US: Trade war or trade tiff? - Westpac

In early 2017, as President Trump was sworn in, there was optimism in financial markets about his pledges to cut taxes and remove regulations and perhaps also boost spending on infrastructure as he had made promises on all these market-friendly issues in his campaign and during the transition, points out Sean Callow, Research Analyst at Westpac.

Key Quotes

“But Trump had also made many firm pledges to protect US industry from what he viewed as unfair foreign competition, including trade agreements. Trump held such views as far back as the 1980s, when he was publicly critical of US trade with Japan. So investors who favour free trade simply had to hope that Trump would find the realities of the presidency cooled his determination to impose protectionist measures that would raise the cost of imports and spark retaliation.”

“Perhaps all it took for trade policy to move to the top of the president’s agenda was delivery of the tax package. Infrastructure seems to be in the too hard basket for now, with Republicans unhappy about any new spending increase outside the military. White House economic adviser Gary Cohn resigned over the tariff proposal and it faces strong opposition from Republican House and Senate members and business.”

“Yet tariffs on imported steel and aluminium seem assured, perhaps with some countries exempted. After keeping a low profile in 2017, trade adviser Peter Navarro is now ascendant. He is a rare economist who sees trade deficits as simply a drag on growth and has a chance now to pursue the views laid out in his book “Death by China.” 

“Navarro will not take issue with the president’s view that “trade wars are good, and easy to win.” But while such talk is a setback for US$ near term, it is too soon to price in a global trade “war.” We can also take comfort from the very strong starting position for global trade volumes. Asian exports finished 2017 at a record high. So if there is at least a trade tiff this year, it is from a position of strength.”