Download Trump and Trade

Trump and Trade
…Threats or all-out trade war?
Raoul Leering – Head of International Trade Analysis
Rob Carnell – Chief International Economist
January 2017
Photo source: Somodevilla/Getty Images
Executive summary
Verbally, Trump has announced an all-out attack on Free Trade, but will he do it?
We think that Trump will not impose huge import tariffs for now,
because he has better options to live up to his promise that he will
bring back jobs to the US
Just threatening to impose high tariffs could do the job, because
Mexico is 20 times as dependent on US demand than vice versa
China is 5 times as dependent on US demand than vice versa
This gives the US a very strong position in (re)negotiating trade deals
But if negotiations fail, high tariffs are likely
Tariffs will favour domestic US industry, but will hurt American exports
If the US implements the threat of a 45% tariff on China and 35% on Mexico, we
forecast the US loses 0.75% GDP over 2 years. Imposition of a blanket 10% tariff for
imports from all countries we forecast will cost 1% of US GDP over the same time span.
2
Key themes in this presentation
Trump: tough talk on trade
Possible implications of Trump’s trade rhetoric
Statements on trade made by Trump and his campaign team so far
People in Trump’s trade team – their stances on China all point
towards tough policies
How much power does Trump actually have over trade?
Slides 4-7
Blaming trade
Economic theory tells us
that there’s a ‘net gain’
from engaging in trade.
But what about those
who lose out?
Can the loss of US
manufacturing jobs
push people towards
populism?
Slides 8-11
3
Trade facts on…
China
Does China qualify as
a manipulator of its
currency? We take a
look at the criteria
Mexico
How has trade with
China and Mexico
actually developed
Slides 12-15
Costs of trade war
Trump has been happy to
threaten China and Mexico,
but what will be the cost for
the US of a trade war. We look
at different scenarios and
estimate the cost to US GDP
Slides 16-20
Our base case
We see Trump avoiding huge import tariffs for now… But
he has to live up to his promise of bringing back US jobs
Slides 21-24
Trump: tough talk on trade
Campaign statements of Trump and his team…
…And how they raise the prospect of a trade war
Impose a 45% import tariff on Chinese goods.
Brand China “a currency manipulator” on day one
Withdrawal of Pacific trade agreement TPP on day one in office
A tax of 35% on American companies that offshore production of
products that they subsequently sell on the American market
Rip up NAFTA if renegotiations are not satisfactory
A general import tariff of 5% to 10% on all imports except energy
5
Trump’s key figures talking tough
Wilbur Ross
US Secretary of
Commerce
Investor and vocal critic of NAFTA
China world’s biggest “trade cheater”
Sees tariffs as a “a sanction”
•
•
•
Robert Lighthizer
•
•
Dan DiMicco
•
•
Trade Advisor to
Trump – former CEO of
Nucor Steel
Author of Steeling America’s Future
Labelled China as destructive
US Trade
Representative
Lawyer who served under Reagan
Accused China of unfair trade
Peter Navarro
Director of National
Trade Council
•
•
Economist and strong China critic
Author of Death by China
Thoughts that Trump’s campaign rhetoric would not be matched with protectionist actions are running
into trouble…now that he has named his trade team. Four of the most important members of that team
have strong views on China and trade.
6
Trump and Trade – How much power does he have?
Although there are “checks and balances” in terms of the President’s powers on taxation and spending,
which are ultimately controlled by Congress, he does have significant executive powers on Trade.
NAFTA Implementation Act
1993
•
•
•
Power to withdraw from Nafta with 6
months notice
Power to put Mexico and Canada on
WTO tariffs
Impose additional duties after
consulting Congress
Trade Act 1974
Section 122
•
•
7
Impose tariffs or quotas of up to
15% for 150 days to address
serious balance of payments
deficits
…or both
Trade Expansion Act 1962
Section 232 (b)
•
Impose Tariffs / quotas to offset
national security impacts
Trading with the enemy Act 1917
(and International emergency
economic powers act 1977)
• Unlimited powers to limit trade…
…seize / freeze assets of all kinds
• for use in times of war)
Is Trump right to be tough on trade?
