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The Economic Impact of Trump’s Foreign Policy

By: Matt Dodson and Molly Mann

Donald Trump’s “Make America Great Again” campaign enticed the middle class, inspired the politically frustrated, and arguably served as the deciding factor in his presidential victory. His campaign focused on many important issues, specifically, foreign policy. An aspect of Trump’s strict foreign policy could likely come to fruition as he has recently announced a 25 percent tariff on steel and 10 percent tariff on aluminum. (cnbc.com)

Tariffs, taxes levied on imported goods typically intended to discourage imports and raise government revenue, can prove healthy for the economy in the short term by decreasing trade deficits, improving domestic competition, and lifting the economy overall. In our previous blog, we discussed net exports and noticed a slight increase in net exports during periods of economic recession. However, in the long term, tariffs could damage the economy by ignoring the principles of specialization. For instance, several years ago our population worked in steel mills providing materials for production, but now more Americans attend college and work higher paying jobs. The changing workforce now earns larger paychecks, but must sacrifice some of that income to pay off their past tuition and debt. Coinciding with the evolving job market and rising student debt, Trump could face challenges in attempting to resurge the steel industry if these jobs do not provide incomes to cover the costs of living and rising education costs.

Overall, the looming threat of Trump’s tariffs leads to volatility in the financial markets due to speculation of economic uncertainty. Although the market has fluctuated drastically based on Trump’s previous actions, it always recovers. However, this situation may mean different for the market. Trump’s original announcement caused equities to fall, such as the Dow closing 420 points lower earlier in the week. Granted, financial markets such as the Dow or the NASDAQ change drastically on a day to day basis and cannot serve as direct predictors of implementations of future policy. Nevertheless, the Dow closed 336.7 points higher on Monday with Caterpillar, a company which relies on steel and aluminum, contributing to the gains with a 3.2 percent rise.(cnbc.com) These fluctuations and market responses speak towards the global uncertainty and disagreement towards Trump’s propositions, however, the Caterpillar trades Monday appear as an optimistic response to the previous week.

Trump is not the first one to try to enforce a steel tariff. George W. Bush also unsuccessfully attempted to implement major steel tariffs in March 2002, but excluded Mexico, Canada, and some developing countries (to avoid penalties). Bush’s foreign policy received major push back from European and Asian countries, who proposed retaliatory tariffs of their own, eventually leading to discussions at the World Trade Organization (WTO). In late 2003, the WTO decided that the tariff violated trade agreements and authorized billions of dollars' worth of sanctions. The WTO sanctions, international turmoil, and market downslide led to the United States’ withdrawal of the tariffs, more than a year prior to their scheduled termination, in December 2003. (zerohedge.com)

The graph featured above shows the impact of the Bush steel tariffs on the financial markets, the US Dollar, and yield rates. The S&P 500, the value of the US Dollar, and 10-Year bond yields saw a sharp decline beginning in March 2002, when the tariffs began, and continuing throughout the remainder of the year. The downtrend could be expected because the tariffs, seen as a bad thing for the economy, led to an increase in negative speculation causing the US Dollar to depreciate. The depreciation of the dollar adds to inflation increasing the likelihood of bonds defaulting causing yield rates to decrease. If Trump’s policy officially goes through, it may face a similar fate with already decreasing markets and future decreases in bond yields and the US dollar.

Currently, Trump’s tariffs face a significantly different economic climate than the recessions of Bush’s time in the early 2000s which could cause the current tariffs to fare better than the ones of the past. Additionally, there could also be an even greater negative effect because countries including Canada and Mexico currently would face the repercussions from the tariffs. The renegotiations of NAFTA in the coming weeks could change these terms. (cnbc.com) Considering Trump's unpredictable tendencies, the potential tariffs may serve as a negotiation tactic to create a better NAFTA deal. As Trump’s plans fully come to light, it will be interesting to see the possible resulting trade-war and whether Trump’s proposal produces a different economic result than Bush’s did 15 years earlier.

CNBC trade war story

CNBC Fed Chair Powell story

Zero Hedge post

CNBC story

21 thoughts on “The Economic Impact of Trump’s Foreign Policy

  1. dugganj20

    I wonder if Trump's tariffs will have similar results as Bush's did, with countries rebelling and causing conflict. The blog post makes a good point by questioning if our labor force is even strong enough to keep up with our domestic needs in the steel industry, as more and more people are attending college instead of working jobs in industries like steel production. However, if it is, the tariffs could potentially be good for the economy by strengthening domestic competition and boosting the U.S.'s economy.

