Tag Archives: Trump

Trump – why is he really putting tariffs on steel and aluminum?

Donald Trump announced on 2nd March that the US will impose a 25% tariff on steel imports and a 10% tariff and aluminum imports. A tariff protects domestic firms against overseas competition and raises revenue for the government. A tariff is a tax placed (or levied) on imports that raises the price of imported goods thereby making locally-made products relatively more price competitive. This may protect jobs and/or improve the balance of payments but it can cause resentment overseas. High tariffs on imports may cause a country’s trading partners to retaliate and follow suit by placing tariffs on exports of foreign made goods. Notice on the graph below how a tariff reduces the quantity of imports from 6m bottles to 2m bottles and the domestic supply increases from 2m to 4m bottles.


For many years US producers have found it hard to compete with cheap imports and this has led to many steel plants closing down with thousands of workers losing their jobs. Two main factors have caused this:

  1. Global steel and aluminum production has increased significantly over the last 15 years which has created excess capacity.
  2. Chinese firms have been widely accused of pricing below the cost of production in order to get rid of excess stock

Previous Tariffs – nothing new here.

The US is not the only country or group to impose tariffs on foreign products. The EU has done the following:

  • Put a tariff of 28.5% on certain types of steel pipes and tubes made in China after it was found that the prices were artificially low.
  • Imposed 43 anti-dumping and anti-subsidy measures, 20 of which are on products originating from China

The Obama Administration also was active in counteracting alleged Chinese dumping.

  • March 2016 – they put a 265.79% on imports of cold-rolled steel, used to make auto parts, appliances and shipping containers, from seven countries including China.
  • May 2016 – to clampdown on the glut of steel imports the US imposed anti-dumping and anti-subsidy duties of up to 450% on corrosion-resistant steel form China.

What is the difference between previous tariffs and Trumps announcement?

The difference here is that Trump’s tariffs would apply to all products rather than targeting particular areas of steel and aluminum production. Trump seems to be threatening action against any nation that runs trade surpluses with the United States. He tweeted last week:

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win,”

“Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore—we win big. It’s easy!”

The EU maintain that the key problem is as mentioned above is global over capacity caused by non-market production – producing the output even though there is no demand for it. They are of the belief that this can be dealt with at the source – i.e. those countries over producing. The oil industry seems to work in a similar way with OPEC where production can change with negotiations between oil producing countries. However if a trade war does eventuate Europe has warned the US to expect imports tariffs on American icons like Harley-Davidson, Levi’s jeans and Kentucky bourbon.

China is not the big importer into the US

It seems that in a lot of his communication he singles out China as being the problem especially with the trade deficit the US has with that country. However China only supplies 2.9% of US steel imports – see below:

Top steel exporters to the United States with their corresponding percentage of total U.S. steel imports:

 

Canadian steel producers, like their U.S. counterparts, have been complaining about Chinese firms dumping products in the domestic market. Sensitive to these complaints, the Canadian government has long imposed protective duties on some Chinese exports, such as hot-rolled steel plate. On Thursday, the Canadian International Trade Tribunal indicated that these duties would remain in place. On this issue, at least, the United States and Canada should have been able to find common ground. Instead, Canada, like the E.U., is threatening to retaliate against Trump’s plan.

 

 

Source: Wood Mackenzie

Why is Trump really doing this?

As with any politician it is all about popularity. Part of his rhetoric on the election campaign was to make America great again and to revive the heavy industry in areas such as Pennsylvania (steel production) a normally very safe seat for the Republicans – in fact the Democrats didn’t even field a candidate in the last election. However, Trump voters are disappointed with his presidency and, with the Democrats fielding a candidate, the forthcoming special election in western Pennsylvania is too close to call. An upset victory by the Democrats, or even a narrow loss, would make the midterm elections a very close contest as the Democrats try to retake control of the House of Representatives.

The big question is will Trump go ahead with the tariffs or back down as he has done with immigration etc.

Source: New Yorker – Will Trump Really Start a Broad Trade War? by John Cassidy

The 3 heads of Donald Trump

Below is a great cartoon clip from the FT with Gillian Tett talking about the 3 heads of Donald Trump. With some excellent cartoon graphics she goes through each of the following:

  1. The sensible serious Trump
  2. The love to shock Trump
  3. Sleezy, freewheeling, write my own rules, anti elitist Trump

One wonders which Trump will be more prevalent in his presidency? A lot of references to economics – animal spirits, NAFTA, tax cuts, corporate tax etc. As Gillian Tett points out ‘nobody really knows who he is’

Options for taking on Trump – the Japanese Model.

trump-abeA colleague alerted me to a Terrie Lloyd a New Zealand businessman in Japan who writes a weekly newsletter. With the election of Donald Trump his recent writing looked at bullies and ways in which you deal with them. Shinzo Abe, the Japanese prime minister, has been proactive in getting to know Trump and his team and how the two countries can work together.

Research on bullies

Lloyd suggests that there are generally three ways to deal with a bully.

Run – UK seem to be taking this option
Fight – Chinese will do this
Suffer and appease – Japan, having a bullying culture already, will go for appeasement

Abe will be meeting with Trump on 10th February for a second time in as many months and will want to convince him that Japan is one of the good guys and if he has to pick on someone in the area he should pick on China. For this to work Abe also needs to feed Trump’s ego publicly

Lloyd looks at the work of Dacher Keltner who has written about appeasement and related
human emotion and social practice. He looks at two general classes of appeasement.

