Sunday, April 10, 2016

If Trump Launched a Trade War on Asia

U.S. stocks swooned during China’s mild summer slowdown.
Imagine what 45% tariffs would do.

By RICHARD KATZ, editor of the Oriental Economist Report and APP member
Wall Street Journal, March 29, 2016

If Donald Trump becomes U.S. president, will he wreak havoc on world trade? Or is he bluffing when he proposes a 45% across-the-board tariff on manufactured imports from China, and 35% on goods made in Mexico by U.S. firms such as Ford Motor?

No one knows, perhaps not even Mr. Trump himself. But here’s what we do know.

First, U.S. law enables Mr. Trump to carry out his threats. Second, while such steps would damage the U.S. economy, perhaps sending it into recession, that damage would be dwarfed by the havoc created among U.S. friends such as South Korea, Taiwan and Thailand.

Even if Mr. Trump loses in November, his candidacy could spark a dangerous sea change. Since World War II, neither major party in America has nominated an outright protectionist. Many Congressional Republicans will no doubt look at his triumph and shift their own stance on trade out of fear of losing their party’s primary elections.

Mr. Trump’s threats violate the rules of the World Trade Organization, but there’s nothing in U.S. law to block a president who cares nothing for WTO rules. According to several respected trade lawyers, including Warren Maruyama, the former general counsel of the Office of U.S. Trade Representative, Mr. Trump can find authorization in Section 301 of the US Trade Act of 1974. It authorizes the president to impose sanctions, including tariffs, on any country that, in his view, undertakes an “act, policy, or practice” that is “unjustifiable” and/or “unreasonable” and “burdens U.S. commerce.”

Mr. Trump could decide that any economic inducements given by Mexico to Ford and other firms constitute an “unjustifiable” act. He’d likely ignore that his rival, Gov. John Kasich, provided special tax cuts to Ford to get it to return some assembly jobs to Ohio. Mr. Trump could call China “unreasonable” for “manipulating” its currency, even though the International Monetary Fund says China’s currency is no longer undervalued.

Mr. Trump says he’s not afraid of U.S. exports being hit in a trade war because China and Mexico would have more to lose. But when China is hit, as it was back in 2009 with an antidumping duty on tires, it hits back and does so quickly. U.S. exports to China and Mexico add up to 2% of U.S. gross domestic product, and 5% of manufacturing sales.

But the U.S. would also be hurt by a cut in imports. Mr. Trump’s tariffs would amount to a tax on American companies and households equal to 1.5% of GDP—1.2 points from his 45% tariff on Chinese products and another 0.3 points from a 35% tariff on goods made in Mexico by American firms. A hit of that size could cause a recession, such as the 1.4% peak-to-trough decline in U.S. GDP seen in 1990. Two years later, “It’s the economy, stupid,” got President George H.W. Bush evicted from the White House.

Beyond that, more than one-half of U.S. imports from China and three-quarters of U.S. imports from Mexico are capital goods and intermediate goods that American firms need for their own production. It’s impossible to abruptly shrink imports from China and Mexico without damaging U.S. firms, reducing long-term growth and destroying jobs. American-based auto plants forced to pay more for steel, for example, would suddenly find themselves less able to compete with imports from Europe, Japan and Korea.

Mr. Trump claims any damage will be swamped by benefits as his tariffs force firms to “bring the jobs back” from China and Mexico. In the case of China, that’s impossible because the growth of imports from China didn’t “take” jobs from the U.S., but from elsewhere in Asia.

During the quarter century from 1990 to 2014, the share of U.S. manufactured imports that came from China soared to 26% from 3.6%. But during that same period, according to the Congressional Research Service, the share of U.S. factory imports coming from all of East Asia stayed the same (47% in 1990 and 46% in 2014).

Imports from China didn’t add to U.S. imports; they mostly replaced imports that previously came from other countries. Computer chips once imported directly from Japan now come inside products assembled in China and are labeled “Made in China.”

While the U.S. would suffer, America’s friends and allies in Asia would suffer far more. The ratio of total China-bound exports to domestic GDP ranges from 3.5% in Japan to 10% in Thailand, Singapore and Vietnam to 13%-15% in Korea and Taiwan. Considering that around 40% of the value of these exports consists of imported inputs from the U.S. and other countries, the global damage from the ripple effects would be enormous.

Mr. Trump may not think this matters. But consider how U.S. stocks swooned in 2015 in reaction to a relatively mild deceleration in China. How much more severe would the impact be on currency and stock markets from the economic and geopolitical maelstrom Mr. Trump proposes to let loose—not to mention the anxiety of having such a reckless character at the helm in Washington.

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