President Trump's Trade Policies & "The Law of Blatantly Obvious Consequences"

Since his inauguration, President Trump has pulled out of TPP and is now threatening a twenty percent duty on all goods imported from Mexico into the United States. With little appreciation for the post WWII history of globalization and an obvious lack of understanding for how international trade really works, many business people have warned the President about the impact that the “Law of Unintended Consequences” may have on his decisions. In this article I’m going to take a slightly different tack and point out a new maxim of global trade, the coining of which can be attributed directly to Mr. Trump’s ill-advised trade policies: “The Law of Blatantly Obvious Consequences.”

Let’s start with the erstwhile Trans-Pacific Partnership, which in addition to the U.S., was made up of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. First off, one can only wonder if Mr. Trump knows that the U.S. already has Free Trade Agreements (FTAs) in place with six of the TPP nations: Australia, Canada, Chile, Mexico, Peru and Singapore. Because he’s already pulled out of TPP, this bold Trumpian TPP move can’t be deemed complete without taking matters a step further and dismantling each of those FTA’s, too. That maneuver should do wonders for the price of imported goods from these countries and prove to be a real boon for U.S. exports to those same markets.

Second, someone should inform Mr. Trump that due to trade status like Normal Trade Relations (NTR) and decades-old, one-way Preferential Duty Programs like the Generalized System of Preferences, those TPP countries that don’t have FTAs with the U.S. will continue to have much cheaper access to the U.S. market than we do to theirs. This lack of market access reciprocity has been a hallmark of U.S. trade policy for four decades and left unchanged, will only serve to screw the American worker into perpetuity.

The true consequences of the TPP move? Whereas TPP would have finally allowed U.S. exports into notoriously protectionist nations like Japan and Vietnam, we’re right back where we started forty years ago…preferential access to the U.S. market for our so-called trade partners without the reciprocal benefit of access to Japan and half of southeast Asia. If Mr. Trump does go all in and revoke the six existing FTAs already in place, customs duties in the U.S. on goods imported from those nations will simply be passed on to the American consumer. Translation? Say goodbye to those juicy little lamb chops coming in from Australia…they’ll be way too expensive for this summer’s barbecue season.

Also, our exit from TPP leaves the door open to China, who was already in the process of negotiating a trade pact with the Association of Southeast Asian Nations (ASEAN). With lower labor rates than the U.S. and the added benefit of closer geographic proximity to Asian markets, the Chinese should have no problem scooping up much of what could have been ours.

Let’s move on to Mexico, which is actually way worse of a situation. First off, let’s make sure that President Trump knows that there are actually three countries involved in NAFTA…Canada, Mexico and the U.S. As such, by definition, anything we do to Mexico will have repercussions for our commercial relationship with the Canadians. We should also point out that Canada and Mexico rank as our second and third largest global trading partners, so we’re not talking about small economic potatoes here.

Someone in the Republican Congress got the bright idea that Mexico would “finance” The Wall through an import duty of twenty percent on Mexican goods coming into the U.S. Let us not be Trumpwinked into believing that story, either. First, not unlike the above-mentioned scenarios, higher duty rates on imported goods are most-often passed on to the ultimate consumer (i.e. the American people). So, Mexico won’t be paying for The Wall, John Q. Public will. Second, if Mexican goods become too expensive for U.S. tastes, guess what else will happen? Producers will move to another low cost country and in order for his strategy to work, Mr. Trump will have to slap duties on all of those nations, too. By definition, that’s how full blown trade wars start.

Third, if Mexican goods are too expensive in the U.S. and production moves out of Mexico, many Mexican workers will soon be unemployed. And guess what happens then? Instead of staying in their own country where they prefer to be anyway, many hard working Mexican citizens will be forced to go around, under or over The Wall to find work in the U.S. Now there’s a so-called unintended consequence that should actually be quite obvious to anyone that is capable of a complete cycle of thought.

Finally, as Mr. Trump spouts off about The Wall and threatens to impose import duties on Mexican products, the peso has devalued dramatically. To give the reader an idea of this precipitous drop, when I lived in Guadalajara from 2001-2005 the exchange rate was 10 MXP to 1 USD, and had remained that way for years after my return to the U.S. Now, it has devalued by more than double (21 MXP to the USD). Ironically, that makes sneaking into the U.S. to work from Mexico even more attractive because for every dollar a Mexican worker can send home, it is now worth twenty one pesos instead of ten.

Granted, there are a lot of things that the U.S. needs to do to be able to compete in the Age of Globalization. However, none of them should have anything to do with pulling out of FTAs or raising import duties. To validate that belief, Mr. Trump should seek out an important factoid of U.S. history, this time from the Great Depression. In an effort to stimulate job creation in the U.S., the Smoot-Hawley Tariff Act was introduced 1930, with the explicit intent of raising duties on imported goods in order to stimulate domestic production. As any first semester student of Economics 101 can state, the law had the exact opposite effect, only serving to make both imported and U.S. goods more expensive, thus thus thwarting job growth.

Given our newly minted “Law of Blatantly Obvious Consequences,” perhaps Mr. Trump should heed the words of the Harvard professor, George Santayana…“Those who do not understand the past are condemned to repeat it.” Now, that would have been a Tweet worth reading.