four major US manufacturing firms have highlighted the importance of trade developments for Chinese demand [and] several US firms are lowering production or inventory accumulation because of the trade war.” Here’s a summary table:
What’s particularly disconcerting about this is that Trump’s base seems content to trust that corporate America is lying or else don’t understand trade like Trump does. You see the same commentary on Twitter and in various comment sections across web portals. There are constant references to Trump’s purportedly “legendary” business acumen despite numerous investigative reports having definitively debunked virtually every claim he’s ever made about his private sector career. And there are myriad references to corporate management teams (and also farmers) needing to do their patriotic duty by either watching their margins contract or else going out of business altogether, because surely Trump’s strategy will benefit the US in the longer-term, right?
At the end of the day, though, facts are facts. Donald Trump is not a good businessman. Indeed, according to virtually every credible account you care to read, his business career was a highlight reel of disasters. Meanwhile, the men and women who comprise the corporate management teams which have variously pleaded with the administration to reconsider the trade war, are in some cases titans of business and finance, running some of the most successful companies in the history of capitalism.
In a note dated Friday, Barclays elaborates on the difficulty inherent in trying to project the impact from the trade war. The bank’s commentary does a nice job of fleshing out the notion that it is impossible to quantify all of the second-order effects of this administration’s global trade crusade.
“For globally integrated value chains, the re-establishment of trade barriers between the US and China amounts to building walls within a factory, preventing the free flow of parts along the assembly line”, the bank wrote, adding that “medium-term misallocation of capital, together with short-term frictions and the fixed costs of supply chain adjustment, suggest that the world economy will grow less.” At the same time, the bank warns that “negative confidence effects, adverse financial market developments and idiosyncratic weaknesses could amplify the drag by a multiple”.
After noting that the direct impact of tariffs (and even the impact of non-tariff barriers) between the US and China may be somewhat straightforward to estimate, Barclays cautions that “getting a grip on indirect effects of trade diversion and competitiveness effects is a more challenging task.” Consider the following additional short excerpts from the note:
As relative prices adjust globally, substitution effects amplify the drag in countries engaging in trade wars, while they mitigate the negative effect in third countries. US (Chinese) goods not only lose competitiveness in the Chinese (US) export market but also globally. In other words, tariffs or non-tariff measures act as a tax on production because US and Chinese producers inevitably source some of their inputs from each other… Bottlenecks amplify the drag: for instance, Huawei’s reliance on US or US tied chip designers means that the US technology ban could threaten Huawei’s global activities with consequences exceeding its sole share in Chinese value added. Meanwhile, as the US and China lose competitiveness, third countries gain competitiveness and either increase their margins or their export volumes… The drag on US and Chinese domestic demand means world demand for export goods slows affecting most lead suppliers of export goods, such as Germany for instance. While redistribution of extra revenues within the US and China may mitigate the overall impact, they can only offset them altogether if they unintentionally address a pre-existing market inefficiency, which is very unlikely in the current case.
That’s hardly all of it. The bank goes into greater detail in the full note.
When it comes to the impact on consumers, the Trump administration is fond of reminding everyone that the effect of the existing tariffs has been minimal. For one thing, that isn’t entirely true depending on how you define “minimal”. For another, that’s going to change going forward. It’s something of a straw man for the Trump team to continually note that consumer prices haven’t risen markedly – after all, economists generally said the effect of the tariffs would be minimal as long as things didn’t spiral out of control. Well, now things are spiraling out of control.
As Goldman wrote last week, “retailers and consumer goods producers generally expect the burden of the upcoming tariffs to fall on consumers.” There’s only so much companies can do to cushion the blow. Here’s a similar table to the one shown above which documents some of the recent management commentary on how more tariffs will eventually be felt by consumers:
Not all of that sounds overtly dour, but the gist of it is that past a certain point, consumers are going to pay more. Eventually, that’s going to erode demand and in an economy where consumer spending is critical, these consumer taxes (because, again, that’s what tariffs are, contrary to what Trump tweets) are highly undesirable.
Finally, you should bear in mind that everyone with the possible exception of Trump himself and his base understands most of the above.
If you want to take a “you can’t make an omelette without breaking a few eggs” approach to putting global trade on a more level playing field, that’s fine. But whatever you do, don’t buy into the notion that no eggs will be broken.