On Trade, Watch What Trump Does—Not What He Says

Threatening tariffs against China over currency manipulation and “dumping” subsidized exports is basically a campaign requirement, but few follow through

Throughout the 2016 presidential campaign, protectionist and anti-trade rhetoric often dominated the discussion. Senator Bernie Sanders deployed it in his bid for the Democratic nomination. Sec. Hillary Clinton adopted a more anti-trade tone as the race progressed. Throughout the race, President-elect Donald Trump went furthest on the issue, triggering widespread fears of a trade war once he takes office. Such fears have validity in the sense a trade war could be very bad for stocks and the economy (US and global), but it is hasty to presume his election ensures he will wall off the US economy from global trade partners. Watch what politicians do, not what they say.

As is fairly typical of anti-trade proponents, most of the talk centers on the siren song that unfair trade practices mean trade partners are “stealing American jobs,” most notably in manufacturing. China, President-elect Trump claimed, is a chief offender. By manipulating the yuan to keep it artificially low and thus dump cheap exports on America, he claimed, China has stolen thousands of jobs. As a result, he promised to slap punitive tariffs on China to the tune of 45%. But it didn’t stop there. Trump also cited Japan and other Asian nations as unfair trade practitioners, and frequently cited the North American Free Trade Act (NAFTA) as a horribly structured deal that cost America millions of jobs in what Ross Perot termed a “giant sucking sound.” For the former, he promised to avoid entering the Trans-Pacific Partnership to protect American workers. For the latter, he promised to renegotiate NAFTA.

Now, the veracity of these “giant sucking sound” arguments is tenuous at best and outdated in many ways, and it generally overlooks the fact automation and technology have in all likelihood accounted for the vast majority of those job losses. Innovation has been destroying jobsi for centuries, long before modern free-trade agreements were cooked up.ii Heck, China presently isn’t even considered a low-cost manufacturer, when all factors are weighed. Moreover, it is today selling US Treasurys to artificially prop up the yuan, not keep it weak. The Japan argument is straight out of the 1960s or maybe late 1980s. But none of this really matters at the moment, because this is politics, which is a post-fact environment if ever there was one. The economics don’t factor as much as which talking points will garner the greatest amount of popular support, particularly in swing states.

While popular this year politically, protectionism is a real risk for stocks, which shouldn’t be downplayed by investors. The global economy is incredibly interconnected. According to the current Cars.com annual ranking, 2016’s top five cars by American-made components (electronics, transmission, glass, etc.) are all Japanese brands. The Apple iPhone is designed in California, sourced from dozens of nations, assembled in China and sold around the world. Tariffs would tax the import of these components (as well as the sale of imported final products to consumers). This would likely drive up prices, reduce profits, thin competition and spawn a host of negative consequences, particularly since history suggests the US enacting tariffs and trade barriers is likely to be met with tariffs and trade barriers from abroad.

Moreover—unlike, say, taxes and repealing laws passed by previous administrations—the president has huge power to act unilaterally on trade. Sections 201 and 301 of the Trade Act of 1974 permit the president to enact punitive tariffs. And, while we won’t get into all the particulars here, many legal and trade scholars argue President Trump could invalidate NAFTA unilaterally with six months’ notice.

That being said, one shouldn’t automatically assume Trump’s victory means tariffs are coming. Protectionist rhetoric on the campaign trail is far from new. Bill Clinton argued NAFTA wasn’t great in 1992’s campaign (it was negotiated by his principal competitor, George H.W. Bush), then saw it through Congress the next year. In 2008’s presidential primaries, Barack Obama argued NAFTA should be renegotiated because it cost America jobs. When questioned, he and his campaign argued there was no way Canada and Mexico would walk away from the bargaining table. Trump’s campaign seems to have borrowed this rhetoric, lock, stock and barrel. Sad! Congresspeople—Democrats and Republicans alike—frequently argue China manipulates its currency and should be punished with tariffs. Republican nominee Mitt Romney did it in 2012. Obama did it, too, in 2008! But today, Donald Trump’s tough talk on China is presumed to be deadly serious.

Most of these promises were completely hollow. No action followed. After eight years, Obama has done nothing to renegotiate NAFTA, and he oversaw the implementation of its final piece by resolving a long-running dispute over cross-border trucking. He also signed the Korea and Colombia deals, cites Trump’s rhetoric as irresponsible and backs both the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership (a potential trade deal between the US and EU). Democratic and Republican legislation to brand China as a manipulator went nowhere. While Obama did enact some tariffs on China, they are very limited in scope.

What’s more, many presume Trump’s “renegotiation” language on NAFTA is all-or-nothing. But that’s actually unclear. He has said repeatedly, and did so in the debates against Hillary Clinton, that multilateral trade deals were too difficult to enforce, and he favored bilateral deals as a result. So maybe that is what renegotiating NAFTA looks like, but it’s premature to say so.

No one can know exactly what Trump will or won’t do on trade in the White House. It is a matter worth watching closely, but taking action on it today amounts to a presumptuous mistake.

i Not a bad thing overall, but one that can cause near-term dislocations.

ii As Michel Mok wrote in 1931, “An English watchmaker’s apprentice named John Kay, in 1738, invented a flying shuttle for weaving cotton. This was the first modern labor-saving device and with its aid, one man could do the work of two. To the amazement of the young inventor, a roar of protest rose from the English weavers when it was introduced.”