Trump Trade War Is A Side Show - Part 5

Summary

The trade war was always only a side show with no side exposed to any more than 4% of its GDP.

As previously anticipated in prior articles in this series, the trade war is now coming to a close in time for the midterm elections.

There has been some good success with a general winding down of hostilities as Mexico and Canada bow out of the fight with their new version of NAFTA.

There remains now the Europeans and the Chinese to win over with an agreement that results in less tariffs. A Chinese agreement appears to be a lot closer than it was a month ago.

Over one month on from my last article on the trade war, the situation has improved, with Mexico, Canada and the USA signing a new NAFTA and Europe looking to reduce tariffs on trade overall.

And now we have a flash announcement that President Trump has asked officials in his administration to start drafting terms of a trade deal with China.

Part one, two, three and four of this series can be seen here:

Trump Trade War Is A Side Show

The Trump Trade War Is A Side Show - Part 2

The Trump Trade War is a Side Show - Part 3

Trump Trade War Is A Side Show - Part 4

The primary purpose of the other articles was to show that while the trade war dominated headlines, the macro impact of international trade on all the major players is very small as a percentage of GDP.

Trade as a Percentage of GDP

The table below shows the current account as a percentage of GDP for each major "combatant" in the trade war. Japan has the most to lose at 4% of GDP.

(Source: Trading Economics.com)

Running Score on the Trade War

The table below is a running score of the trade war over key time frames updated with the cessation of hostilities between the USA, Mexico and Canada.

(Source: Trading Economics.com plus author calculations for 2017)

On the table and still to come is the following key new US tariff threat: By the end of the year, imposing 25% tariffs on an additional $287 billion worth of Chinese imports.

Now even this appears to be less likely after the flash announcement of a trade deal with China. It appears that it is an 'all of government' project marshaling the resources of many federal government departments to ram an agreement through.

Canada, Mexico and the USA have agreed to renew the NAFTA agreement which means new tariffs are now off the table and business class elites in both countries can enjoy the fruits of enlarging the earnings and profits share of GDP while the wages share of GDP falls. Free trade in the modern sense of the word defined below:

Free Trade: The stage of trade policy that followed mercantilist and protectionist success in raising first Britain and then the United States and Germany to industrial and financial dominance. Pulling up the ladder, these leading industrial nations demand that other countries open their markets to lead-nation exports and investment instead of protecting, subsidizing and modernizing their own industry and agriculture. Such “free trade” has become a euphemism for centralizing industrial, agricultural and financial power in the United States, while offshoring employment to the low-wage countries. Academic rationalization of this kind of globalization is based on short-term equilibrium theory that excludes consideration of how protectionist policies may support capital investment to raise productivity over time. Also ignored are “off balance sheet” costs borne by society to clean up environmental pollution and global warming.

(Source: Hudson, Michael. J IS FOR JUNK ECONOMICS: A Guide To Reality In An Age Of Deception (Kindle Locations 2629-2637). ISLET/Verlag. Kindle Edition.)

Such free trade agreements might better be termed "investor rights agreements" in that they protect the rights of investors from national labor and environmental legislation and set up internal dispute resolution procedures that protect companies from national court systems and the sovereign powers of national states.

Similarly, in Europe, the trade war has been put on hold while a new agreement is ratified between the parties where tariffs overall could be reduced. The European Union [EU] has offered to drop all tariffs on cars (10% for the USA and 2.5% for them) and other goods if the USA does the same. Interestingly, President Trump rejected the offer and sought more concessions and will most likely get them too.

A general reduction in tariffs all around is a win for everyone as it means general taxation and money deletion is lower. More disposable income can go to real goods and services rather than tariff tax. Ultimately, the consumer pays the tariff in both countries and the national government deletes the tax money upon receipt and so lowers the net money supply, incomes and employment. More aggregate demand means more consumption, production, and employment.

What we can expect going forward

What we can expect in the next weeks is:

  1. An agreement with the EU to lower tariffs overall.
  2. An agreement with China that sees reciprocal tariff reductions but does not include intellectual property rights and patent protection clauses (otherwise known as the protection of private corporate product monopolies).

The Chinese believe that when something new and useful is invented, its benefits should be harnessed and spread as widely and as quickly as possible because this lifts the general well being and productivity of the whole economy and in essence was made possible by the support of the rest of the economy.

The western tradition of allowing a single company to have a production monopoly over a product and ration its use by high prices is contrary to the highest and best use of the new invention, while making huge profits for the single company is contrary to the best interests of the society that developed it.

Time is running out for President Trump to accomplish these things. He already has the present unfortunate stock market crash negative headlines to deal with. A market crash caused by his government as I cover in this article on the federal budget statement for September 2018.

With the right headlines at the right time, he could pull off some successful trade negotiations with China to round out and conclude the trade war in time to help Republican candidates in the midterm elections.

China is likely to get a good deal that lowers tariffs overall but does not attack their sovereign rights in the same way that the trade agreement does to Mexico, Canada and the USA in favor of corporate business elites.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.