It is understandable that trade is the scapegoat
for job losses…
Economic theory shows that
the gains from trade outweigh
the losses…
…But…
welfare
gain from
lower prices,
more choice &
extra jobs in
competitive
sectors
welfare
loss from
reduction of well
paying jobs in
uncompetitive
sectors
9
…every trade deal will
generate some
“losers” and the
”pain” or “welfare
losses” felt by these
people (lost jobs or
lower wages)…
…may outweigh
positive feelings about
the gains, which will
tend to be more
diffuse and less
noticeable
Individual perception
is the key here, not
actual GDP results
…because of the decline in manufacturing jobs….
Loss of US manufacturing jobs was one of the key battlegrounds of the latest US election.
Mfg jobs as % of total employment
30
25
20
US
15
10
5
0
71
10
74
77
80
83
86
89
92
95
98
01
04
07
10
13
… which are jobs worth fighting for
Next to finance, a manufacturing job is still your best chance to ensure a good standard of living
So a populist rejection of “free trade” is understandable though the decline in manufacturing may
partly be due to other factors as well – such as automation / roboticisation that drive up productivity
Protecting manufacturing jobs appears to be popular with voters – though this is likely to come at some
cost to GDP and corporate profits – stock valuations
$
Sectoral weekly wages
1800
1800
1600
1600
1400
1400
1200
1200
1000
1000
800
800
600
600
400
400
200
200
Manufacturing
All industry
other services
0
0
02
11
04
06
08
10
12
14
Financial
Some facts on China and Mexico
Trade with China more of a “problem” than Mexico
Imports
% total US imports
20
NAFTA starts
China WTO accession
15
10
China
5
Mexico
0
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15
Exports
% total US exports
20
NAFTA starts
China WTO accession
Mexico
15
China
10
5
0
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
15
NAFTA (came into force 1 Jan 1994)
• Import penetration to the US from
Mexico doubled in the first 10 years
after NAFTA, but there has not been
much growth since.
• US Exports to Mexico also doubled in
share, but the value added is 1.5 times
smaller than of Mexican exports to the
US.
• So it is not surprising that much
research shows that Mexico benefits a
lot more from Nafta than the US and
Canada in terms of GDP and real wages.
China in WTO (11 Dec 2001)
• Chinese import penetration to the US
tripled since WTO membership.
• US exports to China only doubled and
from a lower base − so in levels, the trade
imbalance has still grown.
• US trade balance with China should be a
bigger headache for US politicians than
the trade balance with Mexico.
Is China manipulating its currency? Yes, but up!
China meets only one of the three criteria for being a currency manipulator
Criteria 1:
Using 2% GDP to buy foreign currencies – NO!
USD Trillions
4,5
China FX Reserves
4
A manipulator sells its currency for an
equivalent of 2% GDP. This is not true for
China.
On the contrary: China has intervened to
keep the CNY strong and prevent capital
outflow.
…The CNY is actually losing competitiveness
(see graph)
China actually manages its currency
against a basket of 23 other trading
partners and currencies − what happens
to USD/CNY is not their prime concern and
may be driven by other countries’
currency movements
3,5
3
2,5
2
10
12
13
14
15
16
2000 = 100 Real Broad Effective Exchange Rate
160
China
140
United States
Japan
120
100
80
60
40
94
14
11
97
00
03
06
09
12
15
So, no surprise China doesn’t qualify as manipulator
Criteria 2:
Current account surplus > 3% GDP – NO!
China current account
% GDP
6
5
Manipulators have a current account
surplus of 3% or more. Not true for
China now and has not been true for
much of the last decade.
4
3
2
1
0
10
$bn
600
11
12
13
14
15
16
China / US Trade surplus
500
400
300
200
100
0
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
15
Criteria 3:
Trade surplus with US > $20bn – Yes, since
1992
Manipulators have a trade surplus of
more than USD20bn with the US –
This is true for China, but this is a
pointless, arbitrary amount. For one,
it is unrelated to the size of the US
economy (China already surpassed it
in 1992)
What if US brands China a currency manipulator?
