4 Threats to Prosperity, Part 2

by Brian Wesbury, Chief Economist, First Trust Portfolios

4 Threats to Prosperity, Part 2

Thoughts on Trade Policy / Trade Protectionism

Trade protectionism is number 2 on the list of threats to economic growth.

- if you become protectionist, you can start a trade war.
- 27% of the GDP of the U.S. is imports and exports, a huge part of our economy.
- if we were to shut off the flow of goods and services with the rest of the world, just like the great depression, it could easily toss us into a severe recession which could turn into something even worse.

- With Donald Trump in office, we know he is worried about trade, he has threatened tariffs, he has threatened companies with border taxes, so let’s talk about this for a minute.

- The U.S. is the world’s largest importer - we import $2.8 trillion of goods and services every year, and these are important parts of our every day life - if we didn’t import food, parts for cars, and services as well, we would have a true lack of consumer goods, and prices would rise.

- if we tax those goods as they came in, until we could set up our own manufacturing, it would throw things into mayhem.
- but here’s the most important part - we can’t produce, and we shouldn’t produce everything that we use.
- For example, think about a city - Chicago, where I live - Chicago doesn’t grow its own food - it imports its food. It doesn’t make all its own bricks, glass or steel - it imports that.
- in fact the city of Chicago runs a trade deficit with the rest of the state of Illinois, and with the rest of the country.
- as a result, if we were to put tariffs on goods and services coming into Chicago, it would throw Chicago into mayhem.
- we would never be able to build buildings like we can today, and we shouldn’t [impose tariffs].
- trade benefits all people involved in that trade.

- Now [on the other hand] we can all agree, China steals intellectual property rights, they have rules and laws that keep U.S. investors out, or inhibit them from owning majorities of companies - all of those things should be fixed.

- throwing up a tariff up in place is a very dangerous thing - I continue to believe that, yes, President Trump, seems to be willing to do that, but he needs the cooperation of the House and the Senate.

- most economists and most politicians in Washington D.C. understand the value of trade.
- One last point on this topic - Donald Trump, he seems to grate some people the wrong way, at least that’s the way its reported, after phone calls with foreign leaders, but remember, when we import $2.8 trillion worth of goods, China and Mexico and Canada are three of the largest trading partners we have - Australia sends a lot of resources to the U.S., $11 billion at last count.

Guess what?

- Countries that rely on our markets to sell their goods and services don’t really want to get into a fight.
- So I think the U.S. flexing its muscles in these areas is not the same as becoming protectionist.
- Protectionism is dangerous - we’ll keep an eye on it, but right now this threat is not close to tipping the U.S. or the globe into recession.

Brian Wesbury, Chief Economist, First Trust Portfolios

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