Trade Wars and Diminished Credibility
The U.S. remains in a precarious economic situation, as does the world, and that means Trump's trade war and nationalism, coupled with bank deregulation, could inflict more risk on depleted economies.
As Jonathan Swift once noted: "There is nothing constant in this world but inconsistency."
That's the operative motto for all things Trump, one that makes analyzing the gap between what he thinks and what he tweets much easier. Along those lines, my former boss from my Goldman Sachs days--Gary Cohn--just resigned from his White House post as chief economic adviser to the Chaos Producer in Chief. This was ostensibly in protest against the president's announcement about imposing steel and aluminum tariffs. The next day, Trump signed the order sealing that deal, citing his actions as a "matter of necessity for our security."
Along the way, he said there would be no exemptions to the tariffs, then said there would be--for Canada and Mexico. Trump glowed in the light of his new-found power grab over trade agreements, leaving himself room to decide which countries would be "in" and "out" with respect to these and other tariffs in the future. And that was the week that was in Trump World.
The timing of Cohn's departure certainly put a wrench in his plans to convene executives dependent on steel and present their case against steel tariffs to Trump. Instead, Trump signed the tariffs order flanked by steel and aluminum workers supporting it. Speaking of steel, Cohn's nerves were seemingly made of that metal. At Goldman, he was the man who regularly waded through deals without losing his cool (unlike Trump). On 9/11, I witnessed him directing traders to keep trading oil as shreds of debris and billows of smoke engulfed the windows of the Goldman trading floor, only a few blocks away from the World Trade Center.
He became president (or number two) at Goldman, continually handling the less "cool" behavior of chairman and CEO Lloyd Blankfein, who remained above him in the pecking order for decades. Cohn commanded daily activities at Goldman that led to the firm's creation of shady financial instruments that were later at the core of the financial crisis. Under Cohn, Goldman was bailed out by U.S. taxpayers. The firm morphed, for government subsidy purposes, into a bank holding company, though it handled scant deposits from regular people. It did this to retain access to Federal Reserve support, as it has done, over the past decade. Cohn was also at Goldman when it reached a $5 billion settlement with the Department of Justice over its consistent misconduct regarding mortgage-related securities from 2005 to 2007.
That type of conflict-meets-crisis readied him for his government service. When Cohn came up against Trump, the president's flavor-of-the-minute trade policy hawk, Peter Navarro, met "Globalist Gary" head on. Then Cohn's Trump administration career was over.
The financial news media didn't take Cohn's departure well. Past transgressions forgotten completely, it considered Cohn, one of the few adults in the room, another Trump appointee biting the dust, pointing to what we already know: Inconsistency is the only constant in this White House.
When Trump added imported steel and aluminum to his list of already announced tariffs for solar panels and washing machines, members of his own party joined the world in expressing their disapproval. Many business sectors reliant on raw steel expressed fears that the tariffs would ultimately lead to major job losses, not gains, throughout that U.S. economy. Though the action invoked Section 232 of the 1962 Trade Expansion Act, the rest of the world knows that imported steel costs don't represent security risks, whereas the alienation of allies actually does.
As European Commission President Jean-Claude Juncker said: "We strongly regret this step, which appears to represent a blatant intervention to protect U.S. domestic industry and not to be based on any national security justification." He vowed that Europe would retaliate.
There were three sets of tariffs proposed by the Commerce Department, run by billionaire Wilbur Ross, and the latest, a 25 percent tariff on steel and 10 percent tariff on aluminum imports, are the harshest so far. For the president to circumvent Congress on tariffs, it must allegedly alleviate what would otherwise be a national security risk. That's just the loophole Trump used to ostensibly deliver on his campaign promises to American steelworkers. The problem is that the tariffs could wind up hurting those and other workers, as well as American consumers, instead. It would also add fuel to the fire in an already existing trade war.
Why is it already existing? Because Trump's entire isolationist posture and dogma have already caused U.S. allies and adversaries to seek tighter relationships with each other, from a currency and trade agreement perspective. The latest tariffs are another element on the path away from diplomacy (which could be better used to create agreements that truly benefit workers on all sides of our borders) and toward the street-yard bullying tactics Trump adheres to.
Reactions from around the world were of anger. China's foreign ministry called the tariffs "unreasonable and excessive" and, in true trade war style, promised that Beijing "will take necessary measures to safeguard its legitimate rights and interests."
