Trump’s Trade Agenda Will Continue to Pose a Threat to the Global Economy

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The economy of the United States is booming. But with tariffs under the disguise of national security and the escalating U.S.-China trade conflict, President Trump’s trade policy poses both a threat to the United States as well as the global economy. The Democrats gained the majority in the House of Representatives in the recent mid-term elections, but hopes that the country will return to a more liberal trade policy are still futile.

The economy in the United States is doing more than well. After the Gross Domestic Product (GDP) grew by 2.2 percent in the first quarter of 2018, second-quarter growth accelerated notably to an annual rate of 4.2 percent. In the third quarter, the U.S. economy grew by 3.5 percent, again stronger than expected. But the upswing might soon come to a close. From 2020, the economy is expected to weaken. Increasing debt, an appreciation of the Dollar as well as a widening trade deficit pose considerable risks to the U.S. economy. Furthermore, President Trump’s trade policy dampens both the growth potential of the U.S. and global economy.

A Protectionist Trade Policy Agenda

The United States’ withdrawal from the Transpacific Partnership (TPP), the re-negotiation of NAFTA and tariffs on steel and aluminum signal a clear and certainly concerning break in the traditional trade policy of the United States. In his quest to bring jobs back to the United States, Trump has aligned himself with protectionism, grounded in claims of national security concerns. The trade conflicts between the United States and the People’s Republic of China, the EU and other countries have considerably increased uncertainty in the global economy.

Protectionism Hurts Everybody

Economic research institutes forecast significant job losses in the United States as a result of the steel and aluminium tariffs as well as the potential import tax on automobiles. According to the Peterson Institute of Economics, a 25 percent import tax on automobiles and retaliatory measures could cost 624,000 jobs in the United States alone. Trade Partnership Worldwide adds 400,000 jobs that could be lost by the steel tariffs and retaliatory measures. With the tariffs imposed by the Trump administration, the Tax Foundation predicts a decrease of 0.12 percent in the United States’ long-run GDP. According to calculations of the World Bank, a worldwide escalation of tariffs up to the limits permitted under existing international trade rules of the WTO could lead to a decline in world trade of nine percent. This would be equivalent to those experienced during the global financial crisis in 2008-09, with particularly severe consequences in income and jobs.

USMCA: The New NAFTA

The United States, Mexico and Canada have come to an agreement on the U.S.-Mexico-Canada Agreement (USMCA) as the follow-up treaty to NAFTA. The three trading partners signed the accord at the G20 Summit in Buenos Aires late November 2018. A complete termination of NAFTA or bilateral trade agreements would have been extremely damaging, leading to a fragmentation of the North American market. However, the contents of the agreement give cause for serious concern. In terms of market access, USMCA represents a significant step backwards compared to NAFTA.

Results of the Midterm Elections

The Democrats regained the majority in the House of Representatives in the midterm elections early November, while the Republicans defended their majority in the Senate. President Trump can thus continue to count on the Senate, for example, for nominations for his administration. However, larger legislative proposals are likely to fall by the wayside. An exception could be the urgently needed infrastructure reform finding bipartisan support. Those, who hope for a change in trade policy, are, however, likely to be disappointed. German industry will continue to face up to harsh headwinds from Washington as many Democrats support the presidential trade agenda.