Tuesday, June 5,
2018
(Please scroll down at right to read COMMENTS.)
(Please scroll down at right to read COMMENTS.)
Is Donald Trump a New Herbert Hoover, With
his Policy of Isolationism and Protectionism?
By Dr. Rodrigue
Tremblay
(Author of the
books “The
Code for Global Ethics”, and “The
New American Empire”
“To treat [U.S.] auto imports like a national security
threat would be a self-inflicted economic disaster for American consumers,
dealers, and dealership employees,” Cody
Lusk, president of the American International Automobile Dealers
Association, Wednesday, on May 23, 2018.
“Lots of countries have resorted to
protectionism when their economies were doing badly. It almost never works. But
Trump may be the first leader ever to do it when the economy is booming. He’s
trying to fix a problem that ain’t broke. The auto industry is healthy.” Rufus Yerxa, president of the National
Foreign Trade Council, on Wed., May 23, 2018
“The 1929 depression was so wide, so deep, and so long because the
international economic system was rendered unstable by British inability and
U.S. unwillingness to assume responsibility for stabilizing it by discharging
five functions:
(1) Maintaining a relatively open market for distress
goods; (2) providing countercyclical, or at least stable, long term lending;
(3) policing a relatively stable system of exchange
rates;
(4) ensuring the coordination of macroeconomic
policies;
(5) acting as a lender of last resort by discounting
or otherwise providing liquidity in financial crisis.” Charles Kindleberger (1910-2003),
American economic historian, and author of
The Great Depression 1929-1939,
1973, revised and enlarged in 1986.
“When
every country turned to protect its own private interest, the world public
interest went down the drain, and with it the private interests of all.” Charles Kindleberger (1910-2003),
American economic historian, and author of
The Great Depression 1929-1939,
1973, revised and enlarged in 1986.
American
president Donald Trump seems intent
to isolate the U.S. economy from neighboring economies, and even from the world
economy, and thus to break with three quarters of a century of closer economic
cooperation between countries, established after World War II. There is a clear
danger that the international
economic system could become structurally unsettled for years to come,
which does not mean that such a system is not in need of reform.
What worries many
economists is Donald Trump’s approach to international economic cooperation, or
lack of it, which appears to be a dangerous throwback to the 1930’s. — If his
administration were to continue in that direction, the negative economic and
industrial dislocations and consequences, both for the American economy and for
other economies, would be severe, potentially very severe, considering how
closely intertwined modern economies are today, through investment, industrial
and technological cooperation, and through reciprocal international trade.
Trump: a Sorcerer’s Apprentice in international trade?
Is it possible
that American president Donald Trump is some sort of a Sorcerer’s Apprentice,
as far as his
protectionist trade policy is concerned? He seems bent on instigating a trade
war with other countries, from neighboring Canada, to Europe and to China. In
so doing, however, he may start a sequence of events, which could be impossible
to control or to stop once set in motion, with very negative economic outcomes.
Such outcomes could be a severe economic recession, similar to the 2008-2009
Great Recession, and potentially, in the most extreme case, an economic
depression, similar to the
one the world experienced before World War II.
Indeed, during
the ten years of the 1929-1939 Great Depression, international trade measured
in dollars plummeted 65 percent, total U.S. production fell by 47 percent,
wages fell 42 percent and the unemployment rate rose to 25 percent. This was
truly an economic disaster, mainly brought about by bad public economic
policies. Who would want to repeat such a failure?
Is Donald Trump set to repeat the mistakes of the
1930s?
By now, most
everybody knows that hotel and casino owner Donald Trump is an extremely
self-centered individual who operates in government as he did in his own
business, when he was known, in New York, as being a ruthless
private real estate negotiator, constantly trying to pull the blanket
over to his side, and not hesitating to violate rules and contracts when that
suited him. — But a government is not a private corporation. Citizen Trump does
not “own” the U.S. government. The U.S. government belongs to the American
people and its main function is to pursue policies that promote the common
good, not the private interests of a megalomaniac politician or the financial
interests of his immediate family, or those of his rich donors.
We have some
indication of the troubled economic thinking of Donald Trump, when we consider
what he said in a tweet, on March 2, that international “trade
wars are good, and easy to win”! I have never heard a statement as
outrageous and as irresponsible as this one coming from a head of state,
although in Trump’s case, this seems to have become customary.
