In its February 6, 2017 Global Macro-Research Report -Trade Wars, Goldman Sachs examines the risks and opportunities of more strident American trade policies under an "America First" President Trump.
In considering the following highlights as regards China and Mexico, the leading targets of Trump's possible trade wars, it is important to remember that only 19% of China's exports go to the United States, compared with Mexico's 82%. Moreover, thanks to continuing economic re-structuring, exports now only account for 20% of China's GDP, the rest represented by services, investment and domestic consumption.
The following findings of the Goldman Sachs report are noteworthy -
- According to Nicholas Fawcett, Senior Global Economist Goldman Sachs, tariffs of 45% and 35% on China and Mexico respectively would reduce America's GDP by 0.77 % by 2019, compared to China's reduction of 0.3%, taking into account likely retaliations and global spill-overs, all-out trade wars are likely to damage the United States more than China.
- Immediate losers will be American consumers, who will face increasing inflationary pressures.
- Targeting imports misses the point. For example, one-third of imported auto components (including a large proportion from China) are for car production in the United States. Imposing punitive tariffs on these will only make US-produced exports even less competitive. The same goes for many goods and products in the ubiquitous global production and value chain.
- Being mooted is Destination-based taxation with border adjustment (DBTBA) equivalent to an import tariff plus an export subsidy. Instead of taxing companies’ total income net of total costs, it would tax companies only on income earned domestically and allow them to deduct only domestically sourced costs. Net exporters (like aircraft manufacturers) would benefit, while companies with a high net import share (like apparel or computers) would suffer. Importers with smaller margins would be the most vulnerable. The Dollar will get a further boost, perhaps neutralizing some of the advantages given to exports.
- Depending on the severity of Trump's tariff wars, China may retaliate possibly even more robustly, targeting America's exports of airplanes, cars, agricultural products and even key US enterprises in China. While unlikely, China may also resort to selling more US Treasury bonds, putting pressure on US interest rates.
- Trump's aggressive trade rhetoric is in answer to his electorate's deep-seated grievances in the declining traditional machinery, automobile, furniture, rubber, plastics, textile and clothing sectors. Tariffs alone are unlikely to revive the competitiveness of these industries.
- A more likely first tariff salvo is to target China's imports of steel, aluminum, glass, and solar, where there is already huge Chinese excess capacity.
- As for currency manipulation, the possibility of some window-dressing initiative cannot be ruled out, for example, enacting a non-country-specific, anti-currency manipulator piece of legislation with fast-track presidential powers.
- Looming trade wars are part and parcel of Trump's world view that America's championship of global trade is being taken for suckers. Instead, according to Dr. Richard Haass, president of the Council on Foreign Relations, "trade has an important geopolitical dividend. It’s a way of supporting allies and promoting human development around the world, as well as integrating adversaries in a way that makes them think twice before they disrupt the status quo". Similarly, "our investment in the rest of the world is not an act of charity; it’s an act of self-interest.".