Our friend to the north, Canada, one of the biggest sources of steel for the U.S., and one of biggest buyers of American steel, was equally incensed. Foreign Affairs Minister Chrystia Freeland said tariffs on Canadian steel and aluminum would be "absolutely unacceptable."
Even if Trump meant well (OK, a really big IF), his lack of diplomacy will ultimately render products the U.S. must import more expensive. As for American steel, any money made on extra tariffs will be lost on a reduced pool of buyers for our exported products. Domestic consumers ranging from home to bridge builders will inevitably face higher raw steel prices as a result.
Tariff Timing and Mexico's Stance Affecting NAFTA Talks
Before Trump decided to levy the tariffs, conversations between the U.S. and its NAFTA partners, Mexico and Canada, were coming along, not perfectly, but well enough. Then, the subject of the border wall resurfaced during a phone conversation between Trump and Mexican President Enrique Pena Nieto. That stalemate continues. Pena Nieto reiterated that Mexico won't pay for the wall. Trump "insisted that it would." According to The Washington Post, an involved Mexican official said that the entire conversation sparked Trump's temper. Surprise, surprise. Trump's ongoing temper tantrums are a real chip at the wall of international diplomacy.
It was following that heated discourse (after which Pena Nieto canceled his trip to the U.S., the second time he has done so due to the wall dispute), Trump declared he would impose the tariffs.
Whether a negotiation technique, or a campaign promise confirmed to his base, Trump initially implied that the tariffs were aimed at China (from which the U.S. imports less than 6 percent of its steel). But they hurt Canada the most. Canada provides 16 percent of U.S. imported steel. Brazil and South Korea rank second and third. China isn't even one of America's top 10 suppliers. Worse for Canada, 75 percent of our northern friend's total steel exports go to the U.S. The tariff would cripple one of Canada's leading exports while we are trying to negotiate the "best" NAFTA deal with them.
But that's exactly what Trump wants. By dangling financial threats and then taking them away, he elevates himself to being more of a dictator, and less of a leader, of the country's trade agenda. On Monday, he tweeted that he might consider dropping the tariff on Canada and Mexico if they played ball with him on the new NAFTA agreement. Trump's notion of reciprocity at that time meant Mexico paying for a wall and Canada "treating our farmers better." Navarro, director of the White House National Trade Council, had said something different earlier that morning, but the mismatch between Trump's tweets and people trying to do their jobs in perpetual guess mode as to his decision is par for the course.
All manner of diverse voices called out the tariffs. Goldman Sachs noted that "import tariffs make the U.S. less competitive by raising the prices of raw materials."
In Hamburg, Juncker responded to Trump's announcement with: "We can also do stupid." He vowed to fight back against Trump's tariffs, noting, "This is basically a stupid process, the fact that we have to do this. But we have to do it. We will now impose tariffs on motorcycles, Harley Davidson, on blue jeans, Levis, on bourbon. We can also do stupid. We also have to be this stupid."
Trump retorted with an uppercut to the jaw. "If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S.," he tweeted on Saturday. "They make it impossible for our cars (and more) to sell there. Big trade imbalance!"
Perhaps, just perhaps, competition for stupid isn't in the interest of the U.S., other countries, or the workers and citizens of the world. Destroying U.S. credibility only reduces the desire of other countries to buy from the U.S., or to negotiate better terms for U.S. consumers or workers, and instead, trade more with each other.
Trade War Casualties
It's not rocket science. If it costs more to import steel, either that cost will be passed on to the end user of steel-made products and to middlemen that build things using steel, or U.S. steel manufacturers will step up to the demand that comes from less imported steel.
The part of U.S. industry that uses steel is far larger than that which supplies steel. The ratio is more than 6.5 million workers to about 140,000 in the steel industry itself. And sure, as billionaire U.S. Secretary of Commerce Wilbur Ross pointed out, if a Campbell's soup can uses 2.6 cents worth of steel, and if that steel cost rises by 25 percent, it adds only an extra six-tenths of one cent to the can's price.
But that math doesn't account for whether American companies can accommodate extra domestic steel demand, or whether they will also now raise steel prices--because they can. The U.S. has been behind in infrastructure surrounding the steel industry, one of the reasons U.S. steel mills have been at over, not under, capacity. Renovating mills would enable domestic steel producers to produce more steel for domestic use than raising tariffs on importing steel would.
