Trump Trade Policy: Navigating a Changing Paradigm in Global Trade

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The 21th annual Milken Institute Global Conference kicked off on April 29th in Los Angeles, with an onstage conversation between U.S. Treasury Secretary Steven Mnuchin and Fox Business Network anchor Maria Bartiromo. The next day, U.S. Commerce Secretary Wilbur Ross spoke on stage with Andy Serwer, Editor in Chief of Yahoo Finance.

Asked about the economy, Mnuchin stressed “the President’s economic agenda is the most important agenda, focused on creating sustained 3% or higher GDP growth,” of which the tax plan was a major component.

“We have the lowest small business rates since the 1930s and changing from a worldwide system to a territorial system. A lot of money now being invested in the US,” adding later the administration seeks to make the middle income tax cuts permanent. For a discussion of the then pending tax policy, see author’s May 2017 RCM Global Conference piece.

Bartiromo asked “where specifically are spending increases?” Mnuchin replied: “across the board. The major component is that people could automatically expense capital investment. We're beginning to see wages increase.”

Mnuchin added: “We’re at historically low levels of unemployment.” However, he stressed “we're hoping that the participation rate goes up. A lot of people have left the workforce. They’re no longer looking for jobs,” and as such aren't being counted.

“We hope that through training programs and demand, those people come back into the workforce,” he said.  Mnuchin stressed: “having proper job training programs are important as the economy changes. Getting training for specific jobs,” is very advantageous. This effort can re-invigorate workers displaced by global trade or technology.

Trade Jitters? Maybe the Stock Market Jitters, but not the Economy

U.S. Commerce Secretary Wilbur Ross also spoke on stage with Andy Serwer, Editor in Chief of Yahoo Finance, about trade policy.

Trade worries are one big thing holding back financial markets in an otherwise robust economy, with investors worried that tit-for-tat tariffs will blow up into an outright trade war. Ross is upbeat about President Trump’s trade agenda. But he’s not promising a free lunch. “If you don’t show you’re willing to absorb a little bit of pain, how on earth are you going to get things changed?”

What do the markets tell us? In an email to this author on May 31, 2018, David Ranson, Director of Research of HCWE Worldwide Economics, observed:

“The price of gold is holding down around $1300, while the ratio of Baa to Aaa yields is drifting up from 1.20 last year to 1.23 at present. The outlook for growth based on both together is roughly neutral.

On the basis of recent intermediate output data I see 3½ percent GDP growth plus this year. Even 4% would be achievable if something were to send spreads narrowing again. Another possibility is that a debt crisis in Europe would expel capital to our shores, driving up our growth.”

The administration’s goal of 3% real GDP growth objective is very doable.

Trade and Tariffs:
Ross also announced the administration would delay an imposition of steel and aluminum tariffs on Canada, Mexico, and 25 percent on the EU. He said this was done for national security (232s). However, some critics say the motive is likely politically driven to please the President’s steel producing regions – If national security was the case, why wasn’t this measure pushed by a previous White House?

On 5/31/18, the Trump administration announced it would levy steel and aluminum tariffs on the European Union, Canada and Mexico starting on Friday, a move that brought threats of retaliation from the major trading partners. On 6/9/18 President Trump left the G7 meeting in Canada early to travel to Singapore. The trade issue was left unresolved.

NAFTA, TPP, Multilateral Trade Pacts, and Trade Negotiations:

Serwer noted the President wants to have bilateral negotiations (verses conversations with multiple countries.) Ross replied, "As a legal and practical matter, the EU is the trade negotiator for all of the 20 odd countries within the European Union. There’s no ability to have a separate discussions,” with each country.

Trump had taken the U.S. out of the TransPacific Partnership (TPP). Serwer noted Japan is interested in the U.S. coming back, and asked Ross about Trump’s interest in considering re-entering it. Ross observed “when the President dropped out of the TPP,” it was already dead, pointing out that neither Clinton (if President), nor the Congress had the “political appetite.”

Ross noted: “the President has an underlying thesis: When you're the one with the big trade deficit, and you're negotiating with the guy with the big trade surplus, he has more to lose than you do.” Ross gave some plausible examples such as soy beans.

