Why Trump’s Tariffs Make Markets Panic

TRADERS and investors readily concede that President Trump is on terra firma when he accuses China of playing dirty on trade, stealing US intellectual property, dumping cheap products and manipulating its currency — and that something needs to be done about it. So why did the markets panic Thursday (down more than 700 points during the day) when the president announced $60 billion in new tariffs against China? For starters, this issue is a complex chess match, and investors are worried that Trump is itching for a street fight.

To be fair, there are plenty of non-trade explanations for a market dip, including sellers seeking to cash in on the market gains from the first year of this presidency.

Another factor is the Fed, which is on course to raise interest rates several times this year. Then there’s the Russian-collusion probe: Stocks fell even further the minute news broke that Trump’s personal lawyer in the probe announced he was resigning.

Still, the overriding worry among the investors I speak to is on trade, specifically whether the president understands enough about how much the US economy benefits from free markets to get tough on China without blowing up the beneficial aspects of global trade.

Thanks to the current trading regime, inflation is relatively tame. Capital flow (often from China) allows us to borrow cheaply, keeping interest rates low so businesses can borrow cheaply as well. Lowcost imports have hurt US manufacturing, but our relatively low unemployment rate is a testament to the resiliency of free markets: We import cheap raw materials to build cars and sell them overseas. High-tech companies have replaced the old rust belt behemoths because of the free flow of people and capital.

Yet as the stock market’s turbulence shows, nervousness about Trump is bleeding the share price of major companies that depend on trade for earnings growth and to employ people (most fall into this category).

One reason for optimism, though: The president just appointed avowed free-trader Larry Kudlow as his National Economic Council director.

As I’ve heard Kudlow point out on numerous occasions, the recent tariffs on steel and aluminum will hurt other trading partners and US manufacturers of everything from cars to beer kegs, who will be forced to cut costs (and lay off workers). A trade war could reverse all the potential economic gains spurred by Trump’s tax cuts and deregulation.

But many investors doubt Kudlow will have much stroke with the president over the ardent trade warriors on his economic team (Commerce Secretary Wilbur Ross and trade adviser Peter Navarro), with whom his instincts on trade align.

This is, after all, the same president who once blamed Detroit’s woes on the North American Free Trade Agreement (Trump was about two decades off on Detroit’s economic implosion) and who issued one of the most economically absurd rationales to Canadian Prime Minister Justin Trudeau as to why the US did, then didn’t, then did run a trade deficit with Canada. (For the record: The US has had a trade surplus in goods and services with Canada for the past two years.)

Navarro and Ross have made a compelling case to Trump about China’s out-of-control mercantilism. But history teaches us that the solution isn’t to use protectionism as a blunt instrument (see the failures of tariffs imposed by presidents Reagan, George W. Bush and Obama) because it impacts all our trading relationships, and ultimately damages US exports.

A better way is to get China to open up more of its markets (the country already buys plenty of our agricultural goods) to all our businesses through negotiation and by joining other nations to pressure Beijing. Yes, this is easier said than done — but given the fact that China isn’t going anywhere and that they also buy a lot our debt, we don’t have much choice other than to thread the needle on this one.

Which is so very un-Trump, who has been a blunt-force president for better and often for worse, particularly when it comes to trade — as the markets reminded us again on Thursday.

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