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Trump's Tariffs Could Signal a Dramatic New Era in Trade

When President Trump signed orders to impose an import tariff of solar panels and washing machines, on January 22, 2018, I was completely blown away. It seemed like this could be the start of one of the biggest economic reversals of the last half-century, and the consequences might be extreme.

In itself, the act is a small thing: washing machines and certain types of solar panels are now subject to a 30-percent tax when they cross the border, a move the Trump Administration says will encourage domestic job growth. What the President didn’t say, what he may not be ready to say yet, is that this could be the beginning of the end of the free trade era, which has arguably driven the world’s economies for the last 50 years.

Trump’s Tariffs Could Signal a Dramatic New Era in Trade

In the old days, before NAFTA and before the WTO, countries would typically place import tariffs on goods made overseas. This extra cost was supposed to offset the extra profits from offshoring labor to Third World countries with low labor costs. For several decades, from the 1970s on, the trend in every country was toward lowering or outright abolishing these barriers, with the result that jobs practically leapt out of high-cost markets like the United States and Western Europe and into low-cost markets, notably China. This, in turn, drove Chinese economic growth by leaps and bounds — sometimes by as much as 10 percent in a year — while America’s manufacturing sector stagnated, as did workers’ wages. By imposing the first unilateral tariffs in decades, Donald Trump may be starting down a road back to when America had a highly protected, high-wage economy where almost everything was Made in the U.S.A.

Mixed Results

Ever since the announcement, I’ve been compulsively browsing through the reactions from affected parties. China is outraged, of course, since the Mainland economy is a very shaky Jenga tower built on American exports and bogus real estate deals, and not much else. Manufacturers were already slowly pulling out of China and quietly sneaking off to India before Monday’s announcement, and a sudden hike in the cost of overseas production might be the spur that collapses China’s already-unstable labor market.

The solar industry has been more mixed in its reaction. While I’ve listened to a lot of industry people say a lot of things, the short version is that Sunrun and others who are heavily invested in China are having kittens, while stock in American companies has jumped between 6 and 22 percent overnight. Whatever Trump’s long-term plan, the market is clearly taking him at his word and assuming this is a permanent thing.

Downstream Consequences

Another place where this move will have consequences is in mergers, acquisitions and startups at home. If indeed the Trump Administration insists on a trade war with China, or even if it just extends the tariffs to gumball machines and novelty party favors next, an awful lot of investors might choose that moment to relocate, causing a sudden rush of capital into domestic companies, especially in light industry and fabrication. In short: there has not been a better time to invest in America since the Beatles were on Sullivan, and any holdings you or your clients currently have in China might be somewhere near the peak of their value for a while.