By Gary Cohen
August 1, 2018 at 5:00 am ET
How is it that President Donald Trump does not understand the political and economic impact of a trade war? He still doesn’t recall Newton’s Third Law, “Every action has an equal and opposite reaction.” It definitely applies in global trade. Recent developments continue to reflect this. Coke says it’s raising its soda prices price hike in part because of tariffs on imported aluminum. And the Chamber of Commerce says — following the $12 billion emergency aid package for farmers in the crosshairs of retaliatory tariffs — that another $27 billion is similarly needed for other industries.
Our trading partners have and will continue to react with tariffs of their own, making goods from U.S. companies less competitive and resulting in either reduced international sales or U.S. companies opening factories in strategic international markets to avoid tariffs. Trump must think about unintended consequences before making these careless moves.
There are many losers in the above scenario. First, all American consumers will suffer as a result of higher retail prices. Most American families live on tight budgets and they will not be able to afford all they could prior to a trade war. It’s the lower and middle class that will be hit the hardest, not President Trump’s family. When retaliatory tariffs from our trading partners make American manufacturers less competitive, reductions in international sales or the opening of factories overseas will likely result in American job loss. You may recall that Harley Davidson recently announced they will now be building “hogs” in Europe as a result of Trump’s trade policy. Has Trump thought about all of the Americans who will be the collateral damage in his unsightly trade war?
According to a CNBC article written by Thomas Franck, Goldman Sachs economists say that “an all-out trade war would lower earnings of U.S. companies by 15%.” This is an enormous number and we all know this would result in American job cuts. The economic repercussions of Trump’s trade war will be extremely damaging to the U.S. economy and economies around the world.
Some of our global trading partners will not stop with retaliatory tariffs. We could see governments devalue their currencies to make their products more affordable to U.S. importers as a result of the Trump tariffs. Since his presidential campaign, Trump has been accusing China of currency manipulation — so wouldn’t he consider the possibility of creating a currency war as a result of proliferating a trade war?
Let’s be clear. This trade war will likely backfire on Trump, causing harm to the same American people he is vowing to protect. Free trade has been the best thing for Americans. It has provided all of us with much greater purchasing power as a result of lower prices, many more choices and access to a variety of products that were not previously available in the U.S. When the American people can buy more with their money, they live better. A trade war poses a significant threat to lower and middle-income Americans who were getting some relief from the benefits of free trade. Jamie Dimon, CEO of JPMorgan Chase, said in an interview with CNN’s Christine Romans that we could be “getting pretty close to reversing some of the benefits you have seen in the economy.”
Trump is right to focus on improving our trade imbalance with trading partners. In this regard, I believe his intentions are good. However, his approach and tactics will be extremely damaging to the American people and our economy. He must think about unintended consequences before taking these actions. Unfortunately, Trump has not given this much consideration to date.
Gary Cohen is a clinical professor of supply chain management and international business at the University of Maryland’s Robert H. Smith School of Business.
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