Trump on Trade
Submitted by Wall St. Daily as part of our contributors program
Trump on Trade
By David Dittman, Editorial Director
It’s a topic on a lot of peoples’ minds these days.
And perhaps we should thank Donald Trump – and Bernie Sanders, for that matter – for shaking up a process that’s become the functional equivalent of the “smoke-filled rooms” of political yore.
If nothing else, Trump and Sanders have helped put the corrupt and corroded duopoly that controls Washington, D.C. on notice.
American voters are disgusted.
And the real estate mogul from New York and the socialist from Vermont are the vessels of this discontent.
Let’s hope this feeling persists, and we do “take back our country.”
As David Stockman so plainly noted in a January 11 2016, piece for The Daily Reckoning, “Ballot boxes, not bullets, are the only present day recourse against a tyrannical government.”
Good Ideas, Bad Idea
One of Candidate Trump’s key talking points focuses on the economy, the erosion of the middle class, and the impact of free-trade deals.
In this weekend’s Saturday Spotlight, Wall Street Daily’s Global Markets Analyst Martin Hutchinson weighs Trump’s rhetoric and analyzes his policies.
“Mr. Trump,” according to Martin, “has many good ideas, but unfortunately one very large bad one.”
Trump may or may not be a good candidate. Martin’s agnostic on the question.
But he looks likely to win the Republican nomination and has “at least a sporting chance” of becoming the 45th President of the United States of America.
Our Global Markets Analyst is concerned, however, about one particular policy that may be “economically problematic.”
The Goods on Globalization
Trump advocates a 45% tariff on goods imported into the U.S. from China. And he wants to establish new tariffs on Mexican imports – “whether or not to pay for the wall he wants to build” on our southern border.
“The problem is that trade partners will retaliate.”
During the era of globalization that’s prevailed since the end of World War II in 1945, costs for U.S. consumers have consistently declined.
That’s the direct result of the removal of tariff barriers.
Clothing prices, for example, are down about 11% since 1993. That only sounds like a lot when you consider that the price of pretty much everything else has basically doubled during the same timeframe.
In purchasing-power terms, clothing costs have been cut in half.
That’s because our shirts and pants and underwear come from places like China, Vietnam, and other countries with relatively low labor costs.
The downside of globalization – and there are significant ones – is the foundation upon which Trump is staking his claim to the White House.
We’re talking factory closures in the U.S. in favor of far-off-but-cheaper locales.
But cheap money over the past couple decades – most significantly since 2006 – has led to more outsourcing than is really necessary.
In short, the U.S. Federal Reserve is largely responsible for U.S. job losses since the late 1990s.
Chinese and Vietnamese manufacturers have been able to borrow at low cost to build factories to produce goods to compete in the U.S.
The Trump solution, however, increases costs.
A 45% tariff increase would boost the cost of everything imported from China on a one-for-one basis.
Even if you assume an offsetting impact due to other exporters replacing China, we’re talking double-digit percentage price increases.
Higher tariffs also harm the efficiency of the global marketplace. Things will no longer be manufactured in the cheapest location.
Martin notes that they must not teach David Ricardo’s doctrine of comparative advantage at the University of Pennsylvania Wharton School of Business, else Trump would understand that trade barriers are inherently inefficient.
Death Spirals
A trade war ignited by Trump’s tariff proposals would also lead to rising inflation. It will also, naturally, reduce the volume of global trade.
Now we’re talking Great Depression comparisons.
The Smoot-Hawley Act of 1930 – which boosted U.S. tariffs on imports by an average of approximately 50% – exacerbated what was already a negative economic spiral. It led to a trade war and a currency war.
That’s a sharp contrast with the present global condition, which is a “currency cold war.” Countries are devaluing their currencies “but in a fairly benign way” in order to stimulate their domestic economies.
Martin continues to identify lucrative opportunities for investors based on this “currency cold war” in Currency & Capital.
Trump’s trade proposals would bring enough heat to the situation to turn it into an all-out “hot” currency war.
“Apart from destroying world trade, and, to a large extent, destroying the world economy, it’s a very anti-consumer, anti-little guy move.”
Consumers benefit from cheaper clothing prices. It’s the relatively few producers who scream as their old customers flock to Wal-Mart.
“To some extent, the Trump voters don’t know what they’re asking for,” notes Martin.
A real solution, according to Martin, to the problem of a lack of high-paying jobs, is to push interest rates back to a more normal level and to deregulate.
Martin will be taking a deeper look at the GOP presidential primary process next week.
Look for his analysis of Trump’s long-term prospects vis-à-vis the Republican field on Tuesday.
Around WSD
Global Markets Analyst Martin Hutchinson is one of the more prolific contributors to this website.
This week he addressed a key question about the future of the European Union, dissecting the impact of a potential British exit from that community of states.
He also identified an oversold market, a very close neighbor that’s fundamentally stronger than the U.S. from an economic perspective, but that’s been hit hard by the steep decline in oil prices.
Britain’s future apart from the E.U. may indeed be bright, as is the case for U.S.-based income investors who look north to Canada for high-quality bargains.
Senior Analyst Greg Miller leads off a piece on four solid stocks with a compellingly counterintuitive conclusion: “Completely against his intentions, President Obama has proven to be the greatest gun salesman in American history.”
Indeed, shares of gun manufacturers and gun-related stocks are up handsomely since 2009.
The death of Associate Justice of the Supreme Court Antonin Scalia may spark additional upside.
Chief Income Analyst Alan Gula takes a great look back at legendary trader and hedge fund manager Paul Tudor Jones’ defining coup: Booking a 62% gain during October 1987.
Of course, you’ll remember that on October 19, 1987, the Dow Jones Industrial Average fell by 20.5%.
“Many investors were eviscerated,” notes Alan,” and some traders were completely wiped out.”
Alan goes on to identify the tool PTJ used to great advantage back then. He also has an exchange-traded fund in mind that mimics the strategy.
Finally, Senior Analyst Jonathan Rodriguez takes an opportunity to bid “good riddance” to February.
And he has a hearty welcome for March, historically an investor-friendly month.
Jonathan identifies “one of the simplest yet most powerful tools in any trader’s kit” as a means to capture a trend that’s seen the Dow Jones Industrial Average post an average monthly gain of 1.36% over the past 20 Marches.
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By David Dittman