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This week in Trumponomics: A great time for a trade war

Rick Newman
Senior Columnist

The Trump economy got an important endorsement this week. “The US economy is in great shape,” Federal Reserve Chair Jay Powell said at the end of the central bank’s latest policymaking session. “Most people who want to find jobs are finding them.”

Economic news has been terrific lately, with the unemployment rate dropping to 3.8% and many economists predicting growth of 4% of more during the second quarter. It might seem like an excellent time for President Trump to sit back, let capitalism do what it’s good at, and take credit for it all, whether deserved or not.

But that’s not what he’s doing. Trump is persisting with protectionist trade policies that continually threaten the strength of the underlying economy. Trump is now going ahead with new tariffs on roughly $50 billion worth of Chinese imports, which will raise the cost of more than 800 products purchased by businesses and consumers. This follows new Trump tariffs on about $40 billion worth of steel and aluminum imports. So the Trump tariffs now account for new taxes on about $90 billion worth of imports.

Several trade partners have detailed plans to retaliate with similar tariffs on US imports, and China vowed to do the same in response to Trump’s latest move. Economists generally dislike tariffs because they raise costs, disrupt efficiency and give the government too much control over production. Since Trump’s tariffs weaken an otherwise strong economy, our Trump-o-meter this week reads MEDIOCRE, our equivalent of a C.

Source: Yahoo Finance

Trump’s trade agenda is the least popular part of his economic plan, with economists warning of a recession were Trump to implement it in full. Trump is mulling other trade moves that would be more disruptive than the ones he has already announced, such as killing the North American Free Trade Agreement and slapping tariffs of up to 25% on 8 million imported automobiles Americans buy every year.

Markets wavered on trade concerns earlier this year, but they’ve become more sanguine of late, as investors apparently conclude Trump’s tariffs won’t add up to all that much. Trade accounts for $5.3 trillion of economic activity in the United States, and higher tariffs on a couple hundred billion of that, moving in both directions, won’t sink the economy. It will harm those directly affected, but Trump will be able to point to other folks helped by tariffs, providing the America First narrative he relies upon.

From Trump’s perspective, the strong economy may be giving him maneuvering room on trade that he wouldn’t have otherwise. If job growth were milder or profits weaker, markets might be reacting much more negatively to Trump’s tariffs, essentially making it politically impossible to implement them. And Trump would have a much harder time arguing that his critics are Chicken Littles if the sky really did seem to be falling on account of his trade policies. If you’re going to start a trade war, now is probably as good a time as any.

But market complacency toward protectionism may not last. Investors seem to be hoping for one last sprint in a bull market for stocks that dates to 2009. Economists think a recession could materialize within the next two years, with protectionism contributing to a downturn. But for now, we’re in the heating-up phase that precedes recessions, with more gains in risky assets possible and maybe likely. With profits beckoning, who has time to worry about a trade war?

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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

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