President Trump Presses On

In his first week of official Presidency, Donald Trump has signed a wave of executive orders intended to demonstrate his commitment to keeping his election promises. While some of the policies will take longer to draft and implement, such as tax reform, others are taking immediate effect, including trade policy.

In one of the first key changes, President Trump pulled out of the Trans-Pacific Partnership, and although it had little chance of passing Congress and offered only small prospective gains to GDP, the loss is still symbolic.

High on the list of the new President’s priorities is re-negotiating NAFTA. Mexico & Canada account for around 30% of US trade and so will be a key focus for Trump. It is not known yet whether tariffs on Mexican and Chinese imports, which current stand at 35% and 45% respectively, will be levied. Indeed, more pressure is being applied, even on a firm by firm basis and protectionism is now looking likely to pose a bigger threat than first expected and is likely to weigh on growth while pushing prices higher.

Negative Effects of Trade Restrictions

Trade barriers will shrink import availability, reduce choices, push prices higher, weaken competition and could slow both innovation and productivity. Of the consumer prices likely to react first are those which change frequently and have a relatively high import content such as alcohol. If on the other hand, tariffs were imposed on raw materials a tariff could take longer to filter through the production chain and into consumer prices.

Higher prices will weigh on real incomes and consumption, and although some industries will do better, such as domestic car production, losses will be spread more widely as prices rise, capping consumption. In the political environment, large gains for small groups could pay off as losses can be spread more thinly.  With the economy at full employment, it is hard to see a net gain in output unless protectionist policies significantly raise US investment and therefore, capacity.