By Sam Natapoff, President of Empire Global Ventures LLC (EGV)
The coming red state ruination is no accident; our partners are making a point, economic aggression affects us all.
For President Trump, all questions have simple answers: U.S. “immigration laws are the weakest and worst anywhere in the world”, the Mueller investigation is a “rigged witch hunt”, and “trade wars are good, and easy to win”. While many of Trump’s presidential actions will have negative consequences over time, for his burgeoning trade wars, the bills are already beginning to come due. They are high, they are primarily hurting states that voted for him, and they are harming business people who want to succeed as he did.
International trade is central to the U.S. economy. In 2014 (the latest data available), trade represented an estimated 30 percent of U.S. GDP and supported 41 million U.S. jobs, up 300 percent from 1992. In 2016, U.S. exports alone supported an estimated 10.7 million U.S. jobs. Small entrepreneurs play an outsized role in U.S. trade, exactly the people businessman Donald Trump says he respects. In 2014 (the most recent available figures), small- and medium-sized U.S. firms (SMEs) made up 98 percent of U.S. exporters, 97 percent of U.S. importers, and concluded one-third of all U.S. merchandise trade. In fact, in 2014 U.S. companies with 0-9 employees exported $190 billion, 161 percent more than its closest G-7 competitor’s companies of the same size.
Donald Trump disrupted global trade for three reasons. First, he made a key campaign promise to bring jobs back home by renegotiating America’s trade deals. Second, because he could; unlike immigration, taxation, and health care, President Trump has full control over U.S. trade policy without requiring Congressional approval. Third, gleefully unconstrained, he offered a confrontational and catastrophically simplistic solution to a complex issue.
He stated that the U.S. was “losing” in trade because it had large bilateral trade deficits, particularly a $375 billion goods deficit with China. Trade deficits occur for many reasons and economists generally can’t agree on any of them, but for Donald Trump, trade deficits were bad, he could fix them by himself, and he was spoiling for a fight.
On June 1, Trump first imposed steel and aluminum tariffs affecting countries including Canada, Mexico and Germany, alienating America’s NAFTA and EU partners over less than 2 percent of America’s total imports. They responded with their own tariffs. Then, on July 6, Trump installed $34 billion in tariffs on Chinese goods; China retaliated with $34 billion of its own tariffs, whereupon Trump threatened a further $200 billion. Approximately $75 billion of U.S. goods are now subject to retaliatory, and completely unnecessary, tariffs, which fall heavily on the Rust Belt and the Farm Belt, both areas of strong Trump support.
The economic damage from these decisions is considerable. Estimates project that Trump’s tariffs will reduce U.S. economic growth by between 0.3 and 1.3 percent — economists expect 2.4 percent growth next year. The U.S. Chamber of Commerce, America’s business voice, states that these actions threaten 2.6 million U.S. jobs. Some 468,790 U.S. jobs are estimated to be lost from the steel and aluminum tariffs alone. Over 41 percent of clothes, 72 percent of shoes, and 54 percent of non-leather handbags sold in the U.S. are made in China and will likely now be more expensive. As a result of the EU’s retaliatory tariffs, Harley Davidson is moving some production of its iconic American motorcycle out of the U.S. to the EU, which it says “is not the company’s preference.”
Trump’s trade wars promise both immediate and longer-term economic effects. BlackRock’s CEO Larry Fink stated that intensifying trade tensions could reduce stock prices by 10 to 15 percent, spur a broad market downturn and slow down the U.S. economy. In June, investors withdrew $12.4 billion from global stocks, the fastest withdrawal since the 2008 financial crisis. That same month, the market values of U.S. corn, soybeans, and wheat crops dropped $13 billion, about 10 percent. Reflecting a 25 percent Chinese tariff, U.S. soybean prices fell by 16 percent to their lowest level in 10 years, after having exported some $12 billion to China last year (56 percent of all U.S. soybean exports).
According to Rusty Smith, a corn and soybean farmer in Cotton Plant, Arkansas, this price drop is “like $100,000 that has disappeared into thin air. We were already in the red, and now it’s even worse.” Bloomberg Economics estimates that all these tariffs could cost the global economy $470 billion, reduce global trade by 3.7 percent, and shrink the U.S. economy by 0.9 percent by 2020.
In the U.S., who will be most affected? The emerging conclusion is Republican states, Trump voters and small business people. Moody’s Analytics projects that China’s tariffs will significantly affect 20 percent of the counties that voted for Trump (with a total population of 8 million Americans), as opposed to only 3 percent of the counties that voted for Hillary Clinton (1.1 million total population). Soybean farmers in the Great Plains, car manufacturers in the Midwest, and oil producers in the Dakotas and Texas have all been hit by China’s tariffs, and they are predominantly from red states.
Finally, 59 percent of small- and medium-sized firms export to only a single market, compared to 75 percent of large firms that export to multiple countries, leaving smaller firms exceptionally vulnerable to international trade turmoil. They are the most exposed to the costs of Trump’s frenzied policies and often live in red states.
This red state ruination is not accidental. Donald Trump brought his belligerent brand of politics to trade, insisting that he could force U.S. trading partners to submit. With their responses, the EU and other countries have made a different point — that in an interdependent global economy, economic aggression affects everyone, even the perpetrator, so that reasonable compromise is manifestly preferable to conflict.
To drive this home, these countries intend to punish Trump’s supporters in the U.S. Many of these retaliatory tariffs have been targeted with malice aforethought, to send a message to Donald Trump and to those who put him in office. Several countries have aimed their fire at both Kentucky and Wisconsin, homes of Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan, levying tariffs on specific local products such as whiskey, cheese and Harley Davidson motorcycles.
Trump’s tariffs have created a coalition of conservatives who would never normally oppose a Republican President. The CEO of the U.S. Chamber of Commerce said, “Tariffs are simply taxes that raise prices for everyone… that will cost American jobs and economic growth.” Republican farmers and agribusiness groups have implored Congress to restrain Trump’s trade policies. Even members of Trump’s own party are rebelling. Republican Senator Bob Corker (R-Tenn.) said, “I believe the president is abusing his authorities. I believe it is a massive abuse of his authorities.” Republican Speaker of the House Paul Ryan said, “We risk having American products locked out of new markets, jobs moved overseas, and a decline in American influence.”
In his lust for simplicity and confrontation, Donald Trump has created anarchy in the global trading order. In trade, he suffers no restraints, no dearth of targets and apparently no interest in shielding those who raised him to power. Einstein’s definition of genius was to take the complex and make it simple. Donald Trump’s trade policy has demonstrated his anti-genius, as he has taken something complex and made it chaotic.
Compliments of Empire Global Ventures LLC (EGV), a member of the EACCNY