President Donald Trump, armed with sweeping tax cuts and a handpicked Federal Reserve chief, confidently told the world in March 2018 that “trade wars are good, and easy to win.“
Trump, who has proudly called himself Tariff Man, suggested Tuesday that a trade agreement with China may not happen until after the 2020 election. That warning dashed hopes on Wall Street for imminent trade peace, driving the Dow 450 points, or 1.5%, lower.
And just this week Trump opened several new fronts in the global trade war. He vowed to lob tariffs on steel made in Brazil and Argentina. And he threatened tariffs of up to 100% on French cheese, handbags and champagne.
“No one is safe from Tariff Man,” Chris Krueger, managing director at the Cowen Washington Research Group, wrote in a note to clients.
Tariff Man’s return exposes the flawed trade logic at work here. It is impossible to fight trade wars, especially on multiple fronts, without harming the world’s interconnected economy.
“Trade wars are hard, and everybody loses,” said David Kelly, chief global strategist at JPMorgan Funds. “As many generals have noted over the centuries, it’s very difficult to fight a war on multiple fronts.”
It’s not just the direct cost of the tariffs, which act as a tax on consumers and businesses. The real pain is inflicted by the deep uncertainty over the timing, severity and even location of the trade war. It paralyzes business investment.
“It’s a pretty straightforward equation: More uncertainty means less economic growth and less hiring,” said Kelly, adding that the Trump administration “seems to be completely missing” that point.
NY Fed: Tariffs are paid by US firms, consumers
And yet the White House is now signaling that the US-China trade war might get worse before it gets better.
“In some ways, I think it’s better to wait for after the election, if you want to know the truth,” Trump told reporters in London on Tuesday.
US Commerce Secretary Wilbur Ross told CNBC that the US has more “ammunition” left against China. He warned that the December 15 tariffs on consumer-facing imports from China will take effect “unless there is some reason to postpone them.”
To be sure, the Trump administration is trying to address legitimate and serious problems with China’s trade practices.
There is a real cost to China’s alleged theft of corporate secrets and other nontrade barriers. And China likely wouldn’t be talking about beefing up its intellectual property protections if it weren’t for Trump’s tariffs.
Trump has argued that the cost of tariffs are paid by China, not the US. However, that would only be the case if Chinese companies sharply lowered their dollar prices–which they haven’t.
The New York Federal Reserve found in a report last month that import prices for goods from China haven’t budged much.
“The continued stability of import prices for goods from China means US firms and consumers have to pay the tariff tax,” the NY Fed economists wrote.
Manufacturing downturn worsens
Escalation of the trade war will only add to pain for America’s factories.
Hurt by weak global growth and the trade war, the US manufacturing industry contracted in November for the fourth month in a row, according to the Institute for Supply Management.
“If we’re going to go all in on tariffs, it’s going to have a negative effect on the economy,” said Art Hogan, chief market strategist at National Securities Corporation.
Trump has repeatedly blamed the factory turmoil on the Federal Reserve, which is led by Jerome Powell, the president’s own nominee.
“Manufacturers are being held back by the strong Dollar, which is being propped up by the ridiculous policies of the Federal Reserve,” Trump tweeted Monday.
However, the strong dollar was mentioned only once in the ISM survey, which singled out “global trade” as the No. 1 problem for manufacturers.
“Markets have downshifted further. The continued confusion surrounding China trade has kept export markets on edge,” one wood products maker said in the ISM survey.
Manufacturing makes up just a small part of America’s consumer-led economy. That’s why the decade-long economic expansion has survived multiple factory downturns.
The service sector, which includes banks, restaurants and law firms, has slowed but not contracted because consumer spending remains sturdy, as evidenced by the strong Black Friday and Cyber Monday sales.
Still, there is a risk that the trade war will eventually infect the rest of the economy through weaker hiring or slower consumer spending. That’s why it’s important to watch how the stock market reacts to the latest developments in the trade war. A severe market drop could spook CEOs and households alike.
Investors had been betting on a preliminary trade agreement — one that Trump himself suggested as late as last week was close. Trade hopes helped fuel a melt-up that carried the S&P 500 to 11 record highs in November alone.
Not only was Wall Street hoping the December 15 tariffs would be averted, but investors were also expecting a rollback of existing tariffs.
Now there is growing unease that a trade deal may not happen until 2020–or later.
“It feels like we might be getting to one of those inflection points where things are going to get worse, not better,” said National Securities’ Hogan. “The market has to recalibrate to that.
That recalibration has begun. The Dow has plunged more than 700 points, or nearly 3%, over the past three trading days.
“Forecast for 2020: There will be no settlement in the Trump Trade War, nor will there be a reduction in China-US tensions,” David Kotok, chairman and chief investment officer at Cumberland Advisors, wrote in a note on Tuesday.
So much for trade wars being easy to win.