DANGEROUS PRECEDENT SET FOR GLOBAL TRADE
History could portend worst-case scenario with Trump’s tariffs, Joe Chidley writes
It’s conventional wisdom: Markets hate uncertainty. But maybe, after almost 14 months of Donald Trump in the White House, they’re getting used to it.
Consider the see-saw reaction to the president’s recent tariff tantrum. Last week, he surprised almost everybody by announcing he was getting ready to impose a 25-per-cent tariff on imports of steel and a 10-per-cent levy on aluminum imports.
Followed by the requisite bluster about America getting screwed over by its trading partners, the announcement was short on details — those were supposed to come this week. But markets knew what it all meant, and they didn’t like it. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq all sold off by more than one per cent after Trump threw his trade grenade on Thursday. Here in Canada, which is the largest exporter of steel and aluminum to the U.S. and has, arguably, the most to lose from tariffs, the TSX fell, too.
But, well, you know, that was last week. This week? Not so much.
Establishment Republicans have come out to more or less gently urge Trump to do a rethink.
The man himself has held out a (droopy) olive branch to Canada and Mexico, saying that if they agree to a fair NAFTA (now under renegotiation, of course), he’ll give them a break. And so markets have breathed a sigh of relief, rebounding pretty much back to where they were before the threat of a global trade war reared its ugly head.
Honestly, I don’t see much reason for relief. Investors are clearly thinking that whatever eventually emerges from the White House will be a smaller, or more targeted, or otherwise more acceptable set of tariffs. But even if that is the outcome, it doesn’t augur well for the economy or the markets.
By now, enough has been written and said about Trump’s tariffs that the worst-case scenario is clear: the U.S. imposes levies, the rest of the world retaliates with its own, the U.S. responds, and so on in an escalating trade war that will do nobody any good (except, in the short term, the industries being protected). Trade stalls, hurting global economic growth. In the U.S., the dollar soars (maybe), imports implode, the cost of things goes up, maybe prompting more action from the Fed, and it all leads to recession. Which, you know, isn’t good for stocks.
Of course, this is theory. History provides rare and unreliable comparisons. The best might be the U.S. Smoot-Hawley Tariff Act of the 1930s, which probably exacerbated the Great Depression. But that was almost a century ago, and the world was in the grip of the aforementioned Depression. In the context, you can kind of see the justification for SmootHawley, despite the disastrous outcome. But now? The world is finally on a path to stronger growth and reflation. Who knows what the effect of a global trade war would be? And how would central banks, which are on a path toward normalization, respond? Slower growth might support easier policy; higher inflation might support the opposite. At the very least, we would have a lot more of that uncertainty markets supposedly hate.
I think it’s dangerous to assume the worst-case scenario won’t happen, but let’s say Trump ends up imposing something like the more targeted steel tariffs George W. Bush introduced in 2002. (Canada was exempt.) The S&P 500 shaved about 30 per cent of its value in the months that followed, and the U.S. dollar (against the theory) fell sharply along with Treasury yields, in part because of expectations that tariffs would hurt the economy more than they helped. Which turned out to be about right.
But again, that was a different time. The stock market was still unwinding the dot-com and telecom bubbles; unemployment was on its way to reaching an eight-year high. So what happens to a U.S. economy at or near full employment, as it is now? How does a stock market in maybe the last few months of a bull market respond? We just don’t know.
So there’s uncertainty. But there’s also the reality that the Trump tariffs, however limited they might end up being, will still have terrible implications for global trade.
Officially, his decision is based on a report from the Department of Commerce, which he ordered a few months ago to determine steel and aluminum imports to see whether they pose a threat to national security. The report, not surprisingly, concluded that indeed they do.
To get there, it had to apply a very broad interpretation of “national security” — basically, anything that “weakens the economic welfare of the United States” might be a threat.
This is dangerous precedent. The World Trade Organization gives wide licence to countries to invoke trade measures for national security reasons, but WTO members have rarely done so. That’s in large part because invoking national security would allow or encourage others to impose tariffs for the most specious of ostensible security reasons. It’s akin to nuclear realpolitik and the doctrine of mutually assured destruction: Once you use nukes, everybody can.
Well, Trump has hit the button, and in doing so, the U.S. will lose any remnant of moral suasion it still has on trade. If the world’s largest economy can trundle out a broadly defined national security justification for tariffs, what’s to stop a bad player from doing it, too?
The floodgates on bad trade policy are now wide open. The global economy, and the markets, will eventually pay the price.