Trump's Trade War.

President Trump, as candidate Trump, touted the unfairness of US trade relations with the rest of world. His attacks, principally on China and later on NAFTA, were then seen as media ploy to make the US disfranchised voter to feel they had an ally heading for the White House. Trump the businessman was seen by his largely myopic US centric base as the apostle of business acumen and if he said that China was 'raping America' then he must know what he is talking about. For those who live and breathe international trade his rants were seen as something that will mellow when he sees the facts.

However, as we have learned the facts for Donald J Trump as simply as he wants to see them. With a panache for off the cuff policy making, usually encompassed in the 140 word limitation of Twitter, President Trump has launched a trade war the consequences of which, while damaging to the demons as he sees them, will also severely impact the very base who believed that Trump the businessman knows what he is doing. Raising tariffs, even in the absence of any retaliation fromUS trading partners, will raise the cost of goods for the end user within the US. The aluminum and steel tariff alone would raise the price of finished products and considering a large percentage of the aluminum imported by the US is the high grade aluminum which they do not produce themselves, the protection the tariff seeks is just not there.

Now to expect that levying tariffs on foreign goods will have no repercussions is naive. China, the European Union and others will impose their own set of tariffs on US goods. China,Mexico, Canada and the EU together import about $140 billion of US agricultural products, all of which will be hit by the trade war. While in the scheme of a trillion dollar business this may seem a drop in the ocean, but importantly it affects the rural base of the US economy and a farming crisis, however small with a large economy, cannot look good for the politics. Yes it is true the effects of a trade war are never immediate but more like a slow motion melt down, it is also correct that once a trade war begins to take root into the economic cycle it takes that much longer to stop the trade war and then to reverse its impact.

On broader note, the trade imbalance is a misnomer to be seen in isolation to the over all cash surplus or deficit (as the case may be) when considering that nations not only trade in goods but also provide services and more importantly have their companies in each others economies operating as 'domestic' companies. Take a US cereal manufacturer with operations in Europe; it has production and marketing facilities in Europe which may not be important grains from the US but their profits end up going back to the US economy. In addition there is a plethora of service industry activity overseas, from banking to engineering and consulting which all provide revenue that goes into the US economy. When we account for these we notice that the US does not run a deficit with many of the countries that President Trump alleges there is a 'trade imbalance'. Yes in terms of goods alone he would be correct, in terms of the over all economic activity between the nations he is wrong.

In very simplistic sense the average American wants to walk into Wallmart and get the best deal on say the training shoes. Now telling him you have raised the tariffs to 'make America great again' will not explain why those shoes are 25% more expensive. Telling him that you have reduced the trade deficit is fine but its not money that has gone into his pocket, and in the case of the soy bean farmer or the bourbon whiskey producer your trade battle has cost him his job so the idea of even buying a training show is now out of the question.

It is likely that a large measure of the trade imbalances were unfair to the US, and in isolation to the overall economic balance between nations you may well want to negotiate and fine tune the agreements. Launching nuclear trade war with the idea to get a better deal is really akin to lighting up the forest and then using a hose pipe to drench the fire out. Trade wars never work and unless Trump feels he can rewrite history and somehow his business acumen far exceeds the logic of years of economic theory, we should be bracing ourselves for a recession the like of which has not been seen.