    1. dodsonm20

      The only question here is how long will the tariffs be potentially good for the economy. Specialization tells us that in the long run restricting trade will not prove beneficial.

  2. Edward Calley

    It will be interesting to see the results of Trump's increased protectionism on the economy and the blog brings up some good points on the possible effects. Another interesting point to consider is how these tariffs will be implemented or how Trump's announcement might effect the economy without the tariffs actually being signed into law.

    1. Molly Mann

      I think the impact of these tariffs before they have been signed into law has stirred up the economy and public more so than the actual tariffs might. With so much publicity surrounding the release of Trump's tariffs, I think the actual results of higher consumer prices and higher costs of production will be swept under the rug. With implications of trade wars practically every other day, financial markets have been spinning out of control trying to keep up with what Trump says that day about the tariffs, while an increase in consumer prices might at one point have a large effect, but will never have the ongoing effects of Trump's new daily claims about the tariffs.

  3. bernsteinl20

    This raises a really interesting point to pay attention to in the coming months and years. With coal industry we also saw Trump attempting to save that sector of employment, campaigning on the fact that he will get jobs back. With our economy that is ever changing and modernizing, should we be trying to impose limits that keep these jobs here and certain sectors of the economy alive? Would it be a better use of money and energy to focus policy more on retraining workers and helping pay off debt from higher education?

    1. bbschaeffer1

      I wonder if the uncertainty around President Trump's tariffs will be similar to the Republican tax cuts from earlier this year. While many wanted the tax cuts to go through, it was not a guarantee and there was significant discussion about the effects. I would expect Canada and Mexico to respond even more poorly to the proposed tariffs than the restructuring of NAFTA because this is just another example of President Trump's inexperienced and irrational economic policies.

    2. dodsonm20

      That's a great question and although I don't think I have the answer to solve the issues while helping the economy, I think that the current answers are often influenced heavy by politics and personal interest of groups of people. Not what is actually good for the country and the economy as a whole.

    3. minsong20

      I think it is especially interesting considering that steel production is pretty steady (https://tradingeconomics.com/united-states/steel-production). As specialization occurs and technology improves, efficiency is benefited. Steel production does well, but there are fewer jobs. This is not to ignore that steel manufacturing is key to many industries, but I would guess that the same efficiency issues plague those industries. I am not sure that any tariff can contradict technological advancement.

  4. croughanm20

    It seems as if tariffs like these are a very large gamble. Trump is forcing the hands of American consumers in order to boost the American economy. I understand that its important to "buy American" but at what cost? We ignore comparative advantage.

  5. scottm20

    Another point to take note of is Trump’s decision to specifically focus on steel and aluminum, rather than other raw goods. As briefly mentioned, one reason for the decision could be an underlying attempt to leverage Canada and Mexico in NAFTA renegotiation talks. In terms of trade, Canada is responsible for 16.1% and Mexico for 9.0% of U.S. steel and aluminum imports respectively. Both countries are among the top 4 steel and aluminum importers, along with Brazil and South Korea. China’s steel and aluminum imports are notably lower than one might expect, making up only 2.2% of U.S. imports. The shares of U.S. steel and aluminum imports support the notion that Trump could be using the tariffs as a lever to generate more cooperation from Canada and Mexico in the NAFTA renegotiations. (https://www.wsj.com/articles/trump-wont-quickly-announce-new-tariffs-on-aluminum-steel-1519921704)

  6. the prof

    Two points. (1) Will tariffs on inputs have a different impact that tariffs on final (consumer) goods? Who pays the price increase initially? (2a) Steel and aluminum are capital intensive products – it's not as though we don't make steel, it's that we don't make commodity steel. (2b) As capital intensive products adding capacity is not a matter of hiring more workers. A new steel mill is a multiyear, multibillion dollar project. If jobs are to be had, it will be long after Trump's first term, but the impact of higher input costs will be felt very quickly (and if mishandled could lead to tens of thousands of lost jobs before the midterm elections in early November). So watch what Congress does.

