Trump's trade war is essentially a conflict between his economic team and American businesses. This is because the Trump economic team, along with the president, holds an out-dated perspective on international trade. The "old" way of analyzing foreign trade with an export being a "win" and an import representing a "loss" for an economy is too simplistic nowadays since companies operate without national borders and many times are on both sides of the transaction. Compelling U.S. multinationals to relocate their operations domestically would cause major disruption, higher prices, considerable losses, financial market turmoil, and ultimately make U.S. companies less competitive globally.
The Bureau of Economic Analysis (BEA) constructs an ownership-based trade account, which incorporates the role multinational companies play in international trade. This framework adds the direct investment income and receipts that are associated with international transactions. The ownership-based trade account reduces the traditional trade measure by "Half". Is the Trump economic team even aware of the existence of this statistical measure of international trade? In politics, one can create a misleading narrative, but when developing economic policy, it's crucial to base decisions on "facts."
The ownership-based trade measure offers a more accurate modern-day account of international trade, largely due to the substantial overseas investments by US companies over several decades. For example, US majority-owned foreign affiliates have $3.4 trillion in physical assets like property, plants, and equipment, with 50% of these investments in Europe and another 16% in Canada and Mexico. These assets have helped generate $6 trillion in gross sales and $300 billion in net income, according to the most recent data from 2022.
US trade agreements have been crucial in encouraging American companies to grow internationally. Currently, the US has trade agreements with 20 countries, the most significant being the North American Free Trade Agreement with Canada and Mexico. Despite these agreements, the Trump administration intends to impose tariffs of up to 25% on a wide array of manufactured goods, even in cases where trade agreements are in place, to incentivize companies to manufacture products within the US.
The reasoning behind Trump's tariff strategy is suspect. First, it implicitly recognizes a significant cost gap between domestic and international production that isn't solely to do unfair trade practices. Second, it does not acknowledge that higher product prices are inevitable, as producing goods in the US would be unprofitable without tariffs. Third, it overlooks the costs involved in creating a new manufacturing "ecosystem," including who will bear these costs and the time required to establish it. Fourth, it places US companies with global manufacturing operations in a situation where they may need to sell or cease some activities. Lastly, it overlooks the fact that simply having a trade surplus does not ensure a strong economy (as shown by Japan and Germany), nor does it necessarily lead to a better standard of living.
The Trump tariff approach is 30 years behind the times. It may have yielded certain economic and financial benefits when exports and imports were associated with specific country names, but that world no longer exists.
Nowadays, the economy, workers, and companies would benefit more if the Trump administration collaborated with US businesses to create a forward-looking manufacturing plan and invested in educating the youth or future workforce. Regrettably, the administration intends to prolong the 2017 tax legislation, which advantages high-income earners, prioritizes consumption over investment, leads to massive budget deficits, and simultaneously dismantles the education department.
"Has the Era of American Exceptionalism Ended?" If Trump's tariff strategy is fully implemented, it raises the probability that it has.
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