Five months ago, the initial volley was launched – President Trump’s proposed global tariff on imported steel and aluminum. Looking back, it was a hint of more to come.
Since then, President Trump has enacted, and further proposed, a number of tariffs and trade restrictions targeting America’s trading partners, many of which are key allies. For President Trump, the directive is simple – equalize his perceived imbalance in tariffs, quotas and trade restrictions that America’s trading partners impose on U.S. goods entering their countries. In his view, America’s trade agreements have for too long been to the detriment of U.S. business and workers.
But President Trump’s endeavors to bolster America’s trade agreements have not come without cost. Trade disputes tend to decrease economic growth and employment while increasing inflation – concerns reflected in the volatility of the U.S. stock markets. U.S. tariffs on foreign imports increase costs to American manufacturers, businesses and consumers. Also, many nations, including China, Canada, Mexico and the European Union, have responded with similar tariffs, reducing overseas demand for American products.
Aside from the economic consequences, President Trump faces significant political risk. There is tremendous division among politicians, the business community and American voters as to the cost vs. benefit of these trade disputes.
So, given the potential economic and political fallout, why does President Trump seem so willing to engage, and even escalate, the ongoing trade disputes? For one key reason – he has something that no other nation in the world has – the size and strength of the U.S. economy.
With an economic output of $20.4 trillion, the U.S. is clearly the world’s largest and most powerful economy. It is 45 percent larger than China, the world’s second largest economy, and exceeds the fourth through 10th largest economies combined. In fact, with the total global economy of $79.98 trillion, the U.S. accounts for more than 25 percent of the world’s economic output.
Just as important, apart from its sheer size, the U.S. economy continues to strengthen. For the past eight years, the average growth rate of the U.S. economy has been a very underwhelming 2.1 percent. But in the last nine months of 2017 we averaged 3 percent growth. In the second quarter this year, we’re expecting a growth rate as high as 4 percent. In June, for the third consecutive quarter, the Federal Reserve raised the 2018 projected growth of the U.S. economy.
The rest of the world isn’t as fortunate. Yes, the global economy remains strong, but it is showing signs of softening.
According to the World Bank, the economic growth rate for the global economy in 2018 is projected at 3.1 percent, down from 2017’s rate of 3.8 percent. Canada’s economy grew by 3 percent in 2017, but the Bank of Canada now projects 2018 economic growth to be just 2 percent. China – America’s largest trading partner – has had its economy hover around 6.8 percent growth since 2015. This year, Beijing projects their growth rate to decline to 6.5 percent. In Europe, the collective growth rate of the European Union this year is projected at 2.3 percent, down from its 2017 decade-high growth rate of 2.5 percent.
President Trump and these nations’ leaders realize that a roaring U.S. economy can help absorb much of the negative impact of these trade disputes. Conversely, these other countries risk further destabilizing their already softening economies. President Trump has clearly shown that he has the economic leverage. But more importantly, he’s shown his willingness to make his stand. And therein lies the crux of his strategy – are these other nations willing to put their economies on the line to engage in escalating trade disputes?
It’s too early to tell, but as the U.S. economy continues to show signs of getting stronger, President Trump will likely continue his strategy of ramping up the trade rhetoric. His economy is in a much better position than other nations – and he’s expecting them to back down first.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.