David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.
Donald Trump and his band of protectionists need to enroll in an Econ 101 course – there are few 'winners' in a trade war. They will then be able to learn some basics like 'Harberger's triangle', an area of the supply-demand diagram of tradeable goods depicting the size of the 'deadweight loss' to society from what is otherwise a tax on global production and U.S. consumption. If you are not one of the 400,000 workers in the steel or aluminum industry, you should be up in arms about this. What I find truly amusing is how all the Trump enthusiasts were saying in the campaign and shortly after the election, that we should take him "seriously, not literally". In other words, we were supposed to believe that Mr. Trump would ensure that all the 'good stuff' like tax reform and 'dereg' would occur and that all the bad stuff was just rhetoric.
Well, it was more like a deficit-busting tax relief package that included having to bribe the personal sector with cuts of their own at a time of full or near-full employment. And most of the deregulation moves were restrictions set to expire in any event, so yet another mere hoax. The changes in immigration, like trade, is deemed to be a 'protection' act, but it comes at the expense of growth. And the pledge of having Mexico pay for the wall is looking like an embarrassment and is underlined by the resignation of the U.S. Ambassador to Mexico, which does little to raise the odds of NAFTA surviving.
The amateurism at the White House, I have to say, is absolutely astonishing. Seriously, to see Wilbur Ross on TV with a can of Campbell's soup in his hand – I'm sure that was a first for him. He should have also shown a farm tractor, a car, a piece of natural gas pipeline, an airplane, and some construction equipment to show the viewing public too – because the increase in cost and decline in production from this stupid tax is going to cut a very wide swath. Something tells me Mr. Ross will be crying in his can of soup once the economic carnage is tallied up.
This is all part and parcel of the Trump team's attempt to eliminate the trade deficit, as if that is a desirable goal. You'd be surprised (as would the President) that in periods when the U.S. ran a trade deficit, GDP growth was stronger than when the country ran a surplus. How do you like that? The deficit actually represents strength in domestic demand to the rest of the world. And while Donald Trump has no education in economics, the fact that Peter Navarro doesn't know this tells me something about the quality of the PhD program at Harvard. Clearly overexaggerated.
The White House already has stated that there will be no exemptions and that the actions on steel and aluminum are being taken for 'national security' reasons. That would be funny if it weren't so sad. Frozen electricity – which is essentially what aluminum is – is deemed to be a security of supply issue. The world is awash in steel capacity and this is somehow a national security issue? No. It is rather a political issue. And while the headlines always seem to read about how the trade tensions are really about China, the reality is that the President, for whatever reason, has a bee in his bonnet about Canada. Maybe it's because nobody ever wanted to stay at his downtown Toronto hotel at Bay and Adelaide. But the reality is that he is the only President in modern times to have not visited Ottawa at this juncture of the post-election cycle. His disdain for Justin Trudeau is pretty apparent. His trade team thought Chrystia Freeland and her group would simply roll over, and the fact that they haven't has raised the ire of the U.S. trade protectionists. In any event, the first trade volley was against Canadian dairy farmers and then it was softwood lumber, always an easy target, and then Bombardier, but the global trade courts did rule the other way on that one. Canada is the top exporter of steel to the United States while China is No. 10 on the list. How Canada stands in the way of U.S. national security interests is anyone's guess. And we should also keep in mind, that the United States exports US$2-billion annually more steel to Canada than the other way around. Canada is the United States' best friend in every respect. This is all so sad. And make no mistake, consider NAFTA dead.
The White House doesn't seem to believe that U.S. trading partners will retaliate because of this smug attitude that nobody will cut off their nose to spite their face. This is very naive and shows a total lack of knowledge or understanding of history. My bet is that there is going to be retaliation and that an outright global trade war is going to occur. And with the classic chip that every bully wears on his shoulder, Donald Trump tweets out "trade wars are good, and easy to win". Brave words from the guy who claimed he would have run into the school to save those kids in Florida. Words are cheap, and yet, at the same time, loose lips sink ships.
Let's examine the claim that 'protecting' industries that employ 400,000 people in a work force of 130 million will not cause any damage. After all, nearly seven million Americans work in industries that will be negatively affected by the tariffs. Well, the economic impact will actually take 10 to 20 basis points off annual real GDP growth. The job loss will range anywhere from 190,000 to 380,000 – as the gains in Ohio and Pennsylvania will be swamped by declines in the states most sensitive to the cost run-up in other segments of the industrial economy such as Indiana, Texas, Louisiana, South Carolina and Alabama – all states that Mr. Trump carried in the 2016 election. The "easy win" that he talks about may end up translating into some hefty political losses for him, but his yearning to please his base obviously knows no bounds. Pursuing policies for the greater good seems to be lost on this administration.
Now if NAFTA is abrogated, and I see no reason why the amigos to the north and south would be keen on sustaining the talks which aren't going anywhere after no fewer than seven rounds of discussions, the estimates I have seen from Moody's Analytics is 1.8 million jobs lost. That isn't Canada. That isn't Mexico. That is 1.8 million jobs lost in the United States. And if the White House is wrong on its gamble and there is global retaliation, a full global trade war would generate a decline in U.S. employment of nearly four million. So any of these two scenarios, with obvious nontrivial risks at this point, would create the conditions for an outright recession. And what do I receive on my desk practically daily now? Reasons to buy the stock market dip. Good grief.
I'll tell you who comes out a winner on all this. Vladimir Putin. I mean, who else would be smiling at what could be construed as a trade attack on NATO-member countries? And isn't it interesting – sorry, I meant disturbing – to be enduring presidential tweets on how "trade wars are good" with his allies, and yet nary a tweet on his supposed adversary, Comrade Putin, who just lobbed some fresh threats to the West with the announced development of an "invincible" nuclear missile. (And daring to show an animation of a potential strike on Florida; I guess so long as it was far away from Mar-a-Lago, it didn't deserve a response.) But as we saw in Georgia, Crimea and the Ukraine, Mr. Putin relishes the opportunity of upsetting the apple cart when the West is in disarray, as is the case today. I guess that alone is an endorsement for gold.
So look – before the hardcore Trump supporters get all in a tizzy, I never said that the President "doesn't know what he's talking about" as the weekend Wall Street Journal editorial pages asserted. I only said he needs an immediate crash course in Economics 101, along with his entire trade team.