President Trump says that “trade wars are good and easy to win.”
Unfortunately for the US, that’s simply not true. While Trump has pulled out of free-trade agreements and slapped tariffs on imported goods, other economic superpowers have reduced trade barriers between billions of people.
Only a few days after he took office, Trump pulled out of the Trans-Pacific Partnership, a deal that covered 40% of the world’s GDP. He has also threatened to tear up the North American Free Trade Agreement (NAFTA) unless Congress enacts its deeply flawed replacement, the US-Mexico-Canada Agreement (USMCA).
Trump has also slapped tariffs on hundreds of billions of dollars of imported goods. While his primary target is China, he’s imposed tariffs on products imported from the EU, Canada, and Mexico as well. He’s now accusing Vietnam as being “even worse than China” and threatening to slap new tariffs on Hanoi.
The Painful Consequences of Protectionism
Protectionists – opponents of free trade – like President Trump believe that trade is a zero-sum game. That is, low or non-existent tariffs or trade barriers inevitably put domestic producers out of business and destroy jobs.
But that’s not how markets work. Free trade allows nations to export the goods they can produce efficiently and import those they can’t. Far from being a job-destroyer, free trade has created – and will continue to create – millions of new jobs. A 2010 study demonstrated that free trade agreements helped create 5.4 million American jobs and increased our nation’s GDP by more than $300 billion.
Ending or restricting free trade leads to job losses and slower economic growth. For instance, Trump’s 25% tariff on imported steel has cost domestic auto producers billions of dollars in additional production expenses. As a result, the largest domestic auto manufacturer, General Motors (GM), laid off 14,000 workers and shuttered five US factories in late 2018. A few months later, it laid off another 4,000 employees.
Elsewhere, It’s “Let’s Make a Deal”
As the US withdraws from global trade networks that have led to unparalleled prosperity, free trade has become a stronger force almost everywhere else.
In June, the EU completed a comprehensive trade deal with the Mercosur customs union, which consists of Argentina, Brazil, Paraguay, and Uruguay. The EU has also inked new trade deals with Canada, Mexico, Japan, Singapore, and most recently, Vietnam. Next up for EU trade negotiators are free-trade agreements with Australia, Chile, India, and New Zealand. And the Mercosur countries are seeking agreements with Canada, South Korea, and other countries.
Then there’s the TPP agreement that Trump walked away from. The other 11 countries involved – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam – finalized the pact in 2018. It’s been renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPATPP).
Individual signatories to the TPP are also broadening their trade networks. Japan, the world’s third-largest economy, just signed a free trade agreement with Mexico and is working on a deal with Canada. And Canada is also negotiating new agreements with India, Singapore, and numerous emerging economies in Africa.
Meanwhile, China plans to pour up to a trillion dollars into its massive “New Silk Road” initiative. Along with the construction of up to 50 free trade zones, the vast project will ease border formalities and create a huge network of railways, pipelines, highways, bridges, and port facilities through dozens of Asian countries. When it’s completed, the project will link China to the former Central Asian Soviet republics to its west along with India, Myanmar, Pakistan, and Indonesia to its south.
For China, the New Silk Road project accomplishes several goals. Originally envisioned to counter former President Obama’s “pivot to China,” it’s been repurposed to punish the US for Trump’s trade war. It also cements an increasingly close relationship between China and Russia, two powerful political, economic, and military rivals of the US. But most fundamentally the initiative is intended to boost China’s economy for decades to come. More than sixty countries that represent two-thirds of the world’s population have either signed on to the agreement or indicated interest in it.
It’s hugely ironic that the Communist masters of China understand more about economics than President Trump does. They realize that loosening trade barriers will increase prosperity for more than 1.4 billion Chinese citizens. And that these benefits will increase as trade — both exports and imports — increases.
So while the EU, China, Japan, and other powerful countries and regions tear down obstacles to free trade, the US is erecting new ones. And that will have painful consequences: further job losses, a contracting economy, and the loss of American influence on the rest of the world.
No one in the US should want that outcome, especially President Trump in his campaign for re-election. And the inconvenient truth is that the only way to prevent that outcome is for the US to reverse course and once again embrace free trade.
If you are concerned about how protectionism might harm the economy and impact your retirement plans, check out this Alert I wrote for members of the Nestmann Inner Circle on how to prepare yourself for the coming crash. It’s a three-part issue filled with advice on how to protect your assets in a financial collapse even worse than the one we experienced a decade ago.