The rules can be tweaked though. In the end naming a country a
currency manipulator is a political judgement
If China were to be named a currency manipulator,
there will be no immediate sanctions against China
The Commerce Department is supposed to spend a year
trying to resolve the situation through negotiations – only
then could sanctions (eg, tariffs) be considered
This is really just a jaw-boning exercise to pressure China on
trade
Source: Netherlands Bureau for Policy Analyses (CPB)
16
Calculations: ING Global Markets Research
Economic costs for the US if Trump
follows up on his threats
Implications of a tariff war
US begins
trade war
China & Mexico
retaliate
Trade barriers
disrupt worldwide
value chains
China could
close off
markets for FDI
US and world
economy affected
It will cause damage to US because trade partners will retaliate
US exports are hit because China and Mexico are the second
and third most important buyers of US exports (next slide)
Competitiveness of multinationals like Apple that offshored
production will suffer as imported intermediates rise in price.
US suppliers of Mexican exporters suffer (every $ of Mexican
exports to the US contains 40 cents of US inputs).
That would hurt other US companies − those that produce in
China to service the growing Chinese demand.
Hurting the Chinese economy will hurt the world economy
Consumers and producers will be deprived a broad product
choice and obliged to pay higher prices for those imports that
are indispensable
Source: Netherlands Bureau for Policy Analyses (CPB)
18
Calculations: ING Global Markets Research
Scenario 1
A tariff of 35% and 45% on Mexico and China will cost the US 0.75% GDP
Domestic US producers will benefit from
Chinese and Mexican goods becoming more
expensive by imposing tariffs of 45% and
35%, respectively.
At the same time though US exports will be
hit if we assume that China and Mexico will
retaliate with the same tariffs
Calculations* show that the GDP loss of
lower US exports is 4 times as large as the
gain of extra domestic production that
substitutes imports
On balance US GDP will be 0.75% lower after
2 years of tariffs*
*ING- calculations based on J.W. Mason (2016); see annex
19
Scenario 2
General 10% tariff. Costs for the US would be 1% GDP
A 10% general import tariff leads to
roughly the same extra domestic
production as the 45% tariff on
China and 35% on US offshored
production for US market
But export damage is 20% larger
with a general tariff of 10% because
in this case the US will face tariffs
from a wider range of export
destination markets: like Canada,
Japan and the EU.
On balance US GDP will be roughly
1% lower two years after imposing a
general 10% tariff.
20
Our base case
No tariffs, Trump favours case by case approach
Trump will continue to threaten with tariffs but not impose them: too costly
Trump can live up to his promise to boost US jobs with a stick and carrot approach:
Stick: Threatening is enough. Before taking office Trump already arm twisted Ford and
others with the threat of tariffs, to forgo plans of offshoring jobs to Mexico.
Carrot: Trump can, in cooperation with State government politicians encourage
companies to stay in the US with tax-cuts. Interventions that make companies forgo
concrete offshoring plans are tangible results for Trump that will probably impress the
Trump voter more (more media impact) than tariffs whose “effect” has to be
estimated by economists.
Source: IMF WEO & WTO
22
Calculations: ING Global Markets Research
Base case continued
Renegotiation of existing trade deals (NAFTA, TPP) and a bilateral deal with
China would be a visible policy
Mutual GDP-dependency on bilateral exports
14
12
10
8
Share in
Mexican
GDP earned
by selling to
the US
Share in
Chinese GDP
earned by
selling
Chinese
goods/
services to
the US
Share in US GDP
earned by selling
to China
6
Share in US GDP
earned by selling
to Mexico
4
2
0
VS-China
23
VS-Mexico
There are grounds for the US to want to
(re)negotiate new or existing trade
deals. The benefits of NAFTA have been
unevenly distributed. US has not gained
as much from NAFTA as Mexico, which
shows significant gains (GDP and wages).
Trump could gain trade concessions
from Mexico because the Mexican
economy is 20 times as dependent on
the US then vice versa. So mutal tariffs
hurt both countries but Mexico a lot
more (see Figure).
Although less, the same holds for China
(see Figure). So Trump also has a strong
position in negotiations with China.
