The economic madness of Mr. Tariff Man
It is said that those whom the gods wish to destroy they first make mad.
Judging by President Trump’s recent decision to breathe new life into the world trade war despite the presidential election now being less than one year away, it would seem that the gods are conspiring to destroy him. This would especially appear to be the case considering that if there is one thing that can precipitate a U.S. economic recession next year, it is an escalation in the world trade war.
In its recent World Economic Outlook Report, the IMF took stock of the damage to the global economy wrought by the trade war. It noted that primary as a result of that war, the world economy has moved from a situation in 2018 in which 75 percent of the world’s economies were experiencing economic upswings to one today in which 90 percent of the world’s economies are experiencing economic slowdowns.
Until very recently, it seemed that President Trump was starting to grasp the damage that his trade wars were inflicting on the global economy. It also seemed that he grasped how interconnected the U.S. economy and financial markets are with those abroad. It further seemed that Trump appreciated the trade war risks to the U.S. economy in the run up to next year’s election.
Trump began back-peddling on his trade war rhetoric, and he took a very much softer line on China’s unfair trade practices. In particular, he delayed the threatened imposition of further import tariffs on China and opted instead for trying to negotiate a temporary trade truce that would carry him through next year’s election. He also delayed following through on his threat to impose a 25 percent import tariff on European and Japanese automobiles.
Trump’s more measured approach to trade policy clearly pleased the markets, as underlined by the U.S. stock market hitting all-time highs on a regular basis. But it seemed to have displeased the gods. This might explain why the gods have made Trump make yet another ill-considered lurch back towards a very much more restrictive trade policy.
The opening salvo in the new trade war was an early morning tweet this week from Trump that import tariffs would be re-imposed on Argentine and Brazilian aluminum and steel. The justification offered for those tariffs was that those two countries were purportedly manipulating their currencies to the detriment of U.S. farmers.
Never mind that the recent Argentine and Brazilian currency weakness was prompted by economic weakness at home and by the social unrest now sweeping through Latin America. Never mind too that the re-imposition of those tariffs is bound to weaken those economies, which will only heighten social unrest in that region.
Not satisfied with broadening his trade war to Latin America, Trump has now fired an opening shot across Europe’s bows. He has done so by threatening to impose a 100 percent import tariff on $2.4 billion in French luxury products. This has heightened fears in Europe that Trump might at some stage follow through on his threat to impose import tariffs on European automobiles.
Of yet greater concern for the world economic outlook has been Trump’s recent hardening of his line towards China. After actively seeking a phase-one trade deal with China, he is now saying that he is in no hurry to strike a deal before the 2020 election. This follows his being forced to sign a congressional bill in support of the Hong Kong protestors, which has soured U.S.-Chinese diplomatic relations.
A factor making Trump’s recent re-escalation of the trade war all the more difficult to understand is the failure of his America First policy to deliver its promised results. Not only has it had the effect of plunging the world economy into a synchronized slowdown. It has also failed to prevent a widening under Trump’s watch in the U.S. trade deficit by more than a third.
The last thing that the Trump administration can be accused of is its trade policy consistency. This gives cause for hope that Trump’s latest lurch towards increased protectionism will be short-lived. If that proves not to be the case, it will not only be Trump who will be paying a political price for his trade policy madness. It will also be the U.S. and global economies that will be paying a heavy price in terms of lost output and employment.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
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