FINANCE PROFESSOR: Trump’s ‘failed economics’ could push the US back into recession by 2018

trumpKevin Lamarque/Reuters

Mark T. Williams teaches finance at Boston University, is a former Federal Reserve Bank Examiner, and is the author of “Uncontrolled Risk” about the collapse of Lehman Brothers and the key drivers of the financial crisis.

In Don Quixote fashion, President Trump is attempting to battle global windmills that he has little control over.

Jobs have been lost and American factories closed not because of bad economic policy but because of natural global market forces.

His Twitter threats and strongman tactics might encourage Carrier Corporation to keep 1,000 jobs from moving to Mexico but it wont reverse this longstanding trend. Economic engines — Apple, Facebook and Google — demonstrate the immense opportunities created by an open and competitive global marketplace.

don quixote illustrationIn the 17th century Spanish novel “Don Quixote,” the protagonist fights windmills that he mistakes for giants. The phrase “tilting (or jousting) at windmills” derives from the book and means attacking imaginary enemies. Wikimedia Commons

His America-first plan of picking economic winners and losers will inflict deep-rooted harm to the US economy.

Such policies generate retaliatory trade actions that shrink overall trade, hurt GDP growth, kill jobs, distort corporate decision making, exacerbate market swings, and could push the US economy back into recession by 2018.

Trump ignores the proven broader economic benefits of free trade and how America has prospered. Post War World II, the US has been one of the primary beneficiaries of an increasingly global marketplace.

As the world’s largest economy and trading nation, GDP has grown to over $18 trillion. Annually US exports account for $2.5 trillion that support almost 12 million jobs. An estimated 25% of manufacturing jobs are related to this sector.

Trump’s arbitrary tariffs could significantly cripple our export industry.

Despite Trump’s claim they are our economic enemy, China is America’s largest and most important trading partner with two-way trade topping $660 billion. Exports to China exceed $110 billion, only behind Mexico and Canada.

beijingBeijing, China. Jason Lee/Reuters

As a rapidly growing market of 1.4 billion people with a burgeoning middle class, the opportunity for US exports is immense. China trade allows US consumers to buy goods at lower prices than if produced domestically. This has also kept US inflation down, improved standard of living, and spurred economic growth.

China’s willingness to be the largest foreign buyer of our nation’s debt, topping over $1 trillion, also ensures a stable source of cheap financing.  

A capricious 45% tariff would trigger a no-win trade war. In retaliation, China could halt the purchase of significant quantities of US soybeans and corn, restrict auto sales, iPhones and replace Boeing planes with Airbus.

Tit for tat measures could even impact the financial health of US colleges and universities that enroll over 300,000 Chinese students annually, a customer base that could easily matriculate elsewhere. Additionally, if China were to suddenly lose their appetite for US debt, interest rates could spike, harming US borrowers.

Mexico is America’s second largest trading partner comprising two-way trade of almost $600 billion. From a pure export perspective, sales to Mexico are 2.5 times greater ($250 billion) than to China.

the Basilica of GuadalupeThe Basilica of Guadalupe in Mexico City, Mexico. Noel West/Reuters

This relationship is symbiotic.

Currently, over 80 % of Mexico’s sales benefit US consumers.  If Trump slaps, as advertised, a 35% boarder tax on Mexican made autos, it would trigger retaliation — potentially impacting the cost of everything — from cars, mobile phones, televisions to fruits, vegetables, coffee and cotton.

BMW has already been threatened with a boarder tax. Toyota has also warned that such policy could increase the cost of producing its basic Camry by $1,000. Building this “trade wall” will materially harm, not benefit, US consumers.

Picking economic winners and losers creates numerous unintended consequences. Such Trump policy incentivizes companies to lobby and strike special deals that could be uneconomical and harmful to shareholders.

They also permit inferior companies to use the threat of job outsourcing as a means to extract better market protections. In the short run, these companies may gain advantages but in the long run, artificially imposed barriers are more harmful and create weaker companies.  

toyota camryA 2009 Toyota Camry. Toyota has warned that some of Trump’s proposed policies could increase the cost of producing a Camry by $1,000. Adam Fenster/Reuters

Such suboptimal decision making also puts corporate CEOs at risk of violating well-established conflict of interest standards. The primary role of corporate executives should be to create long-term shareholder value, which might mean closing an inefficient plant and moving jobs abroad over currying political favor with President Trump.

Moreover, Trump’s Twitternomics has interfered with market forces, causing major stocks to fall and some to rise.

Immediately after a December 2016 Twitter attack, Boeing stock dropped by 1%, costing shareholders $550 million. Lockheed Martin stock dropped, too. Trump’s tweets have also injected greater price volatility in auto stocks such as Ford, GM and Toyota.

Similar price declines recently occurred in healthcare and pharmaceutical stocks. In a distorted use of power, Trump has even acted as an ad agency, using social media to champion L.L. Bean products.

boeing 747Boeing 747. Boeing stock dropped after Trump attacked the company on Twitter. Boeing

His daily Twitter addiction poses a real risk to global markets should his account be hacked.

Trump claims he is the “greatest jobs producer god ever created,” pledging to generate 25 million new jobs over the next decade. Launching a trade war against China and Mexico, our two most significant trading partners will have the opposite effect on corporate profits, jobs and GDP growth, inflicting measurable harm to the US economy.

Job creation occurs by harnessing the forces of an increasingly global marketplace, and through comparative advantage allocating capital (physical and human) to its highest and best use. Market forces permit new companies to thrive and noncompetitive ones to die.

Putting up protective “trade walls,” relying on Twitternomics, and retreating from the global economy is failed economics.

This is an opinion column. The thoughts expressed are those of the author.