Trump`s simple Tweet “I am a Tariff Man” send the USD 30 trillion stock market into a tailspin last week. This is hardly something to brag about when Trump wants to be measured on his achievements by the level of the stock market. Trump’s comments and actions are very dangerous, too. Why? simply look at history!
On June 17, 1930, the U.S. government enacted the infamous Smoot-Hawley Tariff Act. It raised U.S. tariffs to record levels on more than 20,000 imported goods. This populist legislation sounded appealing at the time. America First! But it helped create and worsen the Great Depression.
Foreign governments retaliated by shutting out U.S. exports. International trade ground to a halt. The world economy contracted 25%. And a quarter of Americans were thrown out of work and into bread lines.
This is something we want to emulate? Earlier this year, President Trump said trade wars are “great and easy to win.” Not so. Politicians everywhere want to benefit their constituents and would prefer not to look like chumps. That makes trade concessions difficult.
Free trade, the voluntary exchange of goods and services without restrictions, quotas or tariffs is the ideal.
The problem is Trump doesn’t view trade as a win-win, as all voluntary exchange is. Instead he sees it as an adversarial relationship with winners and losers.
That became clear when the European Union said it would accept zero tariffs on all products and services exchanged with the U.S. and Trump responded, “That’s not good enough.” That tells you all you need to know about Trump’s true thoughts on free trade.
The self-proclaimed Tariff Man is undermining the stock market in two major ways.
1. Trump doesn’t appreciate that foreign trade benefits the US far more than it costs us.
The United States is the world’s third-largest exporter. But we are also the world’s single biggest importer. Americans love Japanese electronics, European cars, French wines, Italian shoes, Swiss watches, Dutch chocolates and designer clothing made in China.
It sounds alarming when you hear that we buy more from the rest of the world than it buys from us. But a trade deficit isn’t a debt that must be repaid. Trump should focus on the budget deficit instead. That is a genuine threat to long-term prosperity.
2. Trump creates regular uncertainty.
Markets hate it, but he specializes in it. He thinks it keeps his opponents off balance. That’s undoubtedly true, but would-be supporters also wonder what the heck he’s really trying to do. His exaggerations, distortions and outright falsehoods keep investors in a near-constant state of confusion. That is not a good thing at all.
No one truly wants a trade war. No one benefits from one in the end. But Trump’s unclear objectives undermine the financial markets. That isn’t likely to end until formal agreements are reached with major trading partners.