Guest Contributor: What Does History Tell Us About Trump’s Trade Policy?

Editor's Note: This piece is reposted from the Council on Foreign Relations’ Geo-Graphics blog. It does not necessarily reflect the opinion of Hedgeye


by Benn Steil and Emma Smith


Guest Contributor: What Does History Tell Us About Trump’s Trade Policy? - z benn


The central theme of Donald Trump’s economic policy is trade.  He promises to slash America’s trade deficit by tearing up international agreements and imposing massive new tariffs on imports from China (45%) and Mexico (35%).  By cutting the trade deficit from $500 billion to zero, according to his senior economic advisers, $1.74 trillion in new tax revenue will accrue to the Treasury over the next decade.  Trump will use this massive windfall to fund two-thirds of his proposed tax cuts.  If true, this will indeed go some way toward Making America Great Again.


But unfortunately it isn’t—not by a long shot.  If produced by a Macro 101 student, this sort of analysis would send his professor into paroxysms of red-pen rage.


Guest Contributor: What Does History Tell Us About Trump’s Trade Policy? - z pro


Trade deficits, you see, do not just disappear, and tax revenues soar, because you block imports.  A trade deficit results from a deficit of savings relative to investment.  If savings and investment don’t budge after imports fall—which they don’t in the Trump analysis—then exports must fall by an equivalent amount.  The mechanism by which this would happen is simple.  The lower demand for non-U.S. currency created by the import cut pushes up the value of  the dollar, which makes U.S. exports more expensive and imports cheaper.  So imports rise and exports fall.  The trade deficit remains the same.


For the trade deficit to fall, savings and/or investment have to change. The last two times we saw a significant fall in the trade deficit—in 1988-1992 and 2006-09—investment fell significantly more than savings.  What was the result?  The two largest recessions in the last 35 years.


In short, the idea that protectionism is the road to riches is logically and historically monstrous.  Trump needs a new big idea.


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This Hedgeye Guest Contributor research note was written by Benn Steil and Emma Smith. Mr Steil is director of international economics at the Council on Foreign Relations and author of The Battle of Bretton Woods. This piece does not necessarily reflect the opinion of Hedgeye.

Poll of the Day: Which Option Is MOST LIKELY To Occur In The Next 4 Years?

Takeaway: What do you think? Cast your vote. Let us know.

Poll of the Day: Which Option Is MOST LIKELY To Occur In The Next 4 Years? - poll 10 13 16


CHART OF THE DAY | Presidential Election Polls: What We Can Learn From Brexit

CHART OF THE DAY | Presidential Election Polls: What We Can Learn From Brexit - cod chart


We can learn much about current presidential election uncertainty by thinking about pre-Brexit polling in Britain. 


A New York Times story today calls into question current presidential election polling. The key claim is that a USC/LA Times poll overweights small groups thereby positively distorting Donald Trump's favorability among voters. Hedgeye Director of Research Daryl Jones discusses what this means in today's Early Look (our morning newsletter to investors):


"Interestingly, if we remove that poll from the last 10 major polls, Clinton's lead jumps to +8. Perhaps then, the non-consensus view is not that the polls are wrong and Trump still has a shot, but rather the polls are wrong and Clinton is going to win and the Democrats are going to run the table? The market might like a Clinton Presidency better than a Trump Presidency, but it probably won’t like a clean sweep by the Democrats.


That all said, anyone remember the polls before Brexit?"


Point taken. As you can see in the chart above, just before the British referendum about whether to stay or leave the European Union odds were heavily staked in favor of the stay camp. We all know how that turned out. Whether or not Clinton is actually leading in the polls doesn't necessarily matter. 

A lot can happen in the next 25 days. 


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Cartoon of the Day: Economic "Growth"

Cartoon of the Day: Economic "Growth" - sine curve cartoon 10.12.2016


U.S. economic growth continues down the slope, from 3% to 2% to 1% to...

What The Media Missed: ‘It’s Literally A Lie’ To Say U.S. Growth Isn’t Slowing

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough explains what mainstream media networks missed about U.S. economic growth and the broader implications for investors.

3 Reasons To Sell Kroger’s Bounce | $KR

Takeaway: Supermarket chain Kroger faces growing underfunded pension fund liabilities that are particularly at risk in a financial market downturn.

3 Reasons To Sell Kroger’s Bounce | $KR - kroger 10 12 16


The pop in Kroger (KR) shares today isn’t sustainable. The stock is up on a Wall Street analyst report arguing that the company’s "Venture Concepts could ultimately unlock $4 to $12/share value for Kroger." 


However, much like the risks embedded in Kroger’s exposure to underfunded pension plans, buying the supermarket chain’s shares up here could unwind quickly and unexpectedly.


Hedgeye Consumer Staples analyst Howard Penney has been warning about risks embedded in Kroger shares. A principle concern is Kroger’s exposure to a large number of multi-employer pension plans that the company keeps intentionally underfunded.


Kroger is one of the largest unionized employers in the United States. About 375,000 of their employees are covered by roughly 300 collective bargaining agreements. Kroger employees participate in 36 multi-employer pension plans (MPP), with a combined $70 billion in assets and $100 billion in associated liabilities.


“Kroger’s management team and industry analysts continue to ignore and understate the risks that multi-employer pension plans (MPPs) present to Kroger’s future growth prospects,” Penney wrote in a recent institutional research note.


That’s a big problem. Here’s what you need to know:


  • Underfunded: A Segal Consulting survey found that 53% of the retail food MPPs surveyed were in the “red zone,” meaning they had either “immediate and significant funding problems” or would be unable “to pay benefits within 15 to 20 years.”
  • Risky In Financial Market Downturn: Milliman data shows that every 4% decline in asset returns pushes MPP funding status down by 15% to 20%.
  • Problem Is Getting Bigger: In 2015, Kroger’s pension liability ballooned 61% to $2.9 billion. That number will go even higher this year, hindering the company’s ability to grow and likely leading to lower equity value.


Bottom Line: Kroger’s problems run deep. Sell.


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Editor's Note 

Want to read more? Click here to check out Penney’s Investopedia article on Kroger.

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