    I have yet to see a statement on actual policy – as far as I know, he has yet to sign an Executive Order (March 19th) but has only signed a Presidential Proclamation. Perhaps there's no distinction, as the text of his Proclamation refers to the relevant clauses of trade legislation, and tariffs will be raised on Saturday; we'll know next week.

  7. ingramk20

    In Levinson's book, he talks about how raising the price of inputs increases the price of final goods utilizing those inputs and leads to cost-push inflation. I know it's overly simplistic but either way it seems to me like domestic consumers primarily pay the price. I would like to better understand better the potential implications of placing the tariff on the inputs vs. final goods if anyone else has any ideas.

  8. riversc20

    I read about this in The Washington Post last week; the tariff is quite high and I believe Trump is likely to exclude Mexico and Canada from the tariff, as you state Busch did. Many other countries are going to want exclusion from it as well, or, at least, a lowering of the tariff. I know the high tariff itself will cause tensions in international relations and prove to create great obstacles for industries which require large amounts of imported steel and aluminum; I just hope Trump doesn't fall to favoritism and exclude nations at his own digression (Mexico and Canada are being excluded on account of NAFTA) and start arguments over what warrants an exclusion for some but not others. These tariffs are a bold move on the part of the Trump administration; let's hope it isn't in vain and actually does the domestic aluminum and steel markets some good.

    1. prochniaka20

      Is it common for specific countries to be excluded from tariffs? I feel like that would definitely cause issues and tensions. Since Trump is so controversial, I feel that his choices of who to exclude and include could be very biased.

      1. montjoyr20

        As of now, many of Trump's planned tariffs seem do be directed at specific countries, so thus far most tensions seem to be stemming from the intended target of the policy. One such example appears to be steel from China. The president seems to want to bring jobs back to america by revitalizing the steel industry. Of course this policy could be incredibly detrimental to both economies. The price of steel could potentially rise tremendously due to the high cost of labor in the United state, which could in turn raise the price of the heavy, industrial machinery that accounts for a significant portion of the goods that the united states exports. As a result, this policy would not only anger the chinese, who would lose money in the steel industry and would have to pay more for US imports, it could also anger our trading partners, because they also benefit from the comparatively lower price of goods made with chinese steel as a opposed to american steel.

  9. bullr20

    Looks like Trump's foreign policy will effect more than just market speculation. China recently just levied 25% reciprocal tariffs on Soybeans-- a $14 billion dollar industry and part of the economic backbone of the Midwest. The negative demand shock, not to mention the ensuing likelihood of a full-blown trade war, will certainly have macroeconomic repercussions.

  10. Mariam Samuel

    It is interesting to me because I feel like on the one hand, his campaign to increase tariffs on steel and aluminum is strategically in that he got all of the “angry” population in the rust belt who felt their work was not appreciated enough. On the other hand, tariffs are known as a means of decreasing foreign transactions, and are therefore counter productive to his campaign to increase GDP and employment. Part of his campaign is focused on sort of trying to throw the burden of our debt on other countries, and this is one example of trying to make foreign countries increase government revenue through tariffs. Of course, what Trump likely didn’t expect, or chose to ignore, is that- as in any consumer market- when tariffs increase, volatility and pushback also increased. I doubt he expected other countries to continue paying without a pushback.

  11. pollarde

    Very interesting. Similarly, Wilson and I just covered Trump's tariffs on China that he announced this week, and it is amazing to see how quickly and dramatically the global markets react at the the prospect of a potential trade war.

  12. faithepinho

    I appreciate the inclusion of the recent history of tariffs and their effectiveness! As we have discussed in class, fiscal policy can take time to show up in an economy's movements. While Bush implemented tariffs in early 2002, it took until December 2003 for the World Trade Organization to make a value judgment about the tariffs. There may be an uproar now about Trump's tariff decision, but we must keep an eye out for what could happen in the next couple years.

  13. skinnerf20

    I think something to add on here are the political implications of Trump's decision. How will the people affected by the counter-tariffs levied by China react to this decision? Also, how will this affect the mindset on tariff's for the future? It seems as though people in today's political climate are more likely to cling to key words, and if the tariffs ultimately hurt the voting block Trump/Republicans rely on it will be interesting to see how the 2020 election is shaped by this policy move.

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