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The Donald Trump Trade Plan ‘Would Start a Global Trade War’

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We haven’t yet seen the Donald Trump trade plan in written form, as we have with his tax plan, but the front-runner for the Republican presidential nomination has said a lot about what he wants to do.

Unlike the tax proposal, which appears workable if not perfect, the Trump trade plan would be an economic disaster for both the United States and the world.

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Over the course of dozens of speeches and interviews, Trump has indicated he would use tariffs to punish U.S. companies that have moved jobs overseas, as well as foreign countries that, in his view, aren’t playing fair.

The Trump trade plan for Mexico is a case in point.

“Mexico is killing us on trade,” Trump says, claiming that Mexican trade negotiators have outwitted their U.S. counterparts.

But Mexico is America’s third-biggest trading partner, with $534.5 billion worth of goods moving between the two nations in 2014. The U.S Chamber of Commerce estimates 14 million U.S. jobs depend on trade with Mexico.

Plus, because of an unusual “production sharing” agreement, 40% of the content of goods imported from Mexico to the United States are made in America. So $0.40 out of every dollar used to buy Mexican imports actually supports U.S. industry.

This inconvenient fact plays a part in Trump’s wrong-headed attacks on Ford Motor Co.’s (NYSE: F) plan to spend $2.5 billion on an engine and transmission plant in Mexico.

Why Trump’s Attempt to Punish Ford Won’t Work

Trump’s answer is a punitive tariff.

“Every car and every truck and every part manufactured in this plant that comes across the border, we’re going to charge you a 35% tax, and that tax is going to be paid simultaneously with the transaction, and that’s it,” Trump said when he announced his candidacy in June.

That populist position appeals to many Trump supporters. But here’s why it’s a bad idea…

The U.S. automakers, which all have operations in Mexico, rely on production sharing as a vital source of revenue. Inconveniently, imposing any tariff would require the participation of the automakers. Under North American Free Trade Agreement (NAFTA) rules, they’d have to allege Mexico was “dumping” cars at below-market prices.

But without Mexico, “the U.S. auto industry would be bankrupt,” Mexican economist Luis de la Calle, a former NAFTA leading negotiator, told Forbes.

And a tariff violates NAFTA rules, as well as several World Trade Organization (WTO) agreements the United States has signed, without a legitimate U.S. auto industry complaint.

Trump’s answer to that is more troublesome than his tariff idea.

“We will either renegotiate [NAFTA] or we will break it. Because, you know, every agreement has an end,” Trump told Scott Pelley in an interview on the CBS News program “60 Minutes.”

But only Congress has the power either to revoke NAFTA or impose taxes like the one Trump would like to slap on Ford. And it’s hard to imagine a majority of either Republicans or Democrats voting for such self-destructive policies.

Another popular Donald Trump trade plan topic is China.

Why the Trump Trade Plan for China Is Dangerous

Trump believes China has devalued its currency, the yuan, to give it a trade advantage (making U.S. imports more expensive and Chinese exports cheaper). And here again, he sees tariffs as the answer.

“I would tell them, you have devalued your currency yet again; it is not going to happen. The value of that is the equivalent of a 7% tax or a 12% tax. Because of the fact that you have done that, we are going to charge you 12% coming in. And you know what? They’re going to stop playing games with us,” Trump told The Economist.

Trump’s wrong here as well. It was China’s moves to allow the yuan to move more freely with the market that caused its devaluation earlier this year. In recent years, the Chinese government has kept its currency artificially high.

So putting tariffs on Chinese imports won’t fix that. What it will do is make almost everything on the shelves of U.S. retailers more expensive, hurting America’s poor, as well as its middle class.

And it will start a chain reaction the likes of which we haven’t seen since the genesis of the Great Depression.

Get Ready for a Trade War

There’s a reason countries today negotiate so many free trade deals. It’s because it benefits the world economy as well as national economies. And yes, free trade has been good for the U.S. economy, too.

According to a 2014 HSBC Holdings Plc. (NYSE: HSBC) study, “international trade has boosted annual U.S. income by at least 10 percentage points of GDP relative to what it would have been without global trade, which translates into an aggregate gain of at least $1.7 trillion in 2013, or an average gain of more than $13,600 per U.S. household per year.”

Protectionism, an older term for what Trump is proposing, cripples global trade as nations retaliate against each other with punitive tariffs.

“From an economics point-of-view, we think that if he did one-tenth of what he’s planning, he would trigger a global trade war, which would cause a kind of global recession and cost lots of jobs,” David Rennie, the Washington bureau chief for The Economist, told Public Radio International.

The last time the world saw this kind of trade war was in the early 1930s, and America started it.

Anxiety over the 1929 stock market crash and a desire by congressmen to out-do each other’s efforts to protect businesses in their own states resulted in the Smoot-Hawley Tariff of 1930.

After months of additions, the final bill as passed raised 890 different tariffs. President Herbert Hoover, an avid proponent of Smoot-Hawley, signed the bill. A petition from 1,028 American economists warning of the bill’s disastrous consequences was ignored, as were dire warnings from 23 trading partners, including Canada.

Sure enough, Smoot-Hawley triggered a trade war as other nations fought back with their own tariffs. A decline in world trade, already under way in 1930, accelerated. Total global trade fell from $5.3 billion in 1929 to $3.3 billion in 1931 and to $1.8 billion in 1933.

While not the cause of the Great Depression, the Smoot-Hawley-inspired trade war made it worse.

That’s the real promise of the Donald Trump trade plan – a crippling global trade war.

The Bottom Line: The Donald Trump trade plan would be a catastrophe for the U.S. economy. The punitive tariffs Trump has proposed violate current trade agreements. They’d also raise prices in the United States on most goods while causing other nations to levy retaliatory tariffs. The resulting trade war would torpedo global commerce and trigger a world recession.

Follow me on Twitter @DavidGZeiler.

Why Trump? Despite controversial policies and boorish behavior, Donald Trump leads most of the polls for the GOP presidential nomination. But why? What is it about Trump that generates such strong support? As it happens, Trump is the right candidate at the right time. Here’s why Donald Trump just may be the president America deserves…

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