Trump and Trade

Franklin D. Roosevelt had to deal with a two front war in World War II---Europe and Asia.

Donald J. Trump is faced with a three front trade war right now. China, the EU and our North American neighbors, Mexico and Canada, have all been waging a unilateral trade attack on American business and jobs for years.

More power to these countries for taking advantage of our foolishness. Our elected representatives literally gave away substantial portions of our domestic economy by thinking short-term rather than long-term. They had the leverage of having the most attractive market in the world and yet they gave it away to China, Mexico and other countries for nothing.

No one called it a war when it was one-sided and the United States took it all lying down. Now that Trump is fighting back everyone wants to call it a war.

Let's review how badly we have been losing the war before Trump starting fighting back.

China---$375 billion trade deficit

European Union---$151 billion trade deficit ($65 billion with Germany alone)

Mexico and Canada---$89 billion trade deficit

In total, our trade deficit on goods was -$807 billion offset by a trade surplus in services of $255 billion for a net trade deficit of -$552 billion in 2017.

Fighting multi-front wars are never easy.

It is even more difficult in trade wars where there are multiple internal parties involved.

For example, much is being made right now of the negative effects to farmers as China, Mexico and the EU threaten retaliation on our agricultural exports in response to Trump's tariffs on steel, aluminum, autos and other products. Those effects are seen and felt. However, what of the hundreds of thousands of unseen businesses and jobs that have already been lost in the one-sided war? What about the hundreds of thousands of unseen jobs that might be created if we truly had an even playing field with our "trading partners?" They are not as easily seen and felt but they are much, much bigger in size and scope.

Trump understands the big picture. He also understands the long game. Trump understands that to win you also have to take calculated risks. Of course, it is easier to do that if you have less to lose than the other guy.

Trump has been derided in the past for stating that "trade wars are good, and easy to win."

I don't know that is always true but it is a lot easier to win a trade war when your country is importing a lot more than it is exporting. And that is the case with the United States today---by a wide margin.

Beyond thinking about the long term, rather than the short term, Trump also understands that in order to do deals and reach agreements you need to understand your strengths and weaknesses, as well as those of your adversaries. You also have to be able to apply leverage when you have it. Most everyone on the planet is driven by enlightened self-interest. There are not many who have something that they are going to give up willingly.

Do you think any of our trading "partners" wants to give up the great advantage they have today? No way.

The media and the establishment want you to believe that Trump does not know what he is doing. They want you to believe that he is isolating the United States and we are alone in a three front trade war.

I have to believe that Trump is thinking much bigger than anyone can imagine. I have no doubt he is also thinking two steps ahead.

Notice his comment on Twitter that was directed at the EU yesterday.

Word then came out later that some type of understanding had been made with the EU moving towards no tariffs, barriers and subsidies.

What if Trump's pitch to the EU had sounded something like this?

"Look, we have to get together to create a free trade zone between ourselves. We need to position ourselves to compete with China. Think about it. China trade is similar to what Amazon is in the e-commerce space. We are like WalMart and Macy's going up against them. We need to collaborate to help each other and also put some pressure on China to open their markets. We each can't do it alone. However, if we commit to do this together, China probably doesn't have any choice but to join us. How YUGE would it be to have free and fair trade between the three biggest global trading partners?" 

If you are wondering about the Amazon analogy, consider the market share of Amazon in e-commerce compared to its competitors.

Source: eMarketer, July, 2018 vis Tech Crunch

By the way, the EU had a $175 billion trade deficit with China last year. They also have the same problem as the United States in trade discussions with China. Most of the Chinese market is just not open to EU businesses.

Don't think that the Chinese are not worried about a USA-EU trade alliance. Consider this headline from Reuters earlier in July where it appears that China was trying to preempt such a plan. China wanted to do their own deal with the EU and cut out the United States.

Consider as well the extent that China has leveraged itself and you might begin to understand what Donald Trump already understands. When you are this leveraged you desperately need revenue to service the debt. Trust me, Trump has been there and knows something about it.

Credit: https://www.themaven.net/mishtalk/economics/surge-in-global-credit-driven-by-china-deflationary-bust-coming-Gf5zvrzR0ES3wot8gS5FyA/

Trump has more leverage in the trade war than is being reported. A deal with the EU gives him even more leverage in dealing with China. And with NAFTA as well.

Three front wars are difficult to manage and win. However, if an adversary becomes a true ally, it is a game changer. Don't think that Donald J. Trump does not understand it all.