Trump may have just hit a 'watershed moment' that could end in a trade war

• President Donald Trump has long preferred a more protectionist trade stance.
• His administration began to move that way with new tariffs on Monday, and there is potential for more trade barriers in the coming weeks.
• Trump and administration officials also talked up the idea of a protectionist US, with some caveats, during a trip to the World Economic Forum in Davos, Switzerland.

President Donald Trump's pugilistic campaign style led the then-candidate to take aim at a slew of targets in the run up to the 2016 election. Over the past week, it appears that Trump is finally as president setting his sights on one of his favorite punching bags: free trade.

Trump's predisposition toward protectionist trade policies - higher taxes on imports, increased domestic manufacturing, fewer multinational trade agreements - reared its head over the past week. His administration announced its first planned tariffs and hinted at plans for more. And Trump put the world's elite on notice during a speech at the World Economic Forum in Davos, Switzerland.

"We cannot have free and open trade if some countries exploit the system at the expense of others," Trump said. "We support free trade, but it needs to be fair and it needs to be reciprocal. Because, in the end, unfair trade undermines us all."

Experts say the president and his administration seemed to push the further toward a protectionist stance - and could set the country on a path to a trade war.

Taking aim at free trade

Trump's obsession with trade deficits and tariffs is nothing new. In a 1990 interview with Playboy, the then-real estate mogul said his first act as president would be slapping a tariff on foreign cars.

"I'd throw a tax on every Mercedes-Benz rolling into this country and on all Japanese products, and we'd have wonderful allies again," Trump said.

Almost three decades later, the opening salvo in his trade fight as president came Monday, when the administration announced it would impose tariffs on imported solar cells and panels, and washing machines. Those followed small targets aimed at lumber, milk, and other goods in 2017.

The move seemed to indicate that Trump's campaign rhetoric may not have been all posturing. With a number of trade-related deadlines fast approaching, Trump may finally lean into a protectionist trade policy.

"While it may come as a surprise to some, we have been warning that the US administration, feeling emboldened by the passage of the Tax Cuts and Jobs Act, would likely take on a more protectionist approach in 2018," Gregory Daco, chief US economist at Oxford Economics, wrote in a note to clients on Tuesday.

The Trump administration will soon have to decide on possible tariffs on steel and aluminum products coming into the US. That decision has far broader implications for US manufacturing, said Michael Zezas, a public policy analyst at Morgan Stanley.

"We are watching carefully a few things that are important to determining whether this is just a temporary trade dispute or a broader protectionist push," Zezas told Business Insider. "International reaction that escalates matters and/or the US following through on other upcoming tariff opportunities in steel, aluminum, or intellectual property could all be factors that drive investor concern that this is more than a small scale change in trade policy."

A 'watershed moment'

But the biggest trade albatross on the docket is the next round of discussions on the North America Free Trade Agreement. Already, rumblings have suggested Trump may attempt to remove the US from NAFTA, one of country's cornerstone trade agreements.

Canadian officials told Reuters on January 10 that they expect Trump to remove the US from the deal. Labor unions are already taking action in the event that the president goes through with those plans.

Further down the line, Daco noted that the solar and washing machine tariffs were the result of complaints from US companies under Section 201 of the Trade Act of 1974. The steel and aluminum reviews are being conducted under Section 232 of the Trade Expansion Act of 1962. If Trump signals a protectionist stance, more firms could take advantage of those rules - and more tariffs could result.

"In particular, we note that the affirmative action following the Section 201 investigation represents a watershed moment," Daco said. "It could motivate more trade unions and businesses to adopt that strategy to protect their market shares if they sense more of a protectionist lean by the administration."

Experts say this is a potentially dangerous path for US trade policy, as many groups could respond to tariffs by imposing their own trade restrictions.

Already, South Korea has requested the authority to take retaliatory action against the US over the washing machine tariff, since two major manufacturers, Samsung and LG, are Korean.

Mexico also plans to take action on the washing machine tariff, and the solar tariff could lead to a slew of responsive actions. The potential resulting tit for tat could eventually hurt consumers.

"While the imposition of tariffs may be viewed as 'wins' by the administration they will end up hurting the US economy via higher import prices and potential retaliation from trading partners," Daco said.

Mixed signals from Trump and the administration

Trump and administration officials at the World Economic Forum in Davos, Switzerland, suggested that the tariffs on Monday were not one-off moves but rather part of a coming trend.

"Trade wars are fought every single day, the difference is U.S. troops are now coming to the ramparts," Commerce Secretary Wilbur Ross said Wednesday, adding that the US is finished "being a Patsy" on trade.

Treasury Secretary Steven Mnuchin emphasized that the US was entering a period during which the White House would emphasize "America first." He also prompted controversy by saying that the recent weakening of the US dollar against other major currencies was beneficial for the US.

"Obviously a weaker dollar is good for us as it relates to trade and opportunities," Mnuchin said, in comments he eventually walked back.

Mnuchin eventually walked back his comment and said they were misinterpreted.

Trump also provided mixed messages.

In an interview with CNBC released Friday, Trump said that the US could reenter the Trans-Pacific Partnership - a large multilateral trade deal he pulled the US out of last year - if America could get a "better deal." At the same time, Trump did not commit to remaining in NAFTA and bashed the deal.

"NAFTA's a horrible deal, we're renegotiating it," the president told CNBC. "I may terminate NAFTA, I may not. We'll see what happens. But NAFTA was and I went around and I'd tell stadiums full of people, 'I'll terminate it or renegotiate it.'"

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