The fear of catastrophic trade wars, which would send the economy into a tailspin, has recently helped to increase volatility in the equity markets.
President Trump has exacerbated these fears with tweets and comments about how unfair our current trade agreements are for the U.S., and how he is going to put tariffs on imported goods to level the playing field for U.S. firms and workers. This discussion about tariffs and possible trade wars makes most economists very nervous. Almost all economists agree free trade is a good thing and everyone benefits from free trade. Economic textbooks teach this as a basic principle of economics.
We would like to point out some important points regarding free trade:
1. Not everyone benefits from free trade. The worker that loses his job because his company can get it done cheaper overseas does not benefit from free trade. Instead he/she is a victim of free trade. Consumers who can buy imported goods more cheaply than those made domestically are the primary beneficiaries of cheap foreign goods.
2. Countries that run a trade surplus benefit by the extra dollars they receive. These countries can then invest these dollars in U.S. securities such as stocks and bonds, in real estate, or the purchasing of American companies. This represents a transfer of wealth from America to other countries. Proponents of free trade make the argument that over time equilibrium will be reached so the trade between countries balances out. This has not been the case for the U.S.
The table shows the trade deficit the U.S. ran with its global trading partners last year. The U.S. ran a trade deficit of $568 billion in 2017. Our trade deficit with China alone was $337 billion. While the equity markets have been gyrating, the bond markets have not moved much. However, we will be monitoring developments for signs that global economic growth will be impacted by renegotiating trade agreements which affect the U.S.