Market pundits were quick to point out that last week’s stock market turbulence was the result of higher interest rates. But that’s not the whole story… or even most of it.
President Trump’s protectionist policies threaten the stock market outlook by undermining the favorable effects of his tax cuts and deregulation.
After all, tariffs are just the opposite: higher taxes and more regulation. His bad trade policies are counteracting his good domestic ones.
Supporters of freer trade and limited government should recoil at this.
After all, government doesn’t get any bigger or bossier than when it picks economic winners and losers by deciding who qualifies for tariff relief and who doesn’t, or when it tells consumers what they can buy, in what quantities and at what price.
(If Obama had tried this, Republicans would have rightly lost their minds.)
Capitalism devolves into crapitalism when businesspeople start lobbying their elected representatives for trade relief and protection against foreign competition.
You might think President Trump scored a big win when Canada joined the U.S. and Mexico in a revised trade agreement to replace NAFTA.
But that was small beer. The improvements were incremental at best.
The rally that followed the deal’s announcement was primarily relief that the impasse was overcome. (Even the conservative Wall Street Journal said, “The new trade deal could have been worse given Mr. Trump’s protectionist beliefs, but that’s about the best we can say about it.”)
President Trump doesn’t seem to understand that a trade deficit is not necessarily a bad thing. (And unlike a budget deficit, doesn’t have to be repaid.)
I run a trade deficit with my golf pro, for instance. I regularly buy golf balls and rent carts from him – and he never buys investment letters from me.
It doesn’t matter.
Various countries have different competitive advantages. The U.S., for instance, has a knowledge-based economy that is particularly good at innovation and design.
China, on the other hand, has plenty of cheap labor.
In a new special on Netflix, comedian Dave Chappelle quips, “Donald Trump says he’s gonna bring back those manufacturing jobs from China. Why? So an iPhone can cost $9,000?… I want to wear Nikes, not make ’em.”
There’s more than a little truth in that jest.
Not all jobs are equally desirable. We risk saving low-paying jobs at the cost of destroying far better ones.
Many of the products subject to tariffs don’t need to be made here. And, as Chappelle rightly points out, would get prohibitively expensive if they were.
So far President Trump has delivered a largely incoherent trade message.
He told European trade negotiators he wanted to “work toward zero tariffs, zero non-tariff barriers and zero subsidies on non-auto industrial goods.”
That sounded great.
But when EU Trade Commissioner Cecilia Malmström said the EU is “willing to bring down even our car tariffs to zero, all tariffs to zero, if the U.S. does the same,” Trump balked.
Why? Because his goal isn’t the removal of trade barriers. He wants to protect U.S. businesses from foreign competition. (Which, in turn, encourages other countries to protect their local companies from U.S. exports.)
Who loses in that scenario? American consumers mainly, who pay more for both domestic and imported goods while simultaneously finding a diminished market for U.S. exports thanks to retaliatory tariffs overseas.
There are signs that Trump is simply out of his depth. He recently said, “China is now paying us billions of dollars in tariffs.”
(Come again? That ranks up there with his remark during the 2016 election that judges “sign bills.”)
For the record, U.S. tariffs are collected at the U.S. border and paid for by U.S. citizens. It is you – not the Chinese government or its people – who gets to pick up the tab for these policies.
I’m not suggesting that China is playing fair in its trade relationships.
That country is protecting domestic companies (like Trump), stealing American technology and bullying U.S. companies.
We shouldn’t stand for that.
But rather than getting into a protracted and damaging trade war, the U.S. and similarly mistreated countries should have China thrown out of the World Trade Organization.
As it stands – with the U.S. threatening 25% tariffs on all Chinese imports (thereby disrupting supply lines, raising prices and diminishing U.S. exports) – China is likely to move unpredictably and disruptively.
That’s not likely to be good for our economy. Or the U.S. stock market.