Although risks of trade friction have increased with Donald Trump’s election as President in the US, a research note from investment bank Credit Suisse sees an all-out trade war between the US and China as ‘unlikely’. The note also suggests a proposal in Congress for a tax adjustment on export income might emerge as a viable compromise to assist US exporters while avoiding the risk of retaliation from import tariff hikes.
Björn Eberhardt, Head of Global Macroeconomic Research at the investment bank, acknowledged in his note that Trump has been appointing protectionist individuals to leading trade-related positions and that it is ‘highly likely that these nominees will also bring like-minded followers into crucial positions’. The note also said that ‘there are several laws that Mr Trump could use to impose tariffs and quotas without congressional approval’. If he attempts to raise import tariffs, legal challenges in the US – led by impacted firms – are likely to follow and foreign countries could resort to the WTO to complain. However, Eberhardt notes that impacted foreign countries would likely resort to immediate retaliation with tariffs imposed on US goods. This, he says, would ‘in effect herald the start of a trade war’.
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However, he says that ‘we continue to regard such an outcome as fairly unlikely, as it would clearly run counter to the wishes of a large part of the US population that relies heavily on cheap imports’.
Eberhardt also notes that the ‘US Congress itself does not seem to be too eager to increase tariffs, according to statements from both House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell since the US elections’. A preferred measure may be a general overhaul of the US tax code, including the introduction of a ‘border adjustment’. The latter, Eberhardt says, would exempt corporate income earned from exports from corporate taxes, while subjecting income earned from imports to corporate taxes. Such a policy would makes imports relatively more expensive and cheapen exports.
Trump ‘can cancel NAFTA’
Eberhardt says it can ‘almost be taken for granted’ that the Trump administration will withdraw from the Trans Pacific Partnership (TPP) but as the agreement is not yet in force, there will ‘likely be little tangible damage done to existing trade relations’.
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By GlobalDataMore damagingly, he notes that a wide range of executive powers of the US president allow Mr Trump to cancel treaties such as the North American Free Trade Agreement (NAFTA), with ‘Congress largely unable to step in’. With regard to NAFTA, Trump has vowed to renegotiate the agreement and secure ‘a better deal’ for the US. However, it remains unclear what he actually means by that.
Eberhardt concludes that Trump’s apparent intention to deliver quick results and the appointment of protectionist individuals to key trade positions ‘already signal a shift to more protectionism’. Whether this does indeed lead to trade ‘wars’ between the USA and other economies is difficult to project, but the ‘risk is real’. But he says Congress’s border adjustment proposal as part of broader tax reform ‘might be a way around an overt trade war by applying tariffs and quotas’.
The risk of a trade war between the US and China, that might extend to wider boycotts of US branded products inside China, would cause considerable concern for firms such as Ford and General Motors who are heavily dependent on earnings from joint venture operations in China.
