Donald Trump’s trade policies could damage the states that elected him: CIBC
“Is it fair to say that Donald Trump would essentially be shooting the states that supported him in the foot with his trade policies?”
Economists usually have longer answers to questions on trade. But that’s all that Benjamin Tal, deputy chief economist at CIBC, had to say when asked that particular question.
Tal and his colleague Royce Mendes recently authored a report titled “Trump’s Trade Policy: the Cure is Worse Than the Disease.” It showed that certain Trump-supporting U.S. states have key trade relationships that could be damaged by his plans.
Trump would never have achieved his Electoral College victory without those states’ help. And now their economies could suffer for putting him in the White House.
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Trump has floated a number of ideas for reforming trade, such as the following:
- Scrapping or changing NAFTA
- A 45 per cent tariff on Chinese imports
- A 35 per cent tax on certain goods, like vehicles, produced in Mexico and sold in the U.S.
These kinds of policies could adversely affect U.S. access to “emerging markets,” or countries that are on their way to becoming advanced economies, Tal and Mendes’ paper said.
Mexico, China and Brazil are but a few examples of emerging markets.
All three are top export destinations for states that voted Trump into the Oval Office.
The coloured states in the map below show the places that voted for Trump and their top export destinations. Green represents Mexico; red represents China; yellow represents Brazil.View link »
Together, these states represent 112 Electoral College votes — more than enough to have vaulted Trump to victory in the November election.
But these states could now find themselves vulnerable to policy ideas that hurt both them and American trade more broadly, Tal and Mendes said.
“Lost opportunities on that front could cost the U.S. economy dearly, as demand from emerging markets must be an integral part of any U.S. manufacturing strategy,” they wrote.
The economists hit their point home with the following chart, which shows U.S. exports to emerging markets increasing over developed economies since the Great Recession.
“Emerging markets were first to rebound from the Great Recession, and today their combined GDP is much larger than that of the U.S.,” Tal and Mendes wrote.
“Yes, emerging markets are now emerging more slowly. But even that cooler pace is more than double what the U.S. economy could achieve on steroids.”
Four Trump-voting states in particular could suffer from limiting access to markets like China or Mexico.
Louisiana, which voted 58 per cent in favour of Trump, has a trade surplus with China that represents a 2.5 per cent share of its economy. Its surplus with Mexico makes up just under two per cent of its GDP.
Alaska, which voted 53 per cent in favour of Trump, also has a trade surplus with China which also makes up a noticeable portion of its economy; Nebraska and South Dakota also have noticeable trade surpluses with Mexico.
“The negative effects of countervailing restrictions would immediately hurt his base as much as anybody,” Tal and Mendes wrote.
Mexico and China are also major markets for U.S. agriculture. The former is the biggest importer of American corn; the latter the largest importer of U.S. soybeans.
“The Chinese and the Mexicans know that while agriculture is not a major contributor to U.S. GDP, the rural communities are where a significant portion of Trump voters reside,” the economists added.
It’s too early to say exactly what will happen to these economies if Trump delivers on his ideas; no one knows exactly which one he’s going to implement yet.
But his trade policies could potentially raise prices on a wide range of products for Americans.
Small cars such as the Fiat 500, which is produced in Mexico, could see their prices grow by approximately 20 per cent if a 35 per cent duty were imposed on Mexico, Keith Head, a professor at UBC’s Sauder School of Business, told Global News.
The same could happen to certain Ford and Chevrolet vehicles.
Even if a tariff were imposed with the object of bringing auto assembly jobs back to the United States, such positions could easily go somewhere else, Head added.
“Maybe the assembly returns to the U.S. or maybe Fiat closes the Mexican plant and supplies the use with Fiat 500s from Poland (the place where it makes them for the EU market).”
But cars aren’t the only items that could prove more costly if Trump imposes a border tax on Mexico. Certain air conditioners and refrigerators could also become more expensive.
In any case, it’s difficult to see how any of Trump’s measures would bring jobs back that were already disappearing before certain trade deals even came into force.
The manufacturing share of U.S. employment was already falling before NAFTA was implemented, and before China joined the World Trade Organization (WTO), the CIBC report showed.
Tal and Mendes hope Trump realizes that his “prescribed remedy might actually be worse than the disease.”
And that’s before you even consider retaliation from other countries, said Werner Antweiler, another professor at UBC’s Sauder School of Business.
“Keep in mind whenever one country cranks up their tariffs, others will retaliate, and that’s basically not a situation where one country can win by stealing jobs or goods from other countries,” he said.
That’s what happened in 1930, when Canada retaliated against a U.S. tariff by imposing a 20 per cent tax on U.S. imports.
The move halted global trade and became another factor in the Great Depression.
Foreign Affairs Minister Chrystia Freeland has already said that if the U.S. imposes a tariff, then “Canada would respond appropriately.”
Antweiler hopes such a situation can be avoided.
“The moment you introduce these kinds of trade policies, everybody gets hurt,” he said.
“There are no winners in a trade war.”
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