Conclusions
We think that Trump will not impose huge import tariffs
But Trump has to live up to his promise that he will bring back jobs
to the US
Just threatening to impose high tariffs could do the job because
Mexico is 20 times as dependent on US demand then vice versa
(China 5 times). This gives the US a very strong position in
(re)negotiating trade deals
But if negotiations fail, high tariffs are likely
If US implements a 45% tariff on China and 35% on Mexico, we
forecast the US loses 0.75% GDP over two years
Imposition of a 10% tariff for imports from all countries, we forecast, will cost
1% of US GDP over the same time span
24
Annex 1: US GDP- effect of a 35%/45% import tariff on Mexican and Chinese imports
Assumptions:
3. Price elasticity of the American consumer demand with respect to
1. The 35% tax on Mexican imports concerns non-oil goods only
Chinese and Mexican goods: 1.0.
2. Both Mexico and China retaliate by imposing same tariffs on US
4.Price elasticity of the Chinese and Mexican consumers with respect
exports
to American goods: 1.5.
NB: Mexican and Chinese consumers respond apparently stronger to
To calculate the effect on US GDP we need to know what the effect
price changes. This could be caused by the fact that the share of the
will be on US substitution for imports and on US exports. We use
population with low income is larger than in the US and they are more
elasticities from existing empirical work, summed up in J.W. Mason
price sensitive.
(J.W. Mason, 2016, Trump’s tariffs: A dissent).
5 Percentages of imported goods from Mexico and China that are
For the effect on imports we need the:
substituted by American goods: 50% and vice versa for China and
1. effect of tariffs on the final US consumer price of imported Chinese
Mexico.
and Mexican goods. This “pass through” to consumer prices is 30%.
6. Contributions of exports to Mexico and China to US GDP:
2. The pass through of tariffs on imported goods from the US to
respectively 0.6% and 0.7%. Source: WIOD, RUG
consumer prices in China and Mexico: 60%.
7. Chinese imports represents 1.9% of US GDP, Imports from Mexico
NB: Chinese and Mexican export products are for markets that are
represent 0.8% of US GDP (Source: WIOD = value added of imports
more characterised by competition on price, which limits the
and exports data base)
possibilities to let the consumer pay for the tariff. American exporters
US Macro multiplier for demand impulses: 1.5 after two years
compete more on the basis of quality which gives them more room to
pass on the tariff costs to the Mexican and Chinese consumer.
25
Annex 1 (continued)
8. Share in Mexican imports that will be labelled as offshored
These substitutes will be more expensive or of lesser quality since
American production. Estimate: 87% (non oil exports of Mexico)* 0.80
Chinese products were the first choice. We don’t know how much
(share of US in Mexican imports) * 0.40 (cars and other exports from
more expensive these American substitutes are, so we ignore this.
Mexico by American companies) = 0.28
But we do know that the remaining 85% of the original packages of
source: trading economics and estimations of ING
Chinese goods that are still bought are 15% more expensive and
similarly the remaining Mexican imports are 11% more expensive.
Effects on US imports
For the effects of the tariffs on US imports (and import substitution),
So imposing 35% and 45% tariffs on Mexico and China leads to the
we first of all have to realise that a 45% price increase of Chinese
total import price level to rise with (0.85*0.19*15%) +
products leads to a rise of the consumer price of only 15% (0.3*45%).
(0.89*0.12*11%*0.72 (non offshored production factor) =3.2%. Given
This leads to a 15% decline in US demand for Chinese goods
the share of 11% of gross imports in US GDP, the GDP price level will
(15%*1.0). We Follow the assumption of Mason, half of this 15% is
be pushed up by 0.35%. So real GDP will decline by 0.35% due to the
substituted by similar products from other countries (not hit by the
inflationary effects of the import tariffs. But at the same time tariff
45% tariff) and the other half of this is serviced by domestic
income makes government income rise with the same amount.
(American) suppliers.
So the net effect on GDP of this tariff war on the import side is
Similarly the 35% price increase of non oil Mexican imports leads to
determined fully by the substitution effect: the imposition of the 45%
a rise of the consumer price of 11% leading to decline in demand for
and 35% import tariff on China and Mexico leads to a rise of US GDP.
Mexican products by 11%. Half of this is substituted by American
Chinese imports represents 1.9% of US GDP and imports from Mexico
products.
