You know that moment at the end of action movies when the hero has triumphed over the villain, who’s been buried under a pile of rubble or burned beyond recognition or locked in a deep, deep vault from which he will never again see the light of day, and then the last shot shows his presumably-forever-closed eyes shooting open or his ragged claw emerging from the aforementioned pile of rubble, setting the stage for yet another donnybrook in an inevitable sequel?
Such a cliché. Totally predictable. So why were investors surprised when “Tariff Man” (a.k.a. the President of the United States) emerged from his hidey-hole this month?
We shouldn’t have been. Donald Trump has sufficiently displayed his addiction to tariffs as his main China policy lever, maybe his only China policy lever. In retrospect, an end to a months-long hiatus from talk of more tariffs on Chinese imports — a reprise during which markets reached record highs — was obvious. Raising the levy on US$200-billion worth of already-tariffed Chinese goods to 25 per cent from 10 per cent, and threatening to slap tariffs on the totality of Chinese imports to the U.S., well, maybe we should have seen it coming.
Investors are now forced to sit through the sequel of a desultory 2018: call it Trade Wars 2: The Revenge of Tariff Man. North American markets are off their highs; Asia and emerging markets are getting battered; Euro stocks are wobbling; and volatility, which had taken a breather, is back.
Just when you thought it was safe to go back into stocks…
The best case for markets is that this is a limited release, a short-run kind of thing. Even by Trumpian standards, his tweet reversing weeks of seeming détente with China seemed capricious. To the extent that Trump’s decision was made on a whim, he could just as easily change his mind tomorrow.
Also keep in mind that even as those higher taxes came into effect on May 10, Trump was tweeting that discussions with China on a deal were continuing “in a very congenial manner.” Maybe the tariff escalation is simply a negotiating ploy, putting pressure on the Chinese to get over the hump and agree to a deal.
Another maybe-optimistic sign: on Wednesday, CNBC reported that Trump had decided not to slap tariffs on foreign automobiles — yet — as trade talks with the European Union and Japan progress. (Officially, he has until Friday to make a call on foreign autos, which his commerce department has assessed as a national security threat; its findings have not been made public.)
But all this feels like looking for a needle of sanity in a haystack of madness. For all the hopeful hypotheses that Trump is using tariffs as negotiating levers or that Trump was just having a bad day and acting out, the evidence suggests he truly believes that tariffs are awesome.
That’s something someone can only really maintain if they don’t understand tariffs, which, clearly, Trump does not.
In a May 10 tweet, he said that they will “bring in FAR MORE wealth to our Country than even a phenomenal deal of a traditional kind,” with the extra super benefit that they are “much quicker & easier to do.”
One can concede the second point without accepting the first. It’s clear the trade war so far — including retaliatory tariffs from China and other nations the U.S. has targeted, like Canada — has been negative for America’s collective wealth.
One recent paper, published by the National Bureau of Economic Research, puts the loss to national income from the pre-May 10 tariffs at almost US$8 billion. That’s not very much in the grand scheme of things, but neither is it an economic plus. And that decline seems bound to get worse as higher and more tariffs are introduced, along with the requisite retaliation from China (and perhaps others).
Still, if jobs were being created and industries saved, you could make an argument in favour of tariffs. But consider those other tariffs that haven’t gone away, the ones the U.S. slapped on almost all steel imports, including from Canada, for dubious national security reasons.
According to an analysis last December by the Peterson Institute of International Economics, the U.S. steel industry — or, more specifically, U.S. steel companies — have benefited from Trump’s protectionism, boosting their 2018 pre-tax earnings by an estimated US$2.8 billion, yet U.S. steel-using firms saw their costs go up by US$5.6 billion. The researchers estimated 8,700 new steel jobs will have been created, but “for each new job, steel firms will earn $270,000 of additional pre-tax profits (and) steel users will pay an extra $650,000 for each job created.”
The analysis just emphasizes that tariffs, like any form of taxation, are only a redistribution of wealth, while also being selective, regressive and inefficient.
Trump likes to say the tariffs will pour hundreds of billions of dollars “directly to the Treasury of the U.S.” and that foreigners are paying them, but the truth is they comprise a tax on his own people. The vast bulk of tariff costs on imports so far in this trade war have been passed on through price increases to American consumers and companies. As the tariff regime expands, so will their inflationary impact and regressive nature.
Still, Tariff Man perseveres. “Tariffs will make our Country MUCH STRONGER, not weaker,” Trump tweeted on May 10. “Just sit back and watch!”
Get ready for another bad summer sequel.
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