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Trump's 'easy win' trade war is a no-win situation for Wall Street and Main Street

  • Trade-related disputes with Japan and Germany helped precipitate the Crash of '87.
  • The U.S., now faced with $1 trillion annual budget deficits, will again be increasingly reliant on the "kindness of strangers" to finance those budget deficits.
  • If this president moves forward with these "beggar-thy-neighbor" policies, there will be unintended consequences.

President Donald Trump says trade wars are "easy to win," but history suggests otherwise.

Trade-related disputes with Japan and Germany helped precipitate the Crash of '87, while the 1930s Smoot-Hawley tariffs triggered "beggar-thy-neighbor" trade polices and turned a great recession into The Great Depression.

The latter is the most frequently cited example of how protectionist trade legislation or executive actions can lead to trade wars, harming the domestic and global economies.

And while it's still too early to say if the Trump will follow through with proposed tariffs on foreign steel and aluminum, moving forward in that regard could lead to retaliatory measures by many countries, including some of our closest allies like Canada, Germany, along with the European Union more broadly, and South Korea.

David Frum, in an article in The Atlantic, outlines some additional, and relatively recent, risks about how punitive tariffs have hurt specific industries, individual workers and the overall economy.

1987

In my career, one of the most serious steps on the protectionist front led to the market dislocation of October 1987.

First some background.

When the G-5 industrialized nations agreed to devalue the dollar via the Plaza Accord in September 1985, the engineered decline of the U.S. dollar was supposed to help address the building imbalances we had via ballooning budget and trade — so-called "twin" — deficits that troubled Washington and Wall Street alike.

In 1986, the U.S. and Japan were brawling over semiconductors and televisions sets, so much so that a group of congressmen publically smashed a Toshiba TV on the steps of the Capitol.

Trade relations were also deteriorating with Germany, at that time, risking a multifront trade war.

As the economy accelerated in the 1987, post-1986 tax reform, and with asset prices rising, the Fed started raising rates aggressively.

Surprisingly, the dollar continued to weaken despite attempts in 1986 (the Glen Eagles Accord) and 1987 (Louvre Accord) to halt the slide in the dollar.

Amid the ongoing trade disputes that continued well into 1987, Japan, even then a large buyer of U.S. bonds, boycotted a quarterly refunding auction in May 1987, further driving up rates and weakening the dollar.

The weekend before the Oct. 19 Black Monday, Treasury Secretary James Baker reportedly told the Germans the U.S. would let the dollar "go to hell" if we did not resolve trade disputes with Bonn, then West Germany's capital city.

So trade was a big factor in the crash, just not as obvious as other factors.

Beggar thy neighbor

Today, now faced with $1 trillion annual budget deficits, Washington will again be increasingly reliant on the "kindness of strangers" to finance those shortfalls.

But will those "strangers," particularly China and Japan, the two largest holders of U.S. debt, stop purchasing U.S. bonds, or sell them outright, in retaliation for U.S.-imposed tariffs?

And, if the U.S. were to take further steps, like completely pulling out of NAFTA, a full-blown trade war could have a wide variety of consequences, not the least of which could affect the value of the dollar, the level of interest rates and the overall economy.

It is true that the U.S. has legitimate grievances with trading partners, whether it's the dumping of steel and other commodities, as China often does with its massive oversupply of the metal or its theft of U.S. intellectual property.

However, the U.S. has at its disposal a wide array of dispute-solving mechanisms, not the least of which is through the World Trade Organization, to address these issues.

However, this president and some of his closest advisors are unilateralists and would prefer to renegotiate a host of trade treaties that have taken some 70 years to forge.

If this president moves forward with these "beggar-thy-neighbor" policies, there will be unintended consequences.

With any luck, they will be short-lived until the president's more levelheaded advisors can bring him back into the global fold.

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