Trump tariff hysteria once again is spreading across the land, as the Trump administration doubles down on its threat to impose additional tariffs.
These are coming after tariffs already imposed earlier this year on a number of countries including Canada, Mexico, China, the European Union, Australia, Britain, and several others.
Every time the Trump administration mentions the word tariffs, the media seemingly goes into a frenzy – always quick to highlight the historical disastrous effects of tariffs that have led to trade wars in the past.
Now it seems that most economists understand that tariffs are not conducive to strong international trade, and therefore can restrict economic growth for all countries involved on both sides of the tariff.
The media talking heads and the so-called “experts” trotted out by the media will prattle on about the destructive effects of tariffs and how the last thing anyone needs now is a trade war.
So it’s fascinating that all the experts out there agree that tariffs are destructive and almost everybody understands that, except for the Trump administration. In particular, Donald Trump does not apparently understand that tariffs are not helpful in any way whatsoever.
So what gives? Why is he sending us into an economic spiral that by some accounts will rival the great depression?
Well the truth is, of course, that Trump understands the pros and cons of tariffs probably better than most of the so-called “experts”.
Moreover, the major point ignored by the experts and the media (I think on purpose because it doesn’t advance their agenda) is that Trump is simply using tariffs as a negotiating chip.
It’s highly likely that he has no intention of imposing tariffs on a long-term basis. What he is doing is highlighting the unfair trade practices that have been in place for year, to the disadvantage of the United States, its economy, and its workforce.
The experts that rail against tariffs somehow assume that this disadvantage does not exist – they completely ignore it and of course they have no inclination to do anything about.
But not Trump.
He is determined to correct these unfair practices through tough negotiations with American trading partners, and has a few aces up his sleeve.
Trump has the leverage, another point the experts in media ignore. What leverage is that? Well, the United States is still the biggest economy in the world – and anyone who wants to engage in a tariff trade war with United States is going to lose, because they absolutely depend on access to the US market for their economic well-being.
He knows that and will use it as leverage to, after years of neglect, negotiate fair and equitable trade practices country by country. Thereafter, all talk of tariffs will have been forgotten.
But let’s look at a few facts on what tariffs have actually been imposed or are about to go into effect.
Earlier this year, the Trump administration imposed tariffs on solar panels and washing machines. Of course, the media went berserk.
The impact of those tariffs is less than 1/10 of 1% of the US economy, not a big deal in the scheme of things, but it did open the door to more tariffs.
So more recently tariffs have been imposed on steel and aluminum imports, 25% on steel and 10% on aluminum, which impacts mostly Canada, Mexico, the European Union, Brazil, and South Korea.
It didn’t really impact China, so why would we want to offend our allies with this action? Well, there’s the small matter of national security – if the US steel and aluminum industry collapses then the US would be in the hands of other countries (allied or not) for its military steel and aluminum needs.
That’s not a good situation, especially when the trade practices are unfair to the United States.
If you add up the solar panels, washing machines, steel, and aluminum imports to the United States, you’re looking at about 4.1% of total US imports – a relatively small part of the US economy.
How China Steals U.S. Intellectual Property
Now let’s take a look at China’s economy, which is a special case – different from all other trading partners. Why? Because of China’s reliance on stealing US intellectual property.
Anyone who’s done business with China knows that this is indeed a fact, all you have to do is look at the rule that the Chinese government imposes on any American company that wants to do business in China.
That rule is that an American company working in China must partner with a Chinese company as the minority partner. This has the effect of disclosing American technology to the majority owner Chinese company.
This practice has been going on for years, and the Trump administration is determined to stop it. China, through this action, is circumventing US patent and copyright law. Again, the media experts, and talking heads pretend that this is not an issue.
All they talk about his how terrible these tariffs are, and that we cannot afford to start a trade war with our biggest trading partner China.
Nevertheless the Trump administration has imposed about $50 billion in tariffs on Chinese goods. Why?
Primarily due to Chinese theft of US intellectual property that I just described. Trump firmly believes that in so doing the United States will be “a much stronger, much richer nation.” And of course China has stated it will retaliate by imposing a like value of tariffs on US imports to China, including agricultural products such as soybeans.
Now in addition to the tariffs, currency manipulation, and other unfair trade practices, China also has long-standing trade barriers that make it very difficult (if not impossible) to import certain US products into China.
It seems that China still has not gotten the message, so in response Trump threatened to apply another $200 billion in tariffs to motivate China to get serious at the negotiating table.
This puts Trump in the driver’s seat, because China’s deficit with United States is about $350 billion. China has everything to lose and nothing to gain in a tariff trade war with an indebted country, and Trump knows that.
In my opinion, this will allow him to achieve his goal of fair trade practices with China and other countries. He will force the Chinese to open their markets to more US produced goods, and as a result he will end China’s unfair trade practices.
But the so-called experts holler that the Trump administration is going to trigger a depression, or at least a severe economic recession like what happened back when the US government passed the Smoot-Hawley act of 1930 – even though the economic conditions and the world itself are in a far different place than back in the 1930s.
The Smoot-Hawley Act of 1930
The stock market had already crashed in 1929 when Smoot-Hawley tariffs were enacted by Congress, and the Smoot-Hawley tariffs were far more comprehensive and intended to be long-term than tariffs proposed by Trump.
The Smoot-Hawley tariffs did not cause the depression, although they may have prolonged it, and were quickly reduced significantly through negotiation after just a couple of years.
The Smoot-Hawley tariffs existed in an environment where the economies of the world were very weak, versus today were the economies of the world are very strong. There really is no comparison.
And the key point again is that the Trump tariffs are simply a negotiating ploy, nothing more. That doesn’t mean the stock market doesn’t get spooked every time Trump talks about tariffs, with the Dow plunging a couple hundred points in a single day.
But that’s about it – a single day (maybe two) and then the market snaps right back. In fact, we all know by now that since Trump’s election the bull market has gone up almost nonstopthrough early this year and is now in a consolidation phase.
Given strong corporate earnings and economic growth now pushing 3 to 4%, the market will probably break out of this consolidation to new highs in another leg up for the bull.
That’s quite a contrast to the 1929 stock market crash and the Smoot-Hawley act.
Why has the market responded so favorably to Donald Trump’s presidency? Because he’s unleashed the economic power of the United States through responsible deregulation and business favorable tax reduction. This helps to drive the economy and provide jobs, something many politicians don’t understand, and the insistence on fair trade practices.
So while the so-called experts worry incessantly about Trump’s policies, the stock market is showing that they are worrying needlessly. On the contrary, Trump policies have and will continue to be extremely constructive to business and by extension to the American people through continued strong economic growth, job creation, and wage growth aided by fair international trade practices