On NAFTA, Ross observed “Mexico has elections in July, Canada in June, and the U.S. has fall mid-terms. If we don’t see movement soon, re-negotiations will be put off till fall.”

Ross added: “…like any conventional trade negotiation, they started out with the easier topics to deal with, in the hope of building some momentum, getting people invested in the process.”

Brexit: A case study on avoiding “Multilateral Trade Pacts”:

The EU is a good example of a Multilateral Trade agreement, which seemed to do more for bureaucrats in Brussels than for the British people. British people voted to exit the EU in 2016, a move that many pundits proclaimed disaster, which didn’t happen.

In a HCWE publication on July 15th, 2016 David Ranson quoted Professor Patrick Minford – a pro-Brexit economist:

“… far from being a free-market paradise, the EU market has prices well above world market prices and, in so doing, twists the shape of the British economy toward these protected goods and away from its best shape. Britain produces more of what it is worst at and less of what it is best, while consumers have to pay excessive prices…The UK’s interest is in free trade with the rest of the world …”

“Outside the European Union, Britain will be unleashed to freely trade with the rest of the world. Inside, it was covered by the EU’s 10% tariff wall against the rest of the world (including the U.S.) Having thrown off this tariff, Britain will be able to increase trade with a market far larger than Europe. “

Ranson continued: “Britain’s Brexit opportunity is potentially a huge positive, although the gain is far from automatic. Freedom of trade can and should be pursued unilaterally, especially if negotiating governments are slow to move. Negotiations serve political, not economic, purposes.”

Far from being a disaster, Minford noted in April 2018 the U.K. economy has grown and Brexit is not even complete.

According to Harvard economist Dani Rodrick ‘free trade agreements’ – such as TPP, TTIP, etc. often foster hidden protectionism and benefit special interests and multinational corporations by design—at the expense of workers and national economies.

As such, President Trump was correct in rejecting TPP and should not re-engage it. The British voted to leave the E.U. “free-trade zone” for a reason! Trump should pursue trade agreements with each country where possible. Should negotiations stall, he should be willing to even engage in unilateral trade.

Tariffs may be futile anyway:

When discussing contemporary trade policy, it’s important to understand that with the modern world so integrated, it may be futile for any country to even attempt steep tariffs.

On April 24th, 2018, Ranson wrote:

“It’s doubtful that the economy will be seriously affected by current salvoes of tariffs and counter-tariffs. Even if US and Chinese leaders are NOT posturing and counter-posturing, it’s easy to underestimate the complexities and resilience of international trade.” Ranson listed key points, including an example:

• Tariffs on trade are rather like domestic taxes — they are a system in which loopholes are endemic

• Evasive strategies make it difficult for the authorities to make sure tariffs reach their targets

• Consider, for example, the new Chinese tariff on imports of US corn, an important source of ethanol

• Many countries participate in the world grain markets, and China can choose to buy from other producers

• It can even continue to obtain US corn or ethanol, knowingly or not, from intermediaries

• So it’s not hard to circumvent targeted tariffs like this

• In the end, the markets convert such trade restrictions into a small “wedge” between the price one country pays and the price its adversary receives

“As a result it’s likely that the US will continue to export farm products on nearly the same scale as before,” he concludes. The argument about targeted trade restrictions would not apply to border adjustment taxation. The former is highly specific and circumventable, while the latter is indiscriminate.


With China, the U.S. is having bilateral talks free of constraint of other countries.

Chinese tariffs only represent three tenths of 1% of GDP, which Ross characterizes as “hardly life threatening.” Would escalation present huge risks? Ross says “it's a question of choosing your risks.” Exports grew, but imports went up more. We're having an expanded trade deficit. That's a problem.” We will see in the section below, this viewpoint is flawed.

Serwer asked Ross about the theory that we have a trade deficit with China because the Chinese consumers save more, and then the investments come in terms of buying US companies, whereas we don't save when we buy their goods. Ross responded: “… the reason the Chinese population saves so much is, they have very little in the way of retirement benefits, post-retirement health benefits, etc. There's not much of a social safety network out there. They need to save more than Americans do. We have a lot of saving that's been substituted for by various government and other programs.”

It appears domestic capital creation in the Chinese population is strong, which can drive a net surplus; not surprising since China has an environment that provides an incredible growth engine.