1) reactive – the person provides appropriate responses after incidents and these responses are usually public displays of embarrassment and shame.
2) anticipatory appeasement where a person is proactive and engages in certain strategies to avoid conflict. Polite modesty and shyness are also considered anticipatory appeasement.

Japanese Model for dealing with bullies

With Japan taking the latter option, Keltner is suggesting that Abe must appease Trump with gifts of value and that they are seen publicly to assist Trumps power and reputation. Last month the Japanese gave access to US car manufacturers but will that be enough to keep Trump happy? At the meeting on 10th February Abe will propose a package that could generate 700,000 U.S. jobs and help create a $450-billion market. It includes the building of infrastructure projects such as high-speed trains in the northeastern United States, and the states of Texas and California, and renovating subway and train cars. It also includes cooperation in global infrastructure investment, joint development of robots and artificial intelligence, and cooperation in cybersecurity and space exploration, among others.

Toyota the car manufacturer has also been taking the appeasement option after the Trump administration criticised their building of a second car assembly plant in Mexico and also threatened to impose a 20% tariff on Japanese automobile and auto parts makers with plants in Mexico. Toyota quickly announced it would invest $10 billion in its U.S. operations over the next five years.

Abe has definitely been massaging the ego of Trump not only being the first international leader to visit Washington after his election but also telling Trump that he “hopes the United States will become a greater country through (your) leadership,” adding Japan wants to “fulfill our role as your ally.” It will be interesting to see what happens after their meeting on Friday 10th February.

Sources: Terrie Lloyd,  The Japan Times

2017 means reflation – but what about the Trump Matrix.

Below is a useful graph from the National Australia Bank’s 2017 Outlook. It shows the inflation relative to the central target rate – so for New Zealand the current inflation rate is 0.4% but the policy target agreement is 1 – 3% with a target of 2%. Therefore NZ is 1.6% short of their inflation target.

Inflation globally has been a record lows and according to the IMF “cyclical unemployment and weaker import (commodity) prices can account for the bulk of the deviation of inflation from (central bank) targets …..but other unexplained factors have been playing an increasingly larger role”

Inflation relative to CB target.png

In 2017 it is predicted that higher commodity prices and wages will lift global inflation. With the US Fed raising interest rates there is the sense that inflation could be on its way up.  Also spare capacity is forecast to reduce in most advantage countries with the US already at full employment.

A Trump policy of protectionism and expansionary fiscal policy would definitely mean a more hawkish US Fed. If he does follow this agenda the US will initially experience some kind of stagnation environment, but given the chance for trade retaliation this could quickly lead to a global recession which could eventually push the world close to a secular stagnation scenario of low growth, low inflation, and low productivity. Below is a very informative matrix from NN Investment Partners.

Trump Matrix

Trump Matrix.png

Trump and Trade

In his US Presidential campaign one area that Donald Trump was clear about was trade. During the oil crisis years of 1973 (oil prices quadrupled) and 1979 (oil prices doubled) the traditional US car / truck became very expensive to run and Americans started to buy significant numbers of Japanese cars which were much more reliable and cheaper to run. Trump alluded to this and stated that Japan was robbing America blind. He also criticised inept and corrupt elites for moving jobs abroad – ‘China is killing us’ he said.

In order to even the playing field he has vowed to:

  • impose a 45% tariff on imports from China to compensate for their manipulation of its currency.
  • impose a 35% tariff on goods from Mexico in order to protect American jobs.
  • renegotiate existing agreements like the North American Free Trade Agreement with Canada and Mexico
  • pull out of the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.
  • Trump has threatened to withdraw from the World Trade Organisation (164 members)

America has free-trade agreements with 20 other states and the percentages below tell you how important trade is. See also the graphic from The Economist.

  • 33% of America’s imports come from countries they have free trade agreements
  • 50% of Americas’ exports come from countries they have free trade agreements

us-trade-by-destination

If Trump does go ahead with a trade-war it is estimated employment in private companies employment would decline by 4.8m jobs by 2019. It is ironic that the very group that supported Donald Trump will be the most disadvantaged. Furthermore, with anti-free trade policies comes higher prices which will harm living standards and worsen Americas fiscal position. Although it might preserve some jobs it will worsen prospects and lower well-being for others – OECD.

With America pulling out of the TPP China maybe keen to take the place of the US in this agreement with 11 other Pacific nations.

TPP [would be] a good thing in the long run because it sets high standards for international trade and investment,” says Prof. Larry Qiu, of Hong Kong University’s School of Economics and Finance. He adds that what the world needs is not “more trade and investment … but higher quality and better ordered trade and investment

Trump’s economic policies a vision of the past.

tooze-wages-of-dI came across this interview on PBS News (Making Sense of Financial News) in which Paul Solman interviews economic historian Adam Tooze about the historical context of Trump’s economic policies. Tooze wrote an excellent book about the economics of World War II Germany entitled “The Wages of Destruction” – well worth a read.

He refers to Trump’s policies as nationalism, with a commitment to the redevelopment of American manufacturing and industrial jobs. He cites the following historical events which Trump has seized ownership of.

  • 1933 and 1938 – the New Deal under President Franklin D. Roosevelt and the origins of the modern public sector – government-driven infrastructure spending.
  • 1950s, in which the Eisenhower administration brings about the modern interstate highway system.

He does have concerns about Trump’s aggressive trade policy of protecting United States manufacturing industries and sees a depreciating US dollar, higher US interest rates and a collapse in the market for US debt. However Trump’s rhetoric only applies to approximately 15% of the US labour force. Tooze believes that the appeal of Trump to the voters was that he offered hope for ordinary Americans to be able to earn a living based on the historical context of nationalism.