- Trade tensions are rising around the world, with the United States at the epicentre.
- Retaliatory tariffs on US imports have been chosen to inflict maximum political damage ahead of the US midterm elections.
- The Commonwealth Bank says if politics are driving trade tensions, it points to the likelihood of a political solution.
Make America Great Again.
MAGA, as it has become known, was the slogan that helped propel Donald Trump to the Oval Office in November 2016, promising to reverse what was perceived to be the hollowing out of the economy, helping to restore the United States to being the undisputed superpower globally.
Tax cuts, increased infrastructure spending, including walls, along with healthcare reforms were just some of the promises of the Trump campaign.
To date, he’s has had mixed success.
Leveling the playing field when it comes to global trade was another policy put forward, especially with the United States’ largest trading partner, China.
As he promised before he was elected, Trump is maneuvering to protect US industries in steady decline as global trade, and competition, increased.
The US has already slapped $US34 billion in tariffs on Chinese imports entering the country, with another $US16 billion on the way. And following China’s retaliation by introducing reciprocal tariffs on US imports, another $US200 billion in proposed tariffs on the Asian giant have been put forward for review, paving the way for possible introduction as soon as early September.
Should China announce a counter measure, it could end up seeing the United States introduce tariffs on the vast majority of Chinese imports entering the country.
How such a scenario would impact the global economy in this era of complex supply chains is still highly debatable, but it’s unlikely to be good, especially with trade tensions between the United States and some of its closest allies, Canada, Mexico and the European Union, also starting to build.
Given the risks, including to the US economy, it’s understandable why so many are questioning why the Trump Administration is going down this path.
This chart may explain why.
From the Commonwealth Bank, it shows the relationship between Presidential approval ratings and the number of seats won or lost at midterm elections held in the past.
While we all know the polls did a fairly lousy job of predicting the 2016 election outcome, based on prior relationships, the Republicans look set to lose plenty of seats come November given where Trump’s current rating sits.
To Michael Blythe, Chief Economist at the Commonwealth Bank, this explains much of what has been seen in recent months.
“Politicians like to get elected. And re-elected,” he says.
“Not surprisingly, the prospect of seat losses at the Mid-terms has focused the minds. And it has reinforced the need to have something positive to sell in the election campaign.”
After successfully delivering corporate and personal income tax cuts late last year, something Blythe says “had an easier passage through Congress than seemed likely at the start of the process”, Republicans are looking for what can be presented to the electorate before the midterms are held, with fair trade top of the list.
Essentially, rather than making America great again, the focus on trade is more about political survival.
Blythe says all sides in the dispute have shown savvy political maneuvering.
“The US has a high-profile target for tariffs on steel and aluminium, with surveys showing that 58% of Republican and Republican-leaning voters see this focus as a ‘good thing’ for the US,” Blythe says.
“Most US steel mills are in States that voted for Trump.”
Here’s the chart showing the number of steel mills in the United States, breaking the results down by red or blue state.
China, too, has obviously been thinking hard about what form of targeted retaliation would deliver the most unpalatable political outcome for Republicans.
“China has selected soybeans as its high-profile target in response. Not surprisingly, most US soybean production is concentrated in States that voted for Trump,” Blythe says.
Blythe says other nations involved in the trade dispute have also been particularly selective with their choice of import tariffs.
“The Europeans have chosen to target Harley-Davidson motorcycles and whiskey. Harley production is based in Republican Speaker of the House Paul Ryan’s home state of Wisconsin. Whiskey comes from Kentucky, the home state of Republican Senate leader, Mitch McConnell,” Blythe says.
“Canada has also selected steel, whiskey and yoghurt, the latter prominent in Wisconsin again.”
Everywhere you look, politics appears to be driving moves and countermoves between the sides.
To Blythe, if politics are behind it all, current tensions are unlikely to end up as a full-blown trade war that will bring global trade and economy activity to a shuddering halt.
“These observations underlie our view that if the trade war is all about politics then a political solution will be found. And why a full blown trade war remains a risk to the outlook but should not be part of baseline economic projections,” he said.
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