Trump seems to be
oblivious to basic facts of history or basic economics. He doesn’t seem to have
a clue about the way international trade and international investment function.
He doesn’t seem to understand that the reason the U.S. dollar
is widely used as a means of payment internationally, and as a key currency for
other countries’ central banks, is a direct consequence of the United States
promoting harmonious and multilateral international economic relations. The
United States collects important economic
and financial benefits from this privileged situation.
Trump’s economic
ideas are primitive, obsolete and mercantilist. Let us consider his pretention
that for a country to “win” when it trades with other economies, it must have a
trade surplus with everyone. In a multilaterally trading world, this is
practically impossible. In a given year, a country may have current account
surpluses with a number of countries, but will likely have current account
deficits with other countries. And this is the normal outcome, if we assume that there are no capital movements between countries.
However, when
there are capital movements between countries, as it is the case nowadays, a
country can finance an excess of domestic investment over its domestic savings
(without inflation) and reap the benefits of faster economic growth. In which case, a net borrowing country will register
a current
account deficit to
counterbalance its net capital inflow, in any given year. That is because a
country does not only borrow capital or savings from abroad, it borrows an
excess of goods and services from other countries over its own domestic
production, and this is paid for with an increase in its net foreign debt
(foreign liabilities minus foreign assets). When this new capital is well
invested, the country takes advantage of a faster rate of economic growth.
At the end of
2017, the United States had a net foreign debt equal to $ $7,845.8 billion. If the Trump administration were serious in wanting
the U.S. economy to generate a trade surplus with the rest of the world, it would
stop borrowing heavily from other countries to finance its budget deficit ($440 billion in 2018) and it would take measures to increase domestic
savings to cover the needs of all U.S. domestic investments.
But the United
States is a net borrower of foreign savings, in a given year, and that is the
reason it has a current account deficit. No pronouncements from American
politicians can change that reality.
The general
principle here is that the balance
of payments of a country always balances and there is an economic
adjustment, (through interest rates, exchanges rates and incomes), which makes
sure that this the case.
That an
individual who is the head of state of an important government like the United
States does not seem to understand these simple economic and accounting
principles is a scandal in itself.
Donald Trump goes rogue on international trade and border
taxes
Thursday, May 31,
2018, could be known as the date when Donald Trump launched a trade
war with a host of countries, many of them close
allies of the United States either in NORAD, as is the
case with Canada, or in NATO, as is the
case with many European countries. And Trump had the gall to pretend that he is
raising tariffs on imports from Canada and from European countries for
“national security” reasons, relying on an obscure section 232 of the 1962 trade law (the Trade Expansion Act of 1962),
without having Congress vote on the issue!
In Canada’s case,
one of Trump’s demands to maintain the 1994 North American Free Trade Area (NAFTA)
is to insert a sunset
clause to automatically terminate and renegotiate the trade agreement each five
(5) years. Considering that
companies plan their investments twenty or thirty years in advance, only bad
faith or mischievous intentions would explain why such an impractical demand
has even been considered.
What are the likely negative consequences of an open
trade war for its participants?
- First of all,
U.S. export industries, their production and their employment, will be heavily
penalized and disrupted by the new border taxes and similar taxes imposed by
other countries, in retaliation, on American exports.
- Secondly, U.S.
import industries will face higher prices for their supplies, thus raising
prices for the consumers and raising the overall rate of inflation. Don’t
forget that border taxes are taxes, and that they are ultimately paid by the
consumers when they buy goods, from the purchase of jeans to buying houses.
- Thirdly,
American companies operating worldwide will see their chain of supplies
perturbed. They may also face a less welcoming regulatory climate in some
countries, as a result of the Trump administration’s hostile economic policies.
—Their profit line is most likely to suffer. For instance, for the year 2012
(the last year for which data are available), American corporations reported that
profits earned by their US-controlled subsidiaries abroad amounted to more than
one
trillion US$. American
investors profit directly for such foreign incomes.
- Fourthly, a
rise in domestic inflation is bound to translate into higher interest rates,
which are bound, sooner or later, to derail the stock market, with heavy losses
to be expected, and possibly an overshoot on the way
down.
