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Trump Trade War

These last few weeks have been a roller coaster, no matter who you voted for. You may be surprised to know that the DOW doesn’t reflect this.

On Monday and Tuesday November 7 and 8, when polls were showing Clinton was going to be elected President, the DOW was up over 400 points. On Wednesday, once we knew it would be Trump who was going to be the next President, the DOW was still up over 400 points. The lesson, in my opinion, is that the economy has significant inertia and momentum. Whether the election of Trump will be positive or negative for the economy, we will only know months from now.

I believe that Presidents try to fulfill the promises they made during their campaigns. Trump proposed a number of changes that raised considerable concern from friend and foe alike for their effect on the market. His promises to tear up NAFTA and impose tariffs of 35% to 44% on Mexico and China create concern that the world could find itself in a trade war. This would probably be negative for the stock market itself, but not for all stocks.

President elect Trump has a reputation for being a “very good negotiator.” But I am not sure that being able to walk away from a bad deal on a real estate transaction is the same as doing so in country-to-country trade deals. It remains to see if this is going to be an issue.

There is no doubt that companies have moved manufacturing facilities to China, Mexico, and other countries to benefit from lower labor costs. But that is not the only reason (and maybe not the biggest reason) that jobs have been lost in manufacturing. As a country, China has surpassed the United States as the top manufacturing country in the world, with $2.74 trillion in 2013, compared to $2.03 trillion in the United States. That $2.03 trillion is within 3% of record manufacturing output achieved by the US in 2007. Since 1984, manufacturing output has doubled, but with 1/3 fewer workers.

Let me say that again. Since 1984, manufacturing output has doubled – but there are 1/3 fewer workers. The biggest factor in job losses has been productivity gains, not jobs shipped to other countries.

Here is an analogy. In 1850 there were 23 million people in the United States; 11 million people worked in agriculture. Today the United States produces 600 times the agricultural output as we did in 1850, but by 2014 there were fewer than 762,000 people employed in agriculture. Since the 1850s, farming has become highly productive thanks in large part to trucks, tractors, combines, dairy parlors, etc. Think of it. Each farm labor hour produces over 8,600 times what an hour of farm labor produced in 1850!

The same has occurred in manufacturing. Each hour of labor is now producing 6 times the output that it did in 1984. There are organizations like MEP Supply Chain which are forecasting that manufacturing output in the United States will overtake China and once again become the world leader in manufacturing. The reason? The United State is quickly becoming the most competitive country regarding investments in research, technology, and innovation. At the same time, the productivity gains will continue to reduce the number of jobs per unit of output.

The issue with NAFTA and the TPP is, in my opinion, not about bringing jobs back to the United States. It is, instead, about exports. The campaign rhetoric was for the United States to begin to impose tariffs on goods imported from China, Mexico, and perhaps other countries. The expected response would be for those countries to impose tariffs on goods that we export. The United States exported $2.23 trillion in 2015, $267.2 billion to Mexico alone (at 11.9%, the second-largest export partner).[1] Our total exports are more than our total manufacturing output. Therefore, a trade war could have a significant impact on manufacturing.

Total manufacturing employment in the United States is over 12.3 million jobs. The risk of a trade war for manufacturing alone would be significant.

The Trump transition team announced that on Day One of the new administration that the President elect will ask the Commerce Department and International Trade Commission to study the impact of a complete withdrawal of NAFTA. That in itself will probably launch Mexico and Canada (the second and first largest US trade partners respectively) to begin evaluating on their side the impact. Will Mexico and Canada reach the same conclusions as the United States does? There have been reports that Mexico is already drawing up contingency plans if the United States withdraws from NAFTA.

Donald Trump has the reputation of being very good at negotiating contracts. If he can get concessions from China and Mexico without launching a trade war, this has a lot of potential.

For my clients, I am monitoring the situation closely. I already have a contingency plan in the event of a trade war.

 

[1] “US-Mexico Trade Facts.” Office of the United States Trade Representative. Found: https://ustr.gov/countries-regions/americas/mexico

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