I generally stay away from the subject of politics in these pieces, not because it is controversial, but because I view it as much less relevant than many people think. The U.S. economy is a resilient thing that goes through its own cycles regardless of the actions, or more accurately the words, of politicians.
Politicians will often claim credit for a strong recovery and stock market gains but most of the time those things are achieved despite, not because of what goes on in Washington.
What politicians can do, however, is enact or promote policies that temporarily derail progress, and judging by the market reaction it seems that that is what President Trump did yesterday when he announced that tariff increases on steel and aluminum would be enacted next week.
All the major indices lost ground yesterday after the announcement and are indicating a lower opening this morning, but to be fair to Trump, what he is proposing should not come as a surprise. Consistency has not exactly been a hallmark of his administration so far, but protectionist policies have been one area where the message has not changed.
Getting into a trade war may horrify Wall Street, but to the President’s base of displaced and disgruntled workers in traditional manufacturing industries, it seems like a simple remedy for what ails them. Cheap imports of steel and other things have made U.S. companies less competitive, forcing wages down and causing job cuts and plant closures.
The obvious answer is to make U.S. products competitive again by raising the price of imported goods through tariffs.
Unfortunately, it is not that simple.
Even if you accept the argument that much of the imported steel or whatever is priced unfairly because of subsidies and other policies that exist elsewhere to protect their industries, the inevitable effects of attempting to address that by forcing prices up must be considered. Rising prices in basic goods result in rising prices in everything manufactured, and that is, as several of Trump’s fellow Republicans pointed out yesterday, a tax on every American not employed in those industries.
That is not to mention the prospect of retaliation which will certainly come and will ultimately be bad for the very industries that the tariffs are designed to protect. The fortunes of basic industries fluctuate based primarily on global economic conditions and growth, so a trade war that hits global growth just as it is starting to recover does nobody any good.
To return to my original point that politicians are not responsible for economic gains but can harm and delay them, the most dangerous economic policies are those adopted for political rather than economic reasons. That appears to be the case here. Trump is under enormous pressure right now, so politically, announcing a policy that appeals to his base makes sense in the short term.
Even from that perspective though, Trump has placed a lot of emphasis on higher growth and a booming market since he took office and starting a trade war puts those things in jeopardy.
Given the inconsistent nature of this administration to date, there is a decent chance that those opposed to the policy such as Gary Cohn could yet hold sway, but again, this has been a cornerstone of Trump’s message since the beginning of the campaign. If the President does hold out here, investors should be aware that it will change the basic outlook for stocks and the economy dramatically.
It is no coincidence that the global move towards free trade since World War 2 has been accompanied by massive economic growth and sustained improvements of the living standards in the developed world. The system is not perfect but is the best yet devised and has enabled progress by efficiently allocating capital.
Ultimately that truth will prevail, and any protectionist policies enacted will be reversed at some point. History tells us that that is the case, but also shows that while in place they can do enormous damage.
The current volatility is therefore not another irrational panic but is in reaction to a very real threat to growth. Investors should take note.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.