Tariff Wars Are Likely to Persist Despite Imminent China Deal
Author: Greg Valliere
May 3, 2019
WHILE WAITING FOR THIS MORNING’S JOBS REPORT, which probably will be still another sign of a red-hot labor market, let’s focus on one of the few economic negatives — the U.S. reliance on trade tariffs, which has been a modest drag on global growth.
PRESIDENT TRUMP FAMOUSLY DECLARED THAT “I’m a tariff guy,” which has exasperated members of his own party who believe that tariffs hurt farmers and U.S. firms that rely on predictable and affordable supply chains. Yet the tariffs are likely to persist on a wide range of Chinese products — and on steel and aluminum, to the dismay of countries such as Canada and Mexico.
MOST REPUBLICANS DISAGREE WITH TRUMP: Pro-business GOP lawmakers, led by Senate Finance Committee Chairman Charles Grassley, are insisting that trade and steel tariffs should be lifted on Canada and Mexico as a pre-condition for passing the NAFTA replacement treaty, called USMCA. But Trump apparently rejected their appeals this week, which convinces us that the treaty probably won’t be ratified this year.
THE BIG RISK, if there’s no new trade deal between the U.S., Canada and Mexico, is that Trump could carry out his threat to no longer abide by the existing treaty, NAFTA, and return to the pre-NAFTA playing field — which would be disastrously complicated for businesses in all three countries. We don’t think this will happen, although Trump could continue to threaten it.
STRANGE BEDFELLOWS: Trump knows that NAFTA and other trade deals are very unpopular in crucial electoral states like Pennsylvania and Michigan, where he beat free trade advocate Hillary Clinton in 2016. We think NAFTA has had a positive impact on the overall U.S. economy, but Trump knows a protectionist argument wins a lot of votes in the Rust Belt. Bernie Sanders, Elizabeth Warren and many other leftist Democrats agree.
THIS IS A PROBLEM FOR JOE BIDEN: Like Clinton, he has supported free trade deals, and already has been blasted by Sanders, who told CNN this week that Biden’s support for free trade will become a major issue in the Democrats’ looming free-for-all. Being the front-runner has its downsides, as Biden discovered this week; the front-runner becomes a target.
TRUMP WILL SHOW PLENTY OF TESTOSTERONE ON TARIFFS: Even with a trade deal with Beijing just weeks away from ratification, he apparently won’t lift all tariffs that he imposed on China last year. He hasn’t ruled out tough new auto tariffs, aimed largely at Germany, and the rocky relations between Washington and Ottawa will persist.
IF TRUMP REALLY WANTS ECONOMIC GROWTH to blast off before the election, he should end the tariffs, because they have a negative impact on small businesses and farmers in the U.S., which have to cope with uncertainty and retaliatory tariffs. But Trump apparently won’t relent — tariffs are a club that keeps U.S. trading partners in line, he believes, and his political base agrees.
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