Regarding Chinese businesses who ask, "Why doesn't the United States just go through the normal mechanisms of the WTO? Ross replied: “The WTO is an obsolete set of rules…that have been created to benefit exporting countries to the detriment of importing countries. There is a need for an impartial arbiter of trade rules.”

The Chinese are interested in buying technology, but such attempts often rub up against national security, Ross agreed. “Economic security is national security,” he said.

On May 21th, the U.S. suspended its threat to put tariffs on $150 billion in imports of Chinese goods while negotiations with China continue.

Missing pieces of the Trump Trade Policy:

Wayne Jett, author of “The Fruits of Graft,” referenced what economic philosopher Henry George observed in 1880: “Free trade has enormously increased the wealth of Great Britain, without lessoning pauperism. It has simply increased the rent.”

In a May 9th email to this author, Nathan Lewis, author of “Gold: the Final Standard,” pointed out that we create an “uneven playing field” by imposing legal, labor, environmental, etc. regulations on U.S. business, and allowing “imports from countries that do not have such regulations without penalty (tariffs).” Debate of the merit of these factors is warranted.

That said, Gwynn Guilford, commentator for QUARTZ, commented in 2016:

“Ricardian analysis [analysis of comparative advantage] is right in this sense: The jobs America lost in the last half-century would inevitably have been shed due to comparative advantage, as US productivity climbed. To bring them back now would cost the US economy enormously. By focusing on tariffs and a global tug of war over factory jobs that doesn’t actually exist, Trump now risks a “politician-made disaster” himself. Just as free trade itself didn’t cause America’s lost jobs and stagnant wages, neither will restricting it fix those problems. Winning global cooperation on exchange rates would help—a lot. But ultimately, to make free trade fair again, instead of “bringing back jobs,” America’s new president should also invest in creating new ones.”

In an email to this author, Lewis added: “If there was more job-creation in the U.S., and high levels of domestic capital creation led to a current-account surplus, would we still care about trade issues?” This is a sharp contrast to Ross’ views on the current account

After years of historical research, Lewis stated in 2012, the formula for prosperity in four words: “Low Taxes, Stable Money.” Lewis emphasizes that debasement of great nations’ currencies is done in their “decline and fall” phase.” This brings us back to China.

At last year’s Global Conference 2017, Mnuchin called China a currency manipulator, thus creating subsidies for Chinese exporters.

Getting cooperation with other countries regarding fixed exchange rates can be beneficial; even better if a gold-standard.

To clear up a common fallacy, a gold standard will not create balanced trade. Lewis noted to this author: “fixed exchange rates make trade much more rational.” However, “there is no “price-specie flow mechanism” or anything else that causes “balanced trade” under a gold standard regime.”

However, countries with reliable gold-linked currencies do attract foreign investment. In 2016, Lewis highlighted China’s intentions:

“an essay by Dr. Zhou Xiaochuan, governor of China’s central bank, in March 2009: “The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question: What kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth? An international reserve currency should…[have] …a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.”

Lewis added that “on April 19, 2018 the Shanghai Gold Fix officially began. The pricing mechanism is intended to be a replacement for the London Gold Fix, the primary price-discovery mechanism for gold bullion today.”

The U.S. should not sit around on this. Lewis wrote in March of this year, 34 years after the never passed Kemp Gold Standard Act of 1984, Congressman Alexander Mooney (R-WV) introduced H.R. 5404, “a Bill to define the dollar as a fixed weight of gold.”

Trump and Mnuchin should take the initiative to support the Mooney bill. Securing the reserve currency status of the dollar is paramount for many reasons, including maintaining the dollar’s “international seigniorage.” 

Lastly, missing from the discussion is the complications posed by cross-border corporate transactions. W.J. Mason explained in 2017, most U.S. imports from Mexico, as well as other regions are intermediate and investment goods, not consumer goods. Many are intra-corporate whereas the exporter and importer are owned by same parent. For example, “a tariff on Mexican goods is more likely to raise costs for US businesses — including for US exporters — than to lead people to substitute American-made goods for Mexican ones,” he explains. The Administration should take note.

Jim Altenbach, CFA, is an investment advisory professional in the Los Angeles area. He can be reached at  

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