The Trump effect
On Wednesday November 10th, 2016 Donald Trump swept to an unreal, surreal presidential election win, despite having no political experience, or even the universal support of his own party. In doing so he confounded many experts who believed that his chances of gaining an election victory were very small. This lesson however, is not a story of how Donald Trump came to power but instead focuses on the impact of four years of the Trump administration on the US and world economy
While Trump's populist positions would sometimes contradict his earlier statements, as well as the stated positions of his advisors, two policies consistently stood out - his opposition to illegal immigration as well as an opposition to various free trade agreements, that America was currently tied to, such as the Trans-Pacific Partnership. On May 2nd, during his campaign he even told CNN live that 'we (the American people) can't continue to allow China to rape our country'. The full speech can be accessed at: China raping America
So what was the impact of Donald Trump ripping up some of the existing trade agreements that the USA were part of?
Firstly, let us start this lesson by watching again President Donald Trump's election victory speech. A speech few of us thought that we would ever hear.
But now let us remind ourselves of some of his other comments during the campaign.
The background to Donald Trump's comments lie in the fact that America, for a significant period, has run a large trade deficit with the rest of the world. This is balanced out by a huge surplus in the nation's capital account. For example the Mc Kinsey Global Institute states that the US actually absorbs most of the worlds net capital flows. A record of America's current account deficit is represented on the diagram to the right.
Furthermore, as the chart below illustrates a large proportion of this deficit comes from a small range of nations, with Mexico and China heading this list. With Canada also enjoying a significant trade surplus with the nation President Trump claimed that the North American free trade area was the worst trade deal in history?
So lets examine two questions; firstly could America simply rip up this and other trade agreements and instead adopt an isolationist trade policy? The second question is should he do so and if so what impact would this have on the world and US economies?
The answer to the first question is almost certainly yes. With control over both houses and a clear mandate for trade reform Donald Trump could presumably collect sufficient support to pass new legislation, withdrawing the USA from the North American free trade agreement, passed into law. Donald Trump could also use existing WTO rules to impose prohibitive trade barriers on China, given America’s dominant position within the organisation and China’s previous record on ‘dumping’. The next question is should he do so?
Such a policy would be bad news for both Mexico and China. Japan and Germany may also suffer but the biggest impact will be felt by the two nations at the top of the list, who rely on consumers in the USA as an engine of growth. For example exports constitute one third of the Mexican economy and more than 20% of the Chinese one - much of it to the USA. It is surely no coincidence that the value of the Mexican peso fell immediately once the result of the election became known.
However would trade barriers not hurt the USA as well?
While putting America first proved to a popular vote winner during the election any President contemplating such a move would need to consider a range of stakeholders in any decision.
Firstly, while the USA does have a substantial trade deficit, importing many more goods and services than it exports to Mexico, Canada and China, exports to those regions are also considerable. For instance exports to China were 8.822 billion $ in June 2016 while exports to Mexico, during the same period were 19.56 billion $, smaller than the volume of imported products but still considerable.
If the USA did choose to rip up the existing trade agreement one of the first American casualties would be those American businesses that currently export goods and services to Mexico and China. This is because both nations are likely to retaliate and place tariff barriers on American products.
Donald Trump also needs to consider exactly who is the largest beneficiary from the current trading agreement? The Chinese / Mexican producers or the American consumer? Would the working classes who voted to make America great again be prepared to pay a higher price for their consumer goods than under the current arrangement? Let your students decide?
Divide your class into groups representing the following stakeholder / pressure groups and practise a mock discussion. Each group presents their point of view and tries to convince the teacher, who will act as the new President on the merits and weaknesses of imposing high tariff barriers on imported goods and services. The following stakeholder groups should be represented:
- American consumers
- American manufacturing workers
- internal revenue service
- American exporters
- US businesses which rely on imported raw materials and components in the production of the finished product.
The above lesson is available as a PDF file at: the Trump effect