That move, of course, was the declaration that the United States would impose 25 percent tariffs on up to $60 billion of Chinese imports — the equivalent, in the complex world of international trade, of wielding a two-by-four to perform arthroscopic surgery. The market’s reaction to the trade salvo was all the more unusual because trade is such a complicated subject and because China clearly does abuse the spirit and sometimes the letter of those rules.
Markets don’t usually crack at the mere announcement of trade changes, even when they are ill-conceived, so why now? Hold the thought. There was no such reaction when Ronald Reagan imposed trade barriers (which he did often) or when Bill Clinton did, or when Barack Obama did.
In fact, it’s hard to find an example of a president doing anything, trade-related or not, that caused such an immediate market shock. Consider some history. The market crash in 1987, so-called Black Monday, was apparently caused by rising interest rates and a shaky dollar and magnified by an ill-conceived new investment product (“portfolio insurance”).
None of those could be exclusively, if at all, attributed to Reagan. Generally, the parlor sport of attributing market performance to the presiding chiefs (Cal Coolidge up; Jimmy Carter down) tells us less than we would think because so many factors are outside a president’s control. Moreover, a president’s full impact often isn’t registered in the market until later. No sooner did Coolidge triumphantly retire and move back to Northampton, Mass., in 1929 than the market crack and the Depression began. In the fall of 2008, under George W. Bush — was it really only a decade ago? — the market crashed, or so it seemed, nearly every day. But Bush didn’t cause Lehman Bros. to fail, nor was he mainly responsible for the mortgage bubble that led to the firm’s collapse. He was one of many public officials who failed to head it off. He had scant control over the Federal Reserve, whose responsibility was more direct.
Nor was Bill Clinton responsible for the market plunge in 1998, when Russia defaulted on its debt and the supposedly Nobel Prize-winning hedge fund Long-Term Capital Management turned out not to be so smart after all. Nor was George H.W. Bush to blame when Iraq’s invasion of Kuwait tanked the market (although he gets a ribbon for the rebound, which coincided with the U.S. invasion to free Kuwait).
Perhaps the nearest comparison to Trump’s solo act on trade was when the House, in 2008, voted down the Troubled Asset Relief Program, a bailout that was deemed necessary for the country’s busted banking industry but that was unpopular west of Wall Street. The S&P 500 fell almost 9 percent — forcing the House to reconsider. And then there are all those days when the market cracks for no discernible reason at all.
Last week was different. The stock market was about as coherent as the stock market can be.
Markets don’t talk the way people do — they merely register prices that are the amalgam of what millions of people are thinking or feeling. But many of those people were speaking even before Trump made his move.
Economists such as Paul Krugman (a Democrat) and Greg Mankiw (a Republican) warned that trade is not the win-lose game the president seems to imagine. Prominent retailers from Walmart on down warned that tariffs would lead to higher prices. The Farm Belt — the bread basket of American exports — begged the White House not to expose farmers to retaliatory tariffs by other nations. China has already threatened to respond in just that way. Avatars of the new economy (Tim Cook) and of the old (Jamie Dimon) pointed out, in so many words, that going back to the days of, oh, the ancient Phoenicians, that trading nations have always prospered. Not since Herbert Hoover signed the Smoot-Hawley Tariff bill in 1930, ignoring a petition from 1,028 American economists, has a White House so trampled on the prevailing economic wisdom.
Trump could still back down, as he partly appeared to do by crafting exceptions to the specific tariffs he announced in February on aluminum and steel. (At the time, he said there would be no exceptions.) But the market, I think, was voicing several discrete fears. First, most broadly, is that Trump does not appear to appreciate that trade is not a zero-sum game. It is not like one of his casinