Some quick background on the macro. Let’s look at the potential impact on a Trump re-election if he does what he is talking about on tariffs. Roughly speaking to set the stage, in President Trump’s first term he placed a set of duties on Chinese products in the America First economic policy to shrink the trade deficit and rebuild the U.S. manufacturing base. The world generally operates under large multilateral trade deals; he wanted to move to more bilateral deals and renegotiate the large deals. Exit TPP, redo NAFTA for example. Tariffs were planned/enacted on a variety of goods imports across finished products and raw materials: steel, washing machines, solar panels, flat screen TVs, batteries and many more Chinese goods in response to IP theft. Retaliatory measures from partners ensued, escalations etc. At the same time, he leveled lots of (correct) charges of currency manipulation by trading partners. Short version that underpins President Trump’s thinking – countries that keep their FX weak increase the attractiveness of their products at the expense of others, cause large trade surpluses, encourage overproduction/under consumption in the country with weak currency and underproduction/overconsumption in the strong currency country. In single product basic terms – if China keeps its currency very cheap it makes washing machines produced there unfairly cheap vs those produced in the U.S. Over time it is the currency naturally strengthening that should close that gap – keeping it weak on purpose as China does/did prevents that natural correction. When you zoom out to the macroeconomic level – the important part is China’s currency manipulation leads to not just exporting cheap washing machines but exporting unemployment from China to the U.S. as manufacturing jobs slowly leave the country due to U.S. products being unnaturally uncompetitive. Clearly it is impossible for all countries to run trade surpluses, someone must run the corresponding deficit, so the practice is damaging. At the same time, Trump discouraged companies from moving production overseas with reduced tax incentives via BEAT and GILTI, reduced domestic corporate tax rates, and used the bully pulpit to shame those that did. Some deal making ensued.

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