Tariffs Dominate Headlines
The tariffs on steel and aluminum have continued to dominate the headlines as the story hasn’t gone away as some expected. President Trump doesn’t appear to be backing down on his proposal even as House Speaker Paul Ryan, the Club for Growth, and the Heritage Foundation all have come out in opposition to the across the board taxes on steel and aluminum imports. The big change which came Monday morning is Trump stated he would remove the steel and aluminum tariffs if NAFTA was renegotiated. He’s against trade deficits, so anyway they are lowered would be a positive. We knew this reaction was a possibility since America’s trade deficit increased in his first year in office.
Potential To Rescind NAFTA In Place Of Tariffs
Getting rid of NAFTA wouldn’t help the trade deficit. As you can see from the chart below, after NAFTA went into effect in 1994, there wasn’t much of a change in manufacturing employment. The sharp change came after 2001 when China joined the WTO. Manufacturing’s share of total employment has been declining in Europe, Japan, the U.K., and America since 1980. The growth of the tech sector, outsourcing, and automation have all been catalysts for the decline in manufacturing employment’s percentage of the labor market. It seems almost impossible for the government to regain the lost manufacturing jobs. The good news is the government doesn’t need to do that because services have picked up the slack. With the ISM manufacturing PMI at the highest point since May 2004, the cyclical strength in manufacturing employment probably won’t improve much from here.
NAFTA is a small part of the U.S. trade deficit. The biggest country America has a trade deficit with is China. Therefore, it makes little sense to get in a trade war with Europe, Mexico, and Canada to reign in the trade deficit. China and America don’t have a trade deal for Trump to rescind. As I mentioned in a previous post, it’s a good situation for America because China buys such a large portion of American treasuries. It appears Trump is bringing up NAFTA for two reasons. First, he blames Mexico for the American opioid crisis and wants to use trade as leverage. Secondly, as you can see from the chart below, Canada is the largest importer of steel and aluminum. Since Trump wants those jobs to come back, he’s focusing on NAFTA.
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