Enraged By Rate Hike, Trump Threatens To Expand Trade War Again (Huh?)
French President Emanuel Macron, left, and President Donald Trump
Donald Trump seems determined to outdo himself on crazy every day. Many people thought he had hit peak crazy when he threatened to tear down the Kennedy Center if they wouldn’t let him put his name on it, but he quickly took crazy to the next level. He is now threatening to cut off trade with some countries because the Fed raised interest rates on Wednesday.
If the threat to cut off trade as a response to a Fed rate hike doesn’t make sense to you, don’t worry. It doesn’t make sense. It’s not clear what Trump imagines he can accomplish by cutting off trade with a country. It will hurt the country with whom we stop doing business, just as it would hurt Michigan if Ohio stopped trading with it, but it will also hurt American households. The loss of imports will mean shortages and higher prices. If we also stop exports to a country, it will mean a loss of jobs.
Trump didn’t say which countries he wanted to end trade with, but we can have some fun speculating. So here are my top three candidates, along with the items where our markets would be most affected.
Canada
Trump would almost certainly put Canada at the top of his list of trade enemies. After all, they sell us all sorts of things; what could be worse than that? This is probably the most absurd of Trump’s targets. Canada has been a close ally for more than a century. Their trade is being governed by a trade agreement negotiated by Donald Trump in his first term, which Trump insists was signed by a stupid president.
The largest import from Canada is 3.9 million barrels a day of oil, roughly 20% of our total consumption. If Trump were to suddenly cut off this flow, to make good on his plan to end trade with Canada, we can expect an enormous surge in gas prices, likely on the order of several dollars a gallon. There would almost certainly be shortages in many areas as new distribution networks would need to be established.
Another major import is cars and car parts, which came to $45.8 billion last year. This would put upward pressure on vehicle prices due to less competition, but more importantly, it would throw a huge monkey wrench into the domestic industry. More of the parts used in assembling vehicles in the United States come from Canada. In principle, these parts can be produced here, but it would take many years to develop this capacity. In the meantime, our industry would be seriously hampered by the inability to get necessary parts. Again, this almost certainly means much higher car prices and shortages of many models.
Two other major imports are lumber at $10.2 billion and aluminum at $9.7 billion. These are both intermediate inputs into the production process. If we lost access to imports from Canada look to much higher house prices, as new construction becomes far more expensive. Similarly, it will be difficult to replace the aluminum the U.S. gets from Canada. This would make airplanes and other products produced in the United States far more expensive.
Spain
Spain likely also features prominently on Trump’s target list. Spain’s prime minister, Pedro Sanchez, has repeatedly stood up to Trump openly. He refused to go along with Trump’s demand that NATO countries increase their military spending to 5% of GDP. He also has been extremely critical of Israel’s mass murder of Palestinians. This has led to explicit warnings of retaliation from Netanyahu. Trump may opt to ban trade with Spain as part of this retaliation.
Spain is a much less consequential trading partner than Canada, being on the other side of the Atlantic and also orienting most of its trade towards the European Union. Our largest imports from Spain are $2.9 billion in pharmaceutical products, $2.6 billion in machinery, and $2.0 billion in electrical equipment.
None of these are especially large for the U.S. economy, but the loss of imports from Spain would almost certainly mean selective shortages and higher prices. Again, these items can be replaced with imports from elsewhere and domestic production, but it will take time.
France
A third likely target is France, first and foremost because its president, Emmanuel Macron, is articulate and internationally respected, and far better looking than Donald Trump. Along with the rest of the European Union, he also has refused to go along with Trump’s war on Iran.
Our largest imports from France are similar to the ones from Spain, but the amounts are much larger: pharmaceutical products, $11.6 billion, machinery $10.5 billion, and aircraft and parts, $6.1 billion. These can be replaced, but not overnight. A cutoff of trade would lead to shortages in many items and lead to serious upward pressure on prices.
How Much Will Americans Pay for Trump’s Quixotic Trade War?
These are my top three candidates for Trump’s trade embargo, but who knows? Trump’s trade wars are not being driven by any rational strategy; it is a question of who happens to get him angry over something, and who will bribe him to not cut off trade.
It’s also possible that Trump just backs down or forgets about his threats. That happens all the time. How many times has he said he was going to destroy Iranian civilization and then, thankfully, forgotten or ignored his threat? Remember the 50% tariffs he threatened to impose on India for buying Russian oil? Trump doesn’t seem to.
Trump makes all sorts of half-baked threats all the time, and the absurd threat to retaliate against a Fed rate hike with random trade embargos is certainly a serious half-baked threat. But it is one that people should keep an eye on.
If Trump does move forward on the threat, it would amount to a big new tax and economic disruption at a time when most people are already feeling pinched. If Trump has his little embargo(s) before the election, it would likely further damage Republican electoral prospects. If he plans to wait until after the election, I guess Republicans can say that the taxes and shortages are their reward for having Trump in the White House.
Dean Baker is a senior economist at the Center for Economic and Policy Research and the author of the 2016 book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Please consider subscribing to his Substack, from which this is reprinted with permission.
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