The Threat Of A Damaging Trade War

The Trump administration is raising fears of a possible trade war, a development that is unsettling markets around the globe, upsetting some of our closest allies, and causing great concern to both a wide swath of US business leaders and to leaders of the President’s own party. Following the President’s announcement last week that he intended to impose sharp tariffs on steel and aluminum imports, our concerns increased substantially when Trump claimed that it would be “easy” for the US to win a trade war. We strongly disagree. There are no winners in a tit-for-tat trade war; every country including the US would lose. And Monday we learned that the President’s top economic advisor, Gary Cohn, has chosen to resign rather than support the President’s stated intention to implement a protectionist trade policy.

Gary Cohn has been the steady hand on the tiller of the administration’s economic policy and deserves considerable credit for the economic achievements of the past year, in particular the tax cut package. Investors are concerned that Cohn’s departure leaves the White House only with advisors pressing for a confrontational, protectionist trade policy. Cohn fully understands the importance of open markets for the US economy and US workers and businesses. Cohn’s decision to resign implies he believed he could not succeed in his year-long battle to convince the President of this view. We share the concern expressed by Senate Majority Leader Mitch McConnell that “this could metastasize into a larger trade war….” Reports that the administration is considering limits on Chinese investments in the US and tariffs on Chinese products add to this concern. Reportedly, he is seeking a $100 billion reduction in China’s trade surplus with the US.

The President’s lack of understanding of basic trade economics and both historical and current trade developments is striking. His statement that “Trade wars aren’t so bad” conflicts with the painful lessons from the history of past trade wars. The Smoot-Hawley Tariff Act of 1930 was followed by tariff increases by Canada and Europe in tit-for-tat restrictions that greatly slowed the US and global recovery from the Great Depression.