Trumps Trade Tirade- who could be the losers?

The new US President has had quite an impact on the business environment in the few short weeks he’s been in power.  The new phenomena just shows the potential power of twitter. It appears his every tweet generates a reaction, but I think reactions will dim.  Like the boy who shouted “Wolf”; the world may pay less and less attention to the alternative-fact ramblings coming from Trumps twitter feed.

One of the key themes in potential US policy is the future of trade.  Trump is adamant he wants to see the current balance of trade changed. He sees the imbalance- US importing more than it exports as a weakness and wants to find some quick-fire solution to fulfil his election commitments of creating jobs.

The current plan is an import tax and an export subsidy.

Here are the countries with which the US has the largest trade imbalances in goods (services not included).

The US has a trade deficit of $347B with China and a trade surplus of $27.5B with Hong Kong SAR.

There are other quirks due to the opaque nature of some of the trade dealings, including trans-shipments, trade invoicing, tax issues, etc. For example, the US has a trade surplus of $24 billion with the Netherlands, not because the end-users of US products are in the Netherlands but because Rotterdam is a huge port for the US-EU shipping route, including commodities. Ireland, with which the US has a trade deficit of $36 billion, and where many US companies shelter much of their profits from US taxes, is also a quirk in the trade data.

Drilling down into exports and imports separately, you can see the imbalances more clearly: There are two categories of countries with which the US has a large trade deficit: Those that import from the US relatively little compared to their exports to the US, primarily China, Japan, and Germany; and those with which the US has a booming bilateral trade, primarily Canada and Mexico.


This chart shows US imports (red) and exports (black), in order of the trade deficit (imports minus exports). Note that China exports to the US 3.1 times as much as it imports from the US; Germany 2.3 times; and Japan 2.1 times. By contrast, Mexico exports to the US only 1.3 times as much as it imports from the US. And trade with Canada is practically in balance.

So Canada clearly isn’t a problem in the new trade world. And given how much Mexico imports from the US, hounding Mexico may also be detrimental- wall or no wall, put an import tax on Mexico and a lot of US exports will be affected.

That leaves China, Japan, and Germany. Both China and Japan have administrative rules and laws that to a greater or lesser extent protect their economy from competition, and in this case US competition.

It may be part of the plan for the US to encourage greater trade reciprocity: what Chinese or Japanese companies are able to do in the US, US companies need to be able to do in China and Japan. This is currently not the case; and I would hazard a guess will be pretty much unlikely.

In China, this would include being able to access the consumer base on equal footing with Chinese companies, being able to open businesses without required joint-ventures and technology transfers, being able to acquire full control of Chinese companies, and the like.  All of which will be very unlikely to occur.

But it maybe that the new US administration may halt the many incentives built into the US system that has made it so profitable for US businesses to send production overseas.

It is to be noted that many off shore US companies will be looking potential relocation- Chinese labour is increasing in cost and US manufactures are less and less welcome in the Chinese market.

China is no longer the cheap labour market it once was. But it is efficient- with salary increases being balanced by productivity increases.

It maybe that as US companies retool for new products and cheaper production, robot factories are built in the US- enabling companies to claim they are repatriating production, without having to hire too many workers. So the plan to bring back jobs may fall foul of innovation.

It will be very interesting to observe how this all pans out and it increases the risk and complexity of any business in Asia trying to identify what the US will do.  This is a big trade agenda for the US and it’s not going to be welcome in those countries that have come to rely on their trade surpluses with the US as an unfailing prop under their own economies.


graph source