0.8%.
26
Annex 1 (continued)
So a decrease of 15% and 11% in imports from China and Mexico
leads to a rise of US GDP by
(0.5*15%* 0.019 + 11%*0.008*0.5)* 1.5 = +0.28%
The effect on US exports
US exports to China and Mexico equal 0.7 and 0.6 percent of US GDP
respectively. Pass-through for US exports to these countries is 60%.
Price elasticity is around 1.5. This makes the imposition of the same
tariffs by Mexico and China lead to a exports induced effect on US
GDP of:
0.6*45%*1.5* 0.007* + 0.013*1.5*35%*0.6 = 0.70 x 1.5= -1.05 GDP
Total effect of tariffs
So the net effect of mutual imposition of 35%/45% tariffs by the US,
Mexico and China is a welfare effect after two years of:
0.28%GDP - 1.05%GDP = -0.77%GDP
27
Annex 2: US GDP effect of a GDP- effect US of a 10% across the board import tariff
Assumption made: Trading partners of the US will impose 10% tariff
on US goods
To calculate the effect on US GDP we need to know what the effect
will be on US substitution for imports and on US exports. We use
elasticities from existing empirical work, summed up in J.W. Mason
(2016), Trump’s tariffs: A dissent.
To make a calculation of the effects on imports we need the:
1. effect of tariffs on the US consumer price of imported goods. This
so called “pass through” of tariffs to consumer prices is 30%.
Effects on US imports
For the effects of the tariffs on US imports (and import
substitution), we first of all have to realise that a 10% price
increase of foreign products leads to a rise of the consumer
price of only 3% (0.3*10%). This leads to a 1.5% decline in US
demand for foreign goods (3%*0.5). This production will be
substituted by similar American products. Since imports
2. The pass through of tariffs in the rest of the world to consumer
prices in China and Mexico: 60%.
make up 11% of US GDP, this substitution will rise US GDP
3. Price elasticity of the American consumer demand with respect
to imported goods: 0.5.
higher GDP). Multiply this with the macro multiplier and the
4. Price elasticity of foreign consumers with respect to American
goods: 1.5.
initially by 0.17 percentage points (10%*0.3*0.5*0.11= 0.17
effect on GDP after two years will be 0.26% US GDP.
5. Percentages of diminished imported goods that are substituted
by domestic goods: 100% for the US and 50% for rest of the
world (they can still import from other countries without the
10%- tariff).
These substitutes will be more expensive since foreign
6. Share of imports in total spending in the US: 15% Source: World
Bank (2015).
of products that are not more expensive but lower in quality.
7. Contributions of exports to US GDP: 13% Source: World Bank.
8. GDP multiplier is 1.5 for the US (source: J.W Mason).
28
products were the first choice. We don’t know how much
more expensive these American substitutes are or made up
So we ignore this.
Annex 2 (continued)
But we do know that the remaining 98.5% of the original
0.6*10%*1.5*0.09* = 0.81%GDP * 1,5 = -1.22% US GDP (after
packages of imported foreign goods that is still bought, are
two years approximately).
3% more expensive. So imposing a 10% tariff on imports will
lead to a rise of the price level of total imports of 2.9%
Total effect of general import tariff of 10%
(0.985*3%). Given the share of 11% of imports in US GDP, the
So the net welfare effect for the US (import substitution
GDP price level will be pushed up by 0.33%. So real GDP will
minus loss of exports) of a mutual imposition of a 10% tariff
decline by 0.33% due to the inflationary effects of the import
on imports by the US and the rest of the world is:
tariffs. But at the same time tariff income makes
0.26% GDP - 1.22%GDP = -0.96%GDP
government income rise with the same amount (in %GDP).
The net GDP effect on the import side is determined fully by
the import substitution effect: +0.26% GDP
The effect on US exports
US exports to the rest of the world equals 9% of US GDP.
Pass-through to the consumer price of the 10% tariff
imposed on US exports to these countries is 60%. Price
elasticity of foreign demand for US exports is 1.5, empirical
studies show. This makes the imposition of a 10% tariff on US
exports lead to decline of US GDP by:
29