When the Bush steel tariff was in effect in 2002, 200,000 Americans in industries requiring steel lost their jobs because of higher steel prices, versus 187,500 workers working in the steel industry. The reality is that there needs to be better infrastructure.
The Trade Deficit
Trump's use of tariffs as a means to control trade deficits comes after his first year in office, during which the overall U.S. trade deficit widened 12.1 percent to $566 billion, its highest level since the 2008 financial crisis. Exports rose 5.5 percent to $2.33 trillion, while imports climbed 6.7 percent to a record $2.9 trillion. The trade gap with China increased 8.1 percent to a record $375.2 billion, and the gap with Mexico rose to $71.1 billion, the second highest on record.
According to the Department of Commerce's International Trade Administration, the U.S. is the world's largest steel importer, with U.S. imports representing about 8 percent of all steel imported globally. Part of the reason for that is not just the price of steel, but the ability of U.S. steel companies to produce it in the U.S. The top eight countries that export steel to the U.S. provide about 1 million metric tons each and make up 75 percent of U.S. steel imports. Canada, Brazil and Mexico send more than a third of their total steel exports to the U.S.
Treasury Secretary Steven Mnuchin tried to assuage fears of global trade wars at a congressional committee hearing, saying, "We are not looking to get into trade wars." He added that he was "supportive" of imposing the duties, thereby contradicting himself, taking a page out of Trump's book of bipolarity and reducing the legitimacy of anything the U.S. government says or does.
House Speaker Paul Ryan has also expressed repeated concerns about a trade war. Yet our internal dramas just serve to alienate us from the world, not obtain better overall "deals," because we are doing so from a position of increasing weakness and erratic White House behavior.
1920s Isolationism and Tariffs
U.S. history during an equally isolationist and deregulatory period shows that alienating the world doesn't help the U.S.--or the world. The Emergency Tariff Act, signed in May 1921, increased import taxes on wheat, sugar, meat, wool and other agricultural products.
The Fordney-McCumber Tariff Act, signed in September 1922, raised tariffs and extended them to industrial goods. The tariffs did encourage Americans to buy American goods. However, they did not help U.S. exports. Other countries retaliated by introducing tariffs of their own, so U.S. exports became more expensive and less popular.
In 1930, following the crash of 1929, President Hoover signed the Smoot-Hawley Tariff Act, against, raising already high tariffs on more than 20,000 imported goods to as much as 60 percent. That set off a global trade war, causing more trading partner retaliation, and a 66 percent drop in global trade between 1929 and 1934 that deepened the Great Depression. To lower the high tariffs, President Roosevelt passed the Reciprocal Trade Agreements Act in 1934.
Why Mexico Matters
Meanwhile, the seventh round of NAFTA talks between Mexico, Canada and the U.S. finished in Mexico City this week, three weeks before Mexico's' campaign season begins on March 30. Jared Kushner flew to Mexico City, having lost his security clearance and thus ability to negotiate world peace in the Middle East. Whether he had anything to do with it or not, the next day, Trump did relent, and agree to exempt Mexico and Canada from tariffs. That said, he could easily re-impose them if talk about a wall or other conversation goes against his demands.
A trade war is about more than prices in and prices out. It's about considering how those prices impact real people and jobs. It's about considering multiple trade and diplomatic relationships--not just between other countries and the U.S., but among those countries with each other.
Trump's supporters may believe that drawing a line in the sand against China that impacts Canada is good for American jobs, but the devil is in the details, and details are not Trump's forte. The reality is that America is losing its position on the world stage as a country that shows consistency in any capacity. These tariffs will inspire better trade relationships among other countries, something Trump's isolationist stance has already put in motion. They will diminish U.S. credibility, the lack of which is a product Trump has coined as his main export.
In the 1930s, U.S.-initiated trade wars contributed to a global Great Depression, one factor that lead to World War II. This time around, the rest of the world is more likely to work together and less with the U.S., not quake in economic fear of U.S. retaliation. This is clear and evidenced by the recent agreement between Japan and the EU, and the Regional Comprehensive Economic Partnership, in which Japan and China are key participants, their historical differences set aside, in efforts to forge non-U.S. trade relationships.
The U.S. remains in a precarious economic situation, as does the world, and that means Trump's trade war and nationalism, coupled with bank deregulation, could inflict more risk on depleted economies. That path would be a truly disastrous one for the U.S.