If President Trump continues down his current path of protectionism and anti-globalization, to try and put “America First”; then retaliatory measures by other world powers, huge domestic deficits, massive job losses and spiralling inflation could in fact put America last!
Those are words coming from Mark T. Williams, Boston University finance professor, former Fed official and author of the acclaimed book on the Lehman Brothers debacle “Uncontrolled Risk”.
According to Williams, Trump’s economic and foreign policies ignore the undeniable benefits that free and open trade has delivered globally. Going back in history, it has been free trade that has made post WWII America into the global economic powerhouse that it is today.
To support his thesis, Williams points to America’s $18 trillion plus GDP, and a $2.5 trillion export market as proof that global trade does pay – especially for America. Exports are responsible for creating and supporting nearly 12 million American jobs; with nearly 25% of all manufacturing jobs in some way related to exports.
Should Trump turn his economic guns to China, Williams predicts there will be a backlash that would only end in pushing America over the recession cliff. With a population of over 1.4 people, China’s growing middle class offers American exporter’s exceptional opportunity to further increase their trade footprint. Additionally, as a low-cost producer, China provides American consumers greater choice to buy lower-priced consumer products at home.
Any hint of a proposed 45% border tax kicking in, and China may very well stop importing items such as Automobiles, Soybeans and Boeing aircraft, amongst a host of others. And such a move will definitely lead to massive job losses in American factories.
A trade war with America’s Southern neighbor Mexico could further aggravate America’s fragile, yet recovering, economy. Despite all the rhetoric about huge trade imbalance between the two nations, US consumers are the net beneficiaries of 80% of Mexican exports to America. Any imposition of a proposed 35% border tax with Mexico could significantly increase US domestic prices for a whole array of goods – from cotton and coffee, to vegetables, cars, fruits and cell phones.
BAD FOR CORPORATE AMERICA
The current system of global trade and open movement of people, goods and services means only the fittest of corporations survive, assuring long-term value to their shareholders. According to a Toronto Tax Lawyer, "By forcing individuals and corporations to “Buy America”, Trump will have a negative effect on American companies."
CEO’s, scared of running afoul of Trump’s Twitternomics, will no longer take decisions that are in the best interest of the company, their shareholders or consumers. Instead, every decision will be second-guessed by the looming spectre of political expediency.
While Carrier agreed to bow down to such tactics, resulting in 1,000 jobs remaining in the U.S (instead of heading South), the longer-term sustainability of such decisions is questioned. For instance: Would companies be better off – in the long run – by leveraging cheaper production costs, regardless of where such costs are to be found?
NOT JUST ONE VOICE
Not oddly enough though, Williams isn’t the only high profile individuals espousing these views. Writing in the latest edition of Gold Investor, former Federal Reserve Chair, Alan Greenspan mirrored those same thoughts.
Mr. Greenspan believes that the Trump administration’s infrastructure spending programs, coupled with the proposed tax cuts, will be a harbinger to deep recession. Increased spending and decreased tax revenue will exacerbate an already precarious debt situation. This will inevitably lead to a grave recession.
Economic stability, job creation and long-term prosperity of any country depend on having broad global interactions and free trade. Protectionism and trade barriers will usher in a new era of economic slowdown for America.