A Rational Look At US Trade Policy

Dear Investors,

The big news lately has been Trump’s announcement of a 25% tariff on imported steel and 10% tariff on aluminum. The market took the announcement as a shock (dropping a bit over 1% for the day) although the Trump Administration had been talking about steel and aluminum tariffs for almost a year. The announcement raised fears that Trump was going to start a trade war. The fear is that other countries will retaliate by imposing tariffs on US goods they import, then Trump will retaliate with more tariffs, and we’ll have a tit-for-tat escalating tariff and trade war. Here are three points to remember about tariffs and this new market fear.

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Trade War
geralt / Pixabay

First, for some reason, enacting steel (and other) tariffs has been en vogue among presidents. Although the steel industry employs only about 140,000 people compared to the steel-consuming industries that employ more than 6,000,000 people, the industry side with fewer workers is viewed as needing help. George W. Bush and Obama both enacted steel tariffs. The Obama tariffs were enacted to target specific types of Chinese imports, such as Chinese tires in 2011. Prior to that, Clinton and Reagan also enacted tariffs on various imports, although Clinton’s tariffs were smaller and more targeted. The point is almost every administration makes some sort of ham-fisted attempt at protecting domestic industries via tariffs. The tariffs usually don’t work well and don’t last long. Bush’s steel tariffs lasted only 20 months, for example. In and of themselves, the newly announced tariffs are small and largely meaningless to the domestic and global economy.

Second, tariffs are usually regarded with hysterics by the media and market commentators. It’s difficult to separate cause and effect when it comes to trade wars. Throughout history, most trade wars have occurred during periods of recession or depression. When faced with a shrinking economy and job losses, governments often turn to protectionist measures to try to help protect domestic industries. Thus, any time tariffs are brought up, you’ll see scary charts showing how the stock market drops when large tariffs are enacted. Never mind that many times the market was already falling, and the tariffs were enacted in the midst of a recession or depression. It’s also worth noting that the media and most conventional economists are staunchly pro-trade with few exceptions.

While I’m of the opinion that the current tariffs are pretty stupid (protecting an industry with only 140,000 people at the expense of industries with 6,000,000 employees doesn’t make much sense), I do not think that all free trade is good all the time. There are pros and cons that need to be carefully weighed. But, the media tends to overreact and there is rarely any nuance.
Finally, we believe it is going to be difficult for Trump to unilaterally enact a trade war from the executive office. While it is true that the executive branch has wide ranging authority when it comes to tariffs, a lot of that authority comes into play only in certain circumstances and only under certain justifications.

For instance, Trump’s steel and aluminum tariffs were enacted using national security justifications (despite objections from the Dept. of Defense). Trump also has a habit of taking to Twitter and undercutting the rationale and legal basis for his own policies. Just as his tweets undercut his travel bans, so now are his tweets on tariffs. For example, he recently tweeted that steel and aluminum tariffs on Mexico and Canada might go away if NAFTA renegotiations were favorable; thus, he has undermined the “national security” justification.

It is going to be exceedingly difficult for the administration to argue further, escalating tariffs on other goods under the same national security rationale even if Trump stays off Twitter. For example, this past weekend Trump tweeted about increasing tariffs on imported European cars. How on earth would the administration be able to justify that importing civilian passenger vehicles is somehow a national security issue?

Congress can also easily override anything Trump does by passing legislation that undoes the tariffs or removes some of the executive branch’s previous tariff authority. Considering the amount of lobbying and corporate money in Washington, we don’t see how the global business community, which is almost all united against tariffs, would do nothing. We are already seeing Congressional pushback against the tariffs from powerful political figures like Speaker Ryan and Kevin Brady, Chairman of the Ways and Means Committee. In fact, look at the recently passed tax bill to see how powerful corporate interests are deeply entrenched in Washington. The bulk of the tax cuts go to corporations, not individuals, and the individual tax cuts expire while the corporate cuts are permanent. If Congress and corporate America can pass a huge comprehensive bill like that, we see no reason why they will not stop a trade war.

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Article by Ben Strubel, Strubel Investment Management