America’s Coming Trade Confirmation

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America’s Coming Trade Confirmation

One of the qualities that Donald Trump brings to the presidency is his skill at negotiation.  As a real-estate developer, he successfully negotiated the purchases of several dozen prime properties that he turned into skyscrapers, hotels, casinos, and golf courses. 

For instance, of his acquisition of the Fifth Avenue site of Trump Tower in Manhattan, The New York Times wrote in 1984, “That Mr. Trump was able to obtain the location, when every real-estate developer in the world would have done just about anything to get it, is testimony to Donald Trump’s persistence and to his skills as a negotiator.”1

Now that Trump is in the White House, he is treating the country as a business that, for too long, has been earning a poor return on its investments.  To him, nowhere is the need for a new approach more glaring than in America’s trade policies with China and Mexico, as well as its free trade agreements such as NAFTA and the Trans-Pacific Partnership (TPP). 

Trump abandoned the TPP on his first day in office.  And he is clearly relying on one of the core principles for success that he spelled out in his 1987 best-seller The Art of the Deal to reshape the U.S.’s deals with its trading partners: “Use your leverage.”2

That guiding philosophy explains the rationale behind some of his more puzzling policy proposals, such as building a wall on the border with Mexico, imposing a 20 percent tariff on imports from Mexico, taking a hostile stance toward trade with China, and creating at least the impression that he is open to removing economic sanctions from Russia.

All of these ideas make more sense when viewed as a way of gaining leverage in trade negotiations.  Consider this; in the fourth quarter 2016, the headline U.S. GDP growth rate was a paltry 1.9 percent, net of the 1.7 percent trade deficit.  As discussed in a post on SeekingAlpha.com, if the U.S. reduced its trade deficit to zero, our GDP growth would rise to 3.6 percent, which is right in line with the 3.5 to 4.0 percent growth that Trump has targeted for the U.S. economy.3

Now consider that the U.S. trade imbalance with Mexico is currently 20 percent.  We import $294 billion in Mexican goods, and export $240 billion in American goods to Mexico.  Slapping a 20 percent tariff on Mexican imports would wipe out the trade deficit.  But, even if the U.S. doesn’t follow through, the threat to do so provides leverage because Mexico depends on the U...

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