Recently, the Trump Administration has been focused on trade, in particular with China. This is not surprising, given that China is the United States’ largest trading partner and reportedly the source of nearly half our total trade deficit.

What is the Trump Administration trying to achieve?

  1. Free and fair trade with China.
  • Correcting any tariffs that disadvantage the U.S. For instance, there is a 25 percent tariff on U.S. automobiles sold in China - while foreign cars sold in the U.S. face only a 2.5 percent tariff.
  • Eliminating unfair trade practices particularly in intellectual property practices, where U.S. companies entered China and formed joint ventures with Chinese firms only to realize that the latter were leaking their intelligence to the government or to their competitors.

 

  1. Creating more jobs for the American middle class.
  • Rectifying the wage gap of cheap labor abroad versus the U.S. workers’ wages. Cheap overseas labor resulted in a hollowing out of certain industry jobs in the U.S. The cheap labor could have been a result of the under-valued Chinese Yuan, which is a currency that is quasi-fixed by the Peoples’ Bank of China.

 

  1. Revitalizing and solidifying America as an economic superpower.
  • Avoiding heavy reliance on foreign imports, particularly with China as it has rapidly grown to be the second-highest GDP power in the world, and is still growing faster than the U.S.

Will the U.S. be successful in achieving this?

My View: The administration’s efforts to highlight and correct certain unfair trade practices have been embraced and everyone would agree we want a level-playing field in trade.

However, it is the approach that the current Administration is taking that the market is more cautious about. President Trump’s approach has been to start by raising tariffs on Chinese goods. This punitive action has the potential to spark a trade war, and indeed China retaliated by slapping tariffs back on certain U.S. goods.

Not only that, raising tariffs to protect certain industries in the U.S. goes against free trade – and is taking a protectionist trade approach. This is just a temporary fix, as we learned when this same scenario played out with the U.S. and Japan in the 1980’s. Worse yet, analysts fear that higher input prices could suppress production in the U.S., ultimately resulting in fewer jobs and a weaker economy.

The market would have preferred to see a reduction in tariffs as the solution to the unfair trade practices, perhaps through a more diplomatic approach, as this is truly much more consistent with free and fair trade principles.

Keep in mind that globalization and free trade still provide a basic framework that ensures economic dependence around the world and an incentive for countries to avoid military friction. The market understands the Administration’s objective, but is confused about its strategy. Until there is a more solid plan aimed at fixing the root of the trade imbalance, the financial market instability may linger.

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