Since being elected US President in January 2017, Donald Trump’s approach to trade has been resolutely confrontational. He has not been afraid to suggest or take measures designed to interfere with the global free market, with the intention of privileging American businesses and re-aligning what he has described as “unfair” trade systems.
The majority of economists agree that his protectionist policies are crude and counter-productive, with many likely to cost US jobs on the long-term, but the US economy and the dollar remain strong. However, with warning signs already on the horizon, how long can this growth period last?
Flying in the face of conventional wisdom, Trump famously said that trade wars are good and easy to win. This misunderstanding of the complex nature of trade has resulted in the president initiating trade wars with allies and competitors alike. Canada, Mexico, and the EU have all been on the receiving end of Trump’s protectionist policies, but it is China that has faced the most serious impositions to trade.
Washington has imposed three rounds of tariffs on Chinese imports this year, totalling $250bn worth of goods. The first two rounds imposed 25% tariffs on $50bn worth of imports from China, and earlier this month China responded with tariffs on $60bn of US imports. However, on Monday Trump escalated the trade war with another set of tariffs on a further $200bn of goods. This most recent tariff is set at 10%, but Trump has warned that the figure will ratchet up to 25% if the US and China do not agree a trade deal by 2019.
Trumps says he has started the trade war with China to protect US jobs and stop the “unfair transfers of American technology and intellectual property to China”. In theory, the tariffs will make US-manufactured goods a cheaper and more attractive prospect to buyers, but while helping one group of US businesses, the tariffs are hurting others. Many firms have already complained to the US Trade Representative’s Office about the negative impact of the tariffs on their businesses and both Ford and General Motors have lowered their profit forecasts for 2018 as a result.
Despite the escalating trade war with China and many other nations and trading blocs around the world, the US economy and dollar remain strong. Trump inherited a booming economy from the Obama administration, with the US outperforming its peers since 2010, but protectionism is sure to have a cooling effect on the economy once the counter-tariffs from all directions begin to bite. Forex strategy and analysis suggests that even if the US economy slows, the “greenback” will remain strong as traders seek out the perceived safety of the world’s reserve currency, rather than riskier bets on the stock market. However, a strong dollar will do little for the average American working at small and medium-sized firms if the US falls into a recession within the next two years, as predicted by the National Association for Business Economists as companies start having to lay off employees.
