Tariffs

So the big question is: will it work? Will Trump’s protectionist policies, announced with some fanfare at a Rose Garden event at the White House yesterday, increase American prosperity? Or will they harm the economy?  Opinion on that matter is sharply divided. In one corner we have the free traders. They are wringing their hands and warning about higher prices, disruption of international trade and a trade war no one can win.  In the other corner are – what to call them? Most are not “anti-free traders” or “economic protectionists” (though some are).  Let’s call them “fair traders.” They like the idea of free trade – in theory. What they don’t like is the ethic of “free trade for thee but not for me.

The classical defense of free trade, the one found in Econ 101 textbooks and Ricardo’s comparative advantage model, goes something like this: countries should specialize in what they can produce most efficiently, export the surplus and import the rest. Trade allows global output to increase, everyone gets richer and any government interference – like tariffs or subsidies – just gums up the works. But that’s not the world we live in. David Ricardo, the early 19th-century British economist who developed the theory of comparative advantage, illustrated it with a now-famous example: even though Portugal could produce both wine and cloth more efficiently than England, both countries would benefit if Portugal specialized in wine and England in cloth, then traded.

The President can’t stop talking about his favorite word – tariffs – although this week his comments are having a new effect. Rather than plummeting, the stock market is showing signs of life – climbing by more than 1 percent – on the news that Donald Trump’s plans for “reciprocal” tariff seemed to have been scaled back significantly.  For weeks the President has been suggesting that come April 2, trade retribution would really kick in: any country that has an “unfair” trading partnership with the United States (Trump was even thinking of extending this to taxes like VAT) would see an equal import tariff imposed on the country.

The stock market, traditionally a leading indicator, entered correction territory last week. But does that indicate that a recession is coming? Well, it’s an old saying on Wall Street that the market has predicted ten of the last three recessions. Markets hate uncertainty, and no one knows how President Trump’s efforts to use American tariffs to force our trading partners to lower theirs will turn out. But foreign trade is increasingly important to all countries, so it’s likely that, after some political Sturm und Drang, deals will be struck and international trade will continue the strongly upward path it has been on since the end of World War Two. By definition, a recession is two consecutive quarters of contraction.

Could it be that Donald Trump actually wants a bear market now? At some point, one was bound to happen on his watch — after all, US equities weren’t going to keep up their stunning gains from the past two years for the rest of his term. A market correction was inevitable, and it seems we’ve already seen that, as the S&P 500 dipped into correction territory this week. And a bear market was almost certainly coming, given that there have been 27 of them in the S&P index since 1928. Hartford Funds provides a good summary here, showing that the average decline in a bear market is 35 percent, and they typically last 9.6 months. By contrast, the average bull market lasts 2.6 years, with prices rising 110 percent. Overall, bear markets occur about every 3.

President Donald Trump has set Saturday as the deadline to impose 25 percent tariffs on Canadian and Mexican imports. From the Oval Office earlier this week, Trump explained that the move aims to push the US’s neighbors to take swift action to curtail illegal immigration and fentanyl, as well as to address growing trade deficits. The tariffs may or may not include oil, with Trump saying Thursday that determinations were still being made. Following Trump’s tariff feud with Colombian president Gustavo Petro Sunday, with the Trump forcing his Colombian counterpart to welcome deportees, his latest move signifies an expansion of his revamped “FAFO” foreign policy.