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Tuesday, January 15, 2019

Disney and the Economy, Part III

August 3, 2018

Economic growth registered a strong 4.1 percent in the second quarter. There are reasons to believe that strong growth can continue, while risks loom as well, with the biggest concern being protectionist trade measures advanced by the Trump administration.

This is the third entry in a series. Disney and the Economy, Part I highlighted the good news on second-quarter economic growth and some implications for the Walt Disney Company. Disney and the Economy, Part II noted changes in tax and regulatory policies that support sustaining strong growth, which has been the challenge since this poor economic recovery-expansion period began in mid-2009.

Unfortunately, there also are factors working against sustaining strong growth. In particular, while the Trump administration has advanced and signed into law some positive tax and regulatory measures, it has been a mess on trade policy.

While Donald Trump seems to have changed positions on most issues over the years, the one where he has remained steadfast is on being protectionist on trade. That’s unfortunate. President Trump is in the midst of an ongoing fit of tariffs and threatened tariffs against other nations, and therefore retaliatory tariffs and threats from those trading partners. China tops the list of nations targeted by the U.S., and steel and aluminum top the list of goods being taxed. For good measure, the quarter-century free trade agreement with our neighbors Mexico and Canada (i.e., NAFTA) is being undermined and threatened by the president, with efforts for “renegotiation” sputtering.

Here are four quick and important points on trade that must be kept in mind.

First, free trade simply means reducing governmental costs and barriers, like tariffs (that is, taxes on imports) and quotas, so that individuals and businesses can more easily trade across international borders. Countries do not trade; instead, individuals and businesses trade. And by definition, when a trade occurs, it means that both parties are better off – otherwise they wouldn’t have engaged in the transaction.

Second, a trade deficit is not an economic negative. To the contrary, the U.S. trade deficit reflects a strong domestic economy that attracts foreign investment and generates increased demand for imports, including consumer products as well as capital and intermediate products for U.S. businesses. Indeed, the U.S. trade deficit usually expands when our economic growth accelerates. For good measure, a trade deficit with a particular country does not mean that the U.S. is “losing,” but again reflects economic differences between nations, including the size and wealth of the U.S. economy.

Third, the U.S. went down the path of protectionism and trade wars once before. That resulted in the Great Depression, with global trade collapsing.

Fourth, trade matters a great deal to the U.S. economy, and far more so than in the past. For example, real total trade (exports plus imports) in 1955 equaled 6.1 percent of real U.S. GDP. That grew to 29.3 percent of the economy in 2017. And growth in trade equals or accounts for some 40 percent of U.S. economic growth in recent times.

So, no one wins a trade war – no one ever does. For the U.S., tariffs on goods and services coming from other nations means imposing taxes on U.S. consumers and businesses. And when other nations inevitably retaliate, U.S. businesses and workers experience reduced economic opportunity and lost business. In addition, the same happens when other nations move ahead with free trade accords – such as the Trans-Pacific Partnership, which President Trump withdrew the U.S. from when first taking office – as barriers are reduced for consumers, businesses and workers operating within the agreement, but not for U.S. consumers, businesses and workers.

History and economics make clear that advancing free trade makes for sound policymaking. The way to deal with China, for example, and its challenges is not to hurt U.S. consumers and businesses with tariffs and a trade war, but instead to constructively engage with the Chinese in an effort to work toward a free trade agreement.

So, protectionism is a wildcard working against sustained strong economic growth. And it certainly is troubling for a company like Disney. Obviously, any barriers to and reductions in trade will hurt The Walt Disney Company given its sizeable international footprint.

Indeed, near the start of the Trump administration, Disney CEO Robert Iger warned, “An all-out trade war with China would be damaging to Disney’s business and to business in general. It’s something I think we have to be very careful about.”

And if a trade war expands, it must be recognized that U.S. intellectual property industries, including the entertainment business, rank among our top exporters, and could come to be a target of retaliation. In addition, Disney will be hurt at home due to increased costs resulting from U.S. tariffs. For example, given Disney’s new and ongoing construction projects, such as theme parks and hotels, higher steel and aluminum costs thanks to protectionism will raise the company’s costs. In addition, in terms of Disney consumer goods coming from China, Disney fans will face higher prices.

Again, no one wins a trade war – not the U.S. and not Disney.

Ray Keating is the editor, publisher and economist for DisneyBizJournal.com, and author of the Pastor Stephen Grant novels, with the two latest books being Reagan Country: A Pastor Stephen Grant Novel and Heroes and Villains: A Pastor Stephen Grant Short Story. He can be contacted at raykeating@keatingreports.com.

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