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Trump’s Terrific Trade War

Trump’s Terrific Trade War

“I have the best words,” he once claimed, and he’s probably right.

I’ve been trying to guess what he will call the trade war he plans to launch any day now.

Speaking to reporters last week, the president said China is “dumping steel and destroying our steel industry. They’ve been doing it for decades, and I’m stopping it.”

Notice the alliteration? Dumping, destroying, doing, decades. Nicely done.

In that spirit, I propose to name the collection of forthcoming tariffs and quotas, “Trump’s Terrific Trade Tempest.”

This conflict won’t end with steel, nor will it be quick. Other governments will fire back. They’re already taking aim.

Source: AP

Loving Loopholes

Last summer at the Camp Kotok economics retreat, I met a man who has done business with the Trump Organization and with Trump himself. The event’s ground rules prevent me from telling you his name, but I can tell you what he said.

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My source said Trump scrupulously followed the law in all their deals. He also said Trump would often insert innocent-looking contract clauses that later harmed the other side.

The point: Trump loves holding people to terms they don’t know they’ve agreed to. If he can’t find a loophole to exploit, he may create one.

That might be legitimate in commercial deals. However, it could backfire in unforeseen (and very non-terrific) ways if he tries to pull the same on the government of a foreign country.

I agree that American workers don’t get fair treatment under international trade agreements like NAFTA. Trump wants to renegotiate or withdraw from those trade deals, but the US’s trading partners naturally object, as do some members of Congress.

But here’s the loophole: It turns out a president can ignore or override many trade agreements without asking anyone’s permission if he finds that they harm US national security.

In those circumstances, a 1962 law empowers him to impose tariffs, quotas, and other trade barriers.

World Trade Organization (WTO) rules let member nations claim a national-security exemption to trade agreements. The provision’s parameters are unclear, because WTO members rarely go to war with each other—but Trump seems ready to test those parameters.

Photo: Bryan Ledgard via Flickr

Steel will only be the test case. Rather than work through cumbersome existing processes, President Trump ordered Commerce Secretary Wilbur Ross to study the national-security implications of steel dumping.

Ross should release his findings soon—but we can guess what they will be. As the Washington Post reported last Friday…

Members of the Senate Finance Committee who emerged from a briefing with Secretary Ross Thursday afternoon said it’s no longer a question of whether Trump acts to protect American steel, but how severely.

In other words, the decision is made. Trump’s Terrific Trade Tempest is on the launch pad.

Combative Mood

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The law gives Trump flexibility. He could act only against China or other countries as well. The possible targets are already squawking—and planning their responses.

For instance, consider this July 7 Financial Times article:

[European Union] officials have begun assembling a list of US goods including whiskey, orange juice and dairy products to target for retaliation over Donald Trump’s plans to invoke national security concerns to limit steel imports.

European Commission president Jean Claude Juncker told the Financial Times, “Our mood is increasingly combative.”

But why retaliate specifically against whiskey?

Source: AP

Well, Europeans will buy less whiskey if EU officials impose tariffs that double its price. And Kentucky ships a lot of bourbon to Europe.

Besides whiskey, what’s also from Kentucky is Senate Majority Leader Mitch McConnell. It’s no accident the EU threatens to strike his state first. With orange juice and dairy also on the list, Florida and Wisconsin politicians won’t be happy either. (House Speaker Paul Ryan is from Wisconsin, by the way).

But even strong opposition from Capitol Hill probably won’t work, because Trump doesn’t need their permission. To stop this trade war, Congress would have to pass new laws and then override Trump’s veto. Not likely.

That means this dispute will expand quickly beyond steel to other industries… and then the US will retaliate against those measures and expand it yet further.

The resulting vicious cycle will be very hard to stop. Even the WTO, which supposedly exists to prevent this scenario, has little power to intervene.

That means Kentucky distillers, Wisconsin dairy farmers, Floridian orange juice producers (and probably many others) will get swept up into a fight that was originally between Chinese and American steel companies.

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Unlike a shooting war in which generals try to minimize civilian casualties, governments fighting a trade war want to increase the pain. It puts political pressure on opponents.

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Reaction Time

The good news is, this should be self-correcting. The bad news: it could last a long time.

Historically, free trade—or the mild version of it we have—isn’t the norm. Protectionism prevailed until the last few decades.

Unfortunately, the benefits of free trade didn’t get distributed fairly. As Newton’s third law says, every action has an equal and opposite reaction.

Source: AP

The global reaction to these measures will take time to unfold, but with President Trump intent on blowing up current structures, it could get ugly.

What can investors do?

