While a lot of apprehension about a possible Trump victory has focused on the risk to international relations, the economic policies he is espousing would also be very costly for the world economy.
A key proposal of his economic platform is a major increase in tariffs on trade with the rest of the world, with especially penal tariffs on imports from China. One of the major arguments made by Trump for raising tariffs on imports is that they could replace the federal income tax, resulting in a dramatic reduction in personal tax bills.
Such ideas are delusional. A series of academic studies show that even if tariffs on all imports were raised to between 50 per cent and 80 per cent, the revenue from the tariffs on what imports remain would replace much less than half of existing revenue from federal taxes. And unilateral action of this kind by the United States would likely set off a tit-for-tat trade war.
A recent study by French economic think tank CEPII has studied the consequences if such a trade war breaks out. Their findings show most countries would suffer, but it would also rebound on the US.
The study shows that higher US tariffs, as would be their aim, would see Americans substitute domestic production for previously-imported goods. However, retaliatory tariffs by their trading partners would mean the US would also lose markets abroad. The research has calculated that American losses would exceed American gains, resulting in a 1.3 per cent decrease in US GDP. US wages would drop by between 1 per cent and 1.5 per cent as a result.
The decrease in world GDP would be somewhat lower, at about 0.5 per cent. However, because the US is the single most important destination for Chinese exports, such a trade war would also have very negative consequences for China, whose GDP would fall by 1.3 per cent. While hurting China is one of the reasons Trump is promising big tariffs, to start a trade war would actually be cutting off your nose to spite your face, if the US becomes worse off as a result.
If US voters realised that the consequences of Trump trade policies would be to make workers in Mexico much better off at the expense of US workers, they might behave rather differently in the election
The two countries that might actually gain from a Trump trade war are Mexico and Canada, because they are currently part of a free-trade area with the US. If imports from the rest of the world to the US become much more expensive due to tariffs, Mexican exports to the US would rise, substituting for imports from elsewhere. So while US workers would become worse off, the research suggests a trade war could mean Mexican wages rising by 5 per cent.
If US voters realised that the consequences of Trump trade policies would be to make workers in Mexico much better off at the expense of US workers, they might behave rather differently in the election. Also, if Trump reads the CEPII study, he might want to have a go at Mexico and Canada too, if he is elected.
The French study also suggests that France and Germany, and much of the rest of the European Union, would be less affected by the disruption caused by a trade war. Nonetheless, for Ireland it could be a very uncomfortable time, given the large US business presence. It could be that, just as foreign subsidiaries within Mexico might escape relatively unscathed, US subsidiaries in Ireland might find themselves protected within the EU. But that’s not a given.
Ireland’s supersized tax revenues from US multinationals domiciled here aren’t viewed too favourably by our EU partners, particularly those whose economies are struggling. In any trade war with the US, it could be tempting for the EU to take action on the tax or competition fronts against US firms based here, as a form of retaliatory action. That could cause us a lot of difficulty, particularly because, when you strip out the extraordinary corporation tax receipts, we are running an underlying budget deficit.
Of course it’s not certain that if Trump won the election, his economic policies could come to pass. He might just decide to ignore campaign promises. Or a second Trump presidency could be marked, as was the first, by a succession of dysfunctional teams in the White House, and a commander in chief showing little interest in day-to-day governance.
But, importantly, trade and tariff policy would require the agreement of both the US Senate and House of Representatives. While current polls suggest that the Republicans are very likely to capture the Senate, there is a reasonable chance that the Democrats will win control of the House, allowing them to block any crazy Trump trade policies, should he win.
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