Since the election of Donald Trump, the financial markets have rallied sharply on the expectation that a Republican president and a Republican Congress would enact laws aimed at both reforming the tax code and deregulating the financial industry. And indeed, reforms aimed at lowering corporate taxes, for example, are likely to boost economic growth by allowing American companies to repatriate hundreds of billions of dollars to the United States, and encouraging foreign companies to invest in America. However, these benefits could be negated if the new president and congress are serious about a 35% tax on imports.
Read A Trade War That Cannot Be Won
The United States has benefited greatly from past free trade agreements. According to the Department of Commerce total exports from the United States reached a record high of little over $2 trillion in 2014. This trend is likely to be reversed in the case of a punitive tariff on imports. Countries such as Mexico will not stand idly by and watch a 35% import tariff imposed by the Trump administration on goods entering the United States from Mexico without retaliation. Trade is a two-way street, and protectionist measures by the United States will most certainly trigger protectionist measures by Mexico as a response. According to the Office of US Trade Representative total trade with Mexico which is the United States’ third largest trading partner totaled $531 billion in two-way goods in 2015. “Goods exports totaled $236 billion; goods imports totaled $295 billion. The US goods trade deficit with Mexico was $58 billion in 2015” (https://ustr.gov/countries-regions/americas/mexico).
While a trade deficit with Mexico exists, the close to $235 billion of goods and services exported to Mexico from the United States are significant—walk into a Wall Mart’s Sam’s Club in Mexico City and you will find plenty of made in the USA items. That would also be the case in other countries throughout the world where the United States exports consumer goods. The United States is also a major exporter of capital goods such as industrial machinery, commercial aircraft, automobiles, semiconductors, and chemicals. In fact, the United States is the world’s third largest exporter after China and the European Union. Hence threatening BMW with a 35% tax on automobiles imported to the United States does not make any sense, especially when BMW is exporting from the United States 65% of the vehicles it manufactures in its Spartanburg, South Carolina plant. According to Germany's VDA automotive industry association, German carmakers export more than half of the vehicles they manufacture in the United States.
What is needed from both the new Trump administration and the incoming congress is clarity regarding the upcoming economic policy agenda in general, and trade policy in particular. At this time it is too early to make any conclusions or attempt to discern nationalist economic rhetoric from reality—that is one of the main reasons why the financial markets have paused and taken a correct wait and see stance. In the end, a great deal will be riding on what policymakers decide to do in the upcoming legislative cycle, with major consequences for both the US and global economies, and subsequently for equity traders and investors.
Abdallah completed a B.A. in Political Science and a Master’s in International Relations from Texas Tech University, and a Ph.D. in Political Science from the University of Houston. Ghassan is an independent trader and writer—his main interests are international relations and political economy.
