Trump & Trade: The First Year

President Trump has been in office for just over one year, having been inaugurated on January 20, 2017. He campaigned on a populist agenda—anti-globalism was a core message. Specifically, his “America First” mantra railed against free trade deals, suggesting they were poorly negotiated, supported immigration restrictions and called on allies to shoulder more of their defense burdens.

In this report, we are going to focus on the trade situation following his first year in office. We will begin with a review of American hegemony and trade, including how trade is affected by saving patterns both in the U.S. and abroad. This analysis will include commentary on the effects of fiscal policy on administration trade policy, showing how they are working at cross purposes. One critically important aspect of administration trade policy is how foreign nations react to the threat of tariffs and sanctions. We will argue that the administration’s goal should be employment and show how foreign companies may be adjusting to Trump’s policies in a way that won’t help narrow the trade deficit but could improve the job market. As always, we will conclude with potential market ramifications.

American Hegemony and Trade

Hegemonic Stability Theory1 argues that the world functions best when there is a single dominant global power that maintains global stability. Kindleberger suggested that the primary cause of the Great Depression was the fact that Britain was losing the ability to act as global hegemon and the U.S. was unwilling to accept the role. The subsequent power vacuum led to the calamities of the first half of the 20th century.

The theory suggests that the hegemon supports world political and economic stability by providing two broad global public goods. The first is military security. This always involves protection of trade routes, both on land and at sea, with the latter being the most important in the last millennia. The second public good is to provide a reserve currency, a global medium of exchange that facilitates global trade and economic stability.

Hegemons throughout history have provided these public goods in different ways. Imperialism was a common response; colonies not only gave the superpower’s navy areas to establish bases, but they also provided markets for trade that the hegemon could dominate for its own needs. The reserve currency was usually provided by precious metals; although the hegemon may not have had complete control over the production of precious metals, supporting a metal currency regime prevented the hegemon from over-expanding the money supply and causing inflation.

The U.S. accepted the hegemonic role during WWII; the arrangements made at Bretton Woods meant the dollar became the free world’s reserve currency. Unlike previous hegemons, the U.S. did not embrace imperialism. America’s founding as a breakaway colony generally undermined imperialism in the U.S., although there was some imperialist activity during the administration of Theodore Roosevelt. Instead of colonies, the U.S. set up treaty organizations that facilitated the establishment of military bases around the world.