- Fifthly, as
economic uncertainly spreads, productive investments will decline, possibly
resulting in a self-reinforcing general downward economic spiral, with lower
productivity growth, lower incomes, lower employment and lower consumer
spending.
Other countries
will suffer similar contractions in their economies, causing negative
multiplier effects worldwide.
This is a
doomsday scenario that the world has seen before and has lived to regret. I do
not know a single economist who would advise a course of action such as the one
the Trump administration seems to be willing to take.
People who ignore history are bound to repeat it.
Indeed, the
Republican Trump administration’s frontal attacks against multilateral trade
looks as reckless and as irresponsible as the much reviled Republican Herbert
Hoover administration’s move against international trade, in 1930. On June 17,
1930, indeed, President Hoover signed the Smoot-Hawley
Act into law, — a law that imposed stiff tariffs on imports. First, American imports plummeted.
And secondly, other
countries raised their own tariffs in retaliation against American exports. The
end result was a dramatic contraction of international trade, which transformed
an economic recession into a full-blown worldwide economic depression, which
lasted ten years.
It is relatively
easy for politicians to start a trade war. It is much more difficult to end one.
Donald Trump has no knowledge or competence in international economics and
finance, and he probably also is ignorant of the damage that the Republican
Herbert Hoover administration did to the U.S. economy, when it precipitated a drop in
international trade and international financial flows.
That Donald Trump
wants to repeat, 88 years later, the mistakes of the Hoover administration is
difficult to understand. [N.B. Franklin D. Roosevelt (1882-1945) defeated
President Herbert Hoover (1874-1964) in a landslide, in the 1932 U.S. presidential
election.]
Indeed, why would
Donald Trump impose economic, and eventually, political isolationism, on the
United States, with his improvised and destructive attacks on international
trade and world economic prosperity? He should know that in so doing, he will
do a lot of damage to the U.S. economy, to U.S. corporations, to American
workers and to American consumers, and to the world economy as well.
In fact, the
Trump administration risks destroying the post World War II system of
international economic cooperation, which has been so beneficial to the United
States, and which has contributed to raise the standards of living of people,
not only in the United States, but in many other countries. American
corporations and American banks, and their employees, have especially benefited
from the economies
of scale, from economic specialisation and from the productivity gains (reduction
in production costs) that the opening and stability of international markets
have allowed.
Trump’s partisan political motivations
What could motivate
the Trump Administration to adopt the risky protectionist policies of the
1930s? This is certainly not for immediate economic reasons, since the U.S.
economy is currently operating at full capacity... Unless, of course, what
really guides Donald Trump is his political obsession regarding the U.S. mid-term elections of next November. Polls
indicate that Trump's tax policies and other policies put forward for the
benefit of the ultra
rich, and financed through future increases in public debt, are not
very popular among the general population.
Therefore, the
enactment of populist trade policies could appeal to the Republicans, at least
in the short term and especially in some rust-belt states. In other words,
Donald Trump and the Republican Party might believe it to be to their political
advantage to ride a wave of economic nationalism and of trade protectionism, in
some key industrial states. It will take several months before the negative effects
of a trade war will be visible to the American public.
If that were the
case, it would be an example of partisan political expediency to reap political
gains; a case of short-term political gain for some, at the cost of longer-term
economic pain for everybody else.
Conclusion
The conclusion is
straightforward. It would be most irresponsible for Donald Trump to initiate a
trade war, especially against allied nations, when the American economy is
already prosperous. As a general rule, politicians should not play with the
economy for their own narrow political benefits. Most Americans, workers or
consumers, will pay a high price when
American companies will be subjected to the new trade taxes, and will have to raise
their prices. The same can be said for the citizens in other trading nations.
Trade protectionism has been tried before, and it does not work.
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_________________________________________
International
economist Dr. Rodrigue Tremblay is the author of the book “The
Code for Global Ethics, Ten Humanist Principles” and of “The
New American Empire”.
Please visit Dr.
Tremblay’s new WEB site:
Posted, Tuesday,
June 5, 2018, at 8:30 am
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© 2018 by Dr.
Rodrigue Tremblay, economist.