While US President Trump has softened his stance on a number of key issues since taking office, trade is decidedly not one of them.
With its ‘America First’ policy, the Trump administration has hinted it wants to rework trade agreements with countries where the US buys more than it sells, including China, Japan, South Korea and Germany.
However, in an era of global supply chains, such focus on bilateral trade deficits is meaningless.
What history tells us
The US is deeply embedded into global supply chains, importing a significant amount of goods with value-added content originating in the US. The US is actually one of the three largest suppliers to the exports of China, Japan, Korea and Germany, so US tariffs and barriers imposed on these countries could come back to hurt US companies.
There is also little evidence that tariffs and barriers on particular countries would lead to higher production in the US and lower imports. More likely, the gap would just be filled by imports from countries that produce similar goods.
One in five jobs in the US is related to imports and exports
President Trump has vigorously championed more protectionism as a way of saving US manufacturing jobs and reducing income inequality.
However, previous episodes of US protectionism have only caused net job losses in the economy. One in five jobs in the US is related to imports and exports, so a tit-for-tat trade war with its main trading partners threatens to weaken the US job market rather than bolster it.
More protectionism could also worsen inequality within the US: typically, the poorest are hit hardest, as prices go up and the choice of goods reduces. Tariffs are particularly damaging to lower-income households, which tend to spend proportionately more on traded goods, such as food and clothes.
Widening trade deficit?
President Trump wants to lower the US trade deficit, but his plans to boost fiscal spending to reinvigorate the domestic economy run counter to this ambition.
A country’s trade deficit shows that it is investing more than it saves. Thus, the US trade deficit should be reduced by raising savings in comparison to investment, but the US administration is planning to do the exact opposite. Cutting taxes and raising infrastructure spending is likely to result in higher domestic prices and greater import demand, leading to a wider trade deficit, which might in turn prompt even greater protectionism from the US authorities.
Threat to world trade
With supply chains being increasingly global, headwinds will be felt far beyond the countries targeted with tariffs. Some Asian countries, such as Korea, Malaysia and Taiwan, are so tightly integrated into the supply chains of China that they, too, would be hurt by any trade spat.
Ultimately, US protectionism poses a threat, not just to the US economy, but to world trade and prosperity
By contrast, some countries stand to win from creeping US protectionism as they get the opportunity to grab a greater share of world trade. The main competitors for US trade are China, Mexico, Germany and Japan, which fiercely compete with each other, so measures against one would benefit the others. Other countries could win as well: Vietnam, Thailand and Philippines in Asia, the UK in Europe.
Ultimately, however, US protectionism poses a threat, not just to the US economy, but to world trade and prosperity. Many countries depend on trade for growth and development, and, although China is likely to assume a greater role in global trade, the US is still the world’s greatest source of demand, so any reduction in US imports is likely to be felt far and wide.