Corporate America’s biggest worry about incoming President Donald Trump is that he’ll ignite trade wars with China, Mexico and other big exporters. His pick for Commerce Secretary, private-equity billionaire Wilbur Ross, says that’s not going to happen.
“There aren’t going to be trade wars,” Ross told Yahoo Finance the day after the election. “There are plenty of things that could be done that would not be the end of the Earth but would help our trade balance.”
On the campaign trail, Trump talked tough about slapping quotas on cheap imports and punishing China if its currency appeared to be undervalued. If those things were to happen, it would make imports more expensive for American consumers, invite similar quotas on American exports and possibly cause a recession. Hence the worry in US boardrooms.
But Ross, who as Commerce Secretary would lead any trade negotiations, describes a more benign approach. On Mexico, he points out that the United States accounts for 80% of Mexican exports, which gives the United States plenty of leverage to lean on its southern neighbor to buy more American-made products. “If I’m a guy’s 80% customer, is he going to fight with me?” Ross says. “No, he’s going to negotiate.”
The goal, he says, wouldn’t be to punish US companies that produce goods in Mexico, but to reduce America’s $60 billion trade deficit with Mexico. That can be done two ways: by Mexico exporting less to the United States or buying more from it. Either could be accomplished, he says, without dismantling the North American Free Trade Agreement.
The US trade deficit with China is about $335 billion. Ross highlights at least two ways to lower that. First, persuade China to buy more stuff from the United States that it currently imports from somewhere else. Example: energy products, such as liquefied natural gas (LNG). “Trump is going to be promoting LNG and its export,” Ross says. “It wouldn’t be hard for [China] to buy more LNG from us than from the Gulf countries.” (Tip for investors: Keep an eye on energy stocks.)
The second thing the United States can do is persuade China to ease its own limits on imports of American raw materials. “They export to us lots of apparel and lots of footwear, but they have quotas on American exports of cotton,” Ross explains. “They could relax those quotas.”
Ross makes it sound easy, but there’s no guarantee trading partners will go along. If they don’t, that’s where Trump’s stick would replace the carrot. “If they won’t negotiate,” says Ross, “then it may become necessary as a negotiating measure to threaten them with as much as a 45% tariff. That’s not a rash statement. That gives you a flavor for his negotiating position.” While campaigning, Trump often suggested such measures as a starting point, but Ross suggests they’d be more of a last resort.
Trump’s trade policies would generate losers, especially if partners like China and Mexico bought more American products while reducing purchases from other countries. Russia sells a lot of gas to China and surely wouldn’t get muscled aside by the Americans without protest. Many emerging markets supply Mexico and China as well, and they could suffer from reduced exports, with negative implications for financial markets. But Trump’s stated goal is to put America first. We’re starting to see how.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.