As I said last week, companies that depend on imports and/or exports will get hurt the most. The global economy is a giant, well-oiled machine that’s about to get gummed up. Keep your hands and feet away from the moving parts.

A few days ago, I sent Macro Growth & Income Alert subscribers an option trade on another US company that is well insulated against a potential trade war.

I’m also looking at a high-dividend foreign stock for the next Yield Shark issue, which will be published on July 25. It’s a company with a long history of dodging international trade barriers.

The common thread: Avoid investments whose success depends on people or goods crossing international borders. Their ability to keep doing it on the same terms is in serious jeopardy.

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See you at the top,

Patrick Watson

P.S. If you’re reading this because someone shared it with you, click here to get your own free Connecting the Dots subscription. You can also follow me on Twitter: @PatrickW.

P.S. If you like my letters, you’ll love reading Over My Shoulder with serious economic analysis from my global network, at a surprisingly affordable price. Click here to learn more.


We welcome your comments. Please comply with our Community Rules.

July 18, 2017, 6:47 p.m.

It’s fine to critique any President. That’s the American way. But, I think Patrick Watson is forgetting something:

American voters had just one credible choice for president: Donald Trump, or Hillary Clinton.

No candidate is perfect, we all know that. But ask yourself: if Mrs. Clinton had been elected, would this criticism have been so personal and condescending?

There is no evil empire to unite us now. As a result, we are disunited. But the collectivist goblins released by the Russian revolution are still with us. They are innate in human nature, and they must be resisted.

Collectivism (communism) is based on envy and greed, and it is the antithesis of Western morality (thou shalt not steal; thou shalt not covet, etc.). We see the collectivist attitude everywhere, from the watering down of our individual rights to the collectivist tendencies in international relations that this president is resisting.

Internationally, the U.N. constantly attempts to confiscate the earned wealth of Americans, and hand it over to countries that refuse to do what is necessary to create such wealth. It is much easier to simply demand America’s wealth. We will be expected to pay more in taxes so other countries can benefit without effort on their part? Patrick Watson may think he has better answers than Donald Trump. But voters had only one choice: Trump or Clinton.

So rather than joining the chorus of Trump-bashers, it would be heartening to see some praise for the things this President is doing right. There are plenty of examples that columnists are aware of. So criticize, but do it constructively. But this article does not do that (”...with President Trump intent on blowing up current structures, it could get ugly”). Give the guy a break, for once.

By trashing this President, Watson is trashing the electorate that put him in office. We had just one opportunity to change things. The chips were down, and everyone knew it. And we won’t get a second chance.

We could see the setup coming. All it required was President Clinton 2.0 to turn America into just another country in the collectivist U.N. Then it would be our “duty” to hand over our earned wealth to countries that knew how to earn it themselves, but chose not to. And is there any doubt which way Clinton would tilt?

We dodged a bullet.  But piling on the new president is also repudiating the decision of American voters, who had just one (realistic, credible) choice. Now we have President Trump—unless the media can generate sufficient dissention. Then what, we get President Pence? Wouldn’t he be neutered, after watching the destruction of his predecessor?

Watson’s criticism is flawed for another reason: Donald Trump has made it clear for many years that he is always negotiating. It is his style and his method. That negotiating style has made him very wealthy. Now he is our agent, negotiating for our benefit. If he had strong support instead of constant criticism of every word and action, our country would benefit. Because when America is united no other country, and not even the world, can withstand us.

Watson cites an anonymous critic to justify his criticism. But how is that any different than the legion of nay-sayers during the campaign, who asserted that they knew for a fact how evil Donald Trump was—but who never got any corroboration from the people who knew him intimately? Anonymous characterization isn’t much different from bearing false witness, is it?

This almost universal lack of support is harmful not just to Donald Trump but to every American, because ‘divided we fall’. A president is elected for four years specifically to avoid this post-election infighting. But now there is a large media-led faction deliberately trying to destroy this presidency.

The really sad thing is that many critics are like Patrick Watson, who cannot bring himself to say one good about the President, without qualifying it into a nothingburger.

This is a time for support, not endless criticism.  Up until now, our country has always united after an election. But not this time.

Mr. Watson should resist the urge jump on the Trump-hatred bandwagon. There has been too much of that already.

Ian Gill
July 18, 2017, 5:42 p.m.

How can you discuss trade without referring in detail to the trade in arms and munitions. Trump has already upset the apple cart in the middle east.  To sell enormous amounts of arms to the source of the Wahhabi cult and think that there will be no repercussion is naive at best.  The bottom line of this trade will be measured in blood.  Yes American blood.

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