President’s Trump’s best asset as a politician right now is the strong US economy. Unemployment is low, profits are up and Americans feel more secure than they have in over a decade.
If Trump simply let the economy do its thing, he’d have a solid pitch to voters come the midterm elections in November: You’re better off with me and my fellow Republicans in charge. Let’s keep it that way.
Trump seems motivated by something else, however. It’s clear by now he’s obsessed with trade, and with rewiring the global flow of goods that has evolved during the last 30 years. His latest moves include the imposition of steel and aluminum tariffs on allies that seemed likely to gain exemptions, including Canada, Mexico and the 28 countries of the European Union. Trump has now made clear: No exemptions. And as expected, those trade partners have responded in kind, announcing tariffs on a like amount of American imports including motorcycles, bourbon, pork, apples and cheese.
Trump may be just getting started. On May 29 he announced there will be new tariffs on $50 billion of imports from China, beginning in mid-June. He’s also considering tariffs of up to 25% on 8 million imported autos Americans purchase each year. And who knows what else.
No winners in a trade war
These are the trade wars Trump thinks he can win, and Trump is no longer threatening such wars—he’s launching them. Since the United States imports more than it exports, Trump seems to think we can slap tariffs on a lot more products than any trading partner can. But this is financial markets’ worst fear regarding Trump, because escalating tariffs can easily become a war of attrition in which governments destroy value and the “winner” is whoever loses the least.
I’ve referred to Trump before as 70s Man: He views smokestack industries such as steel and coal as the backbone of American economic might, even though we’ve evolved into a service and technology economy with manufacturing as an important, but declining, sector. Trump’s fatal flaw is this outdated view of the economy. He feels manufacturing is so important that he’s willing to sacrifice jobs and profits elsewhere—in retail and agriculture, for example—to boost a sector that has been in natural decline as a portion of the nation’s overall economic output.
Economies change continually, with new industries always displacing old ones. Workers in declining industries undoubtedly get hurt, as jobs disappear and the new ones created are in different fields hundreds of miles away. The United States has done an inadequate job of helping displaced workers adapt and find new ways to prosper, and Trump has adroitly appealed to the “forgotten men and women” other politicians have jabbered about but done little or nothing to help.
But Trump’s style of protectionism will produce more displaced workers, in the industries that are harmed as the collateral damage in his trade wars. This will happen in at least two ways. First, tariffs are a tax that boosts the price of the protected product, in this case steel and aluminum. So domestic producers earn more money and might hire more workers. But other companies that purchase those products, such as producers of cars, appliances and beverages, now have to pay more, and their products become more expensive, which means sales could suffer. That kills profits and jobs.
More damage comes from retaliatory tariffs imposed by other countries, which raises the prices of American exports and reduces sales. Some US farmers and business owners have already been complaining about reduced access to Chinese markets, after tit-for-tat protectionist measures by both countries. Trump’s Commerce Secretary, Wilbur Ross, said in April that Americans need to “absorb a little bit of pain” to get better trade deals that will help the US economy. Well, the pain is arriving. What Americans really need to do is tolerate the pain longer than our trade-war foes, hoping they blink first.
The stock market has been flat this year, which is odd given that the Trump tax cuts signed in 2017 have sent corporate profits soaring. Business leaders cite Trump-style protectionism as one of their top concerns, and market selloffs have typically followed Trump’s tariff announcements this year. Many investors view Trump’s tariffs as temporary cudgels meant to establish leverage he can use for negotiating better trade deals, but they are starting to look more like long-term policies that could weigh down markets indefinitely.
There’s also been blowback to Trump’s protectionism in farm states crucial to the outcome of the US midterm elections, including Iowa, Kansas, Missouri and North Dakota, as farmers discover new barriers to selling their products overseas. Does Trump care? Is there a master plan for ironing this all out by November? Increasingly, it seems like there is not. 70s Man wants his tariffs, and more US steel on the street. The rest of the economy can wait.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman