Tradespotting: Choose protectionism. Choose higher inflation. Choose weaker trade and growth
The future of global trade, which has slowed despite a pick-up in global GDP growth, is hogging the headlines, with the spotlight on both the US and UK.
US President Trump and his team have so far focused on (1) substituting US imports for domestic production, with Trump adopting a carrot-and-stick approach (2) trade in goods, particularly manufactured goods and (3) trade with China and regional trading partners and in particular Mexico.
There is in theory nothing irrational in President Trump wanting to boost domestic production and exports, narrow the $500bn trade deficit and spur US employment.
However, his current approach may in practise fall well short of delivering the improvement in US trade and jobs which he seeks. In a more extreme scenario, his tactics could at least in the near-term lead to higher US inflation and weaker trade, creating headwinds for both the US and global economy.
The high-labour cost US economy should be looking to better compete with the likes of Germany, not China. But the quality and desirability of exports matters.
The Dollar’s strength, over which the Trump administration has little or no control, will likely continue to weigh on the overall competitiveness of US exports while at the same time fuelling cheap US imports.
A stronger Renminbi is not the solution as exporting nations other than the US may be better positioned to capitalise on such a relative-price change, while the USD-cost of imports from China may rise.
If the US imposed higher tariffs on imports from China and other countries (such as Mexico), it would take time for US-based companies to boost production given insufficient quality and capacity in US manufacturing.
Moreover, China and other exporting nations such as Mexico and Canada may respond to higher US import tariffs by increasing their tariffs on imports from the US. This would put US exporters at a clear disadvantage vis-à-vis other exporting nations. Read more