President Trump’s trade policy contradicts all economic research and experience. The US president is still convinced that a US trade deficit must be avoided, and that exporting is good while importing is bad. Christian Bjørnskov, professor of economics at Aarhus BSS, explains why Trump is mistaken.
03.12.2019 | INGRID MARIE FOSSUM
“Unfortunately, Trump’s approach to trade policy is extremely detrimental from an economics point of view,“ says Professor of Economics at Aarhus BSS, Christian Bjørnskov, whose analysis of the US president’s trade policy has been published in the Danish scientific journal “Samfundsøkonomen”.
“Trump is basing his policy on a type of mercantilism that we economists have spent the last 200 years debunking. This is a policy that rests on a set of fundamental misapprehensions,” he adds.
Since the late 80s, Donald Trump has advocated a balanced trade model, and he prefers the US to run a trade surplus by exporting more than they import. If the US fails to run a surplus, Donald Trump believes that the countries who have a trade surplus with the US are doing harm to the country.
This analysis is completely flawed, but Trump doesn’t like this kind of imbalance,” says Bjørnskov.
Nor does the American president like to be contradicted, and as his economic adviser, he has appointed one of the few economists that advocate the same protectionist trade policy as he does. In contrast, and as he is prone to do with those who disagree with him, Trump fired his chief economic adviser in 2018 because he had a different view on trade policy.
But why would Donald Trump act in a way that goes against all research and experience and actually makes the US poorer? And in a way that contradicts the 1,100 economists (including several Nobel Prize winners) who signed a letter in which they warned against Donald Trump's trade policy?
"When the world’s largest economy (the US) suffers a downturn, the country will buy fewer goods from other countries - and thus the entire world economy will be affected - including Denmark"
Christian Bjørnskov, Professor, Department of Economics and Business Economics, Aarhus BSS
Tariffs backfire on American companies
The US president is trying to protect American jobs by imposing tariffs on foreign goods to force US companies to opt for US manufacturers instead. This is a away of maintaining jobs in these industries (e.g. steel and aluminium). However, it will always end up backfiring.
Take the 25 per cent tariffs on steel and aluminium. These were originally imposed to affect China (a country which Donald Trump sees as a threat to US national security). They also affected a number of military allies (Canada, the EU, South Korea, Mexico and Brazil) and ultimately also the US.
For example, the US company Alcoa, one of the world’s largest producers of steel, had to pay tariffs on imports into the US from their Canadian production plant. In addition, they were also suppliers of specific types of steel that they do not produce themselves but have to import from other countries. The total financial costs faced by Alcoa amounted to DKK 100 million. (As a result of the tariffs, the company’s profits fell by 12 per cent). The US does not even have the capacity to produce enough steel to cover the country’s own consumption, the CEO of Alcoa told Reuters.
Another example is the aircraft industry where Donald Trump imposed 292 per cent tariffs on Canadian aircrafts. This backfired on the US, as the American company Delta Airlines had just ordered 75 aircrafts from the Canadian company Bombardier with the cost now skyrocketing. In addition, the motors used in the Bombardier aircrafts were actually produced in the US.
Trade barriers typically make countries poorer
Not only do trade barriers often backfire on specific industries, they also end up affecting other parts of the economy. Several studies show that protectionism will have grave economic consequences for society. A well-known example are the tariffs on Chinese tyres imposed by Barack Obama in 2009. These tariffs ended up costing the US USD 900,000 per job in the corresponding industry.
In addition, an analysis shows that while Trump’s steel tariffs might protect 33,000 jobs or so, the country also risks losing 179,000 other jobs in industries that make use of steel and aluminium.
Society is affected not just because consumer spending power is reduced, but also because the country will lose jobs in other sectors than those that the trade barriers are meant to protect.
Consumer spending power reduced
Donald Trump’s trade policy also has a negative social effect as the majority of jobs that will disappear are low-paid jobs in some of the poorest areas of the US. This applies to 2/3 of the jobs that disappear in the short or medium term - e.g. when General Motors had to shut down their Ohio production plant.
Ordinary citizens are also affected as car prices will increase by USD 300 per car. In addition, the price of a washing machine will also increase as a result of the tariffs on steel and washing machines.
Examples on Trumps trade barriers:
| Tariffs on: | Target: | Additional tariffs: |
|---|---|---|
| Passenger aircraft | Bombardier, Canada | 292 pct. |
| Steel | Chinese steel manufactors | 25 pct. |
| Aluminium | Severalk countries | 10 pct. |
| Solar panels | Chinese goods | 30 pct. |
| Washing maschines | Korean washing maschines | 20-50 pct. |
| Various goods | Chinese importers, 800 product lines | 25 pct. |
Consequences for Danish companies
Danish companies are also affected by Donald Trump’s trade policy. Not just as a direct result of the increased tariffs, but also because the international economy as a whole is affected.
“When the US economy suffers, the world economy will also suffer to some extent. When the world’s largest economy (the US) suffers a downturn, the country will buy fewer goods from other countries - and thus the entire world economy will be affected - including Denmark,” says Bjørnskov.
“However, some Danish companies might actually benefit and get access to new markets that have previously belonged to China but are now off limits to China due to Trump’s trade barriers,” he continues.
When the UK leaves EU as a result of Brexit, it will also have consequences. Britain was an important player in the EU in terms of advocating free trade. When they are no longer members, the EU trade policy might well take a different turn. France traditionally advocates a protectionist trade policy, and on several occasions, President Macron has shown that he is swerving in that direction. Other European countries share his view.
Future prospects
According to Christian Bjørnskov, the future of the world economy depends on who will become presidential candidates in the next US election.
“In the US, both parties have become extremely polarised. The Republicans have elected a very right-wing president, and at the moment it looks as if the Democrats will opt for a very left-wing candidate. However, even if the Democrats opt for the left-wing Elizabeth Warren, it won’t make a difference as her approach to trade policy is as protectionist as Trump’s.
However, trade policy is not affected by where the politicians are positioned on the political scale Traditionally, trade policy is a highly personal matter that transcends the political spectrum. Often it depends on the home state of the politicians and thus their special interests.
If the Democrats go for a more mid-seeking politician, and if the Republicans opt for another candidate than the right-wing populist Donald Trump, there is, however, a light at the end of the tunnel. In this case, the US can return to the free-trade policy that the country has been known for since the 1970s. This policy is also recommended by economists all over the world as it increases productivity and thereby the real income.
The benefits of free trade are many and actually include some of Donald Trump’s dream scenarios for the US. However, by introducing his trade barriers, he puts a spanner in the works of these visions.
- Free trade fosters more foreign investments and thus the transfer of new and more efficient technology from abroad.
- Free trade generally leads to a higher investment level.
- Free trade is linked to an overall higher quality in a country’s economic policy.
(Source: Wazciarg, Christian Bjørnskov, Samfundsøkonomen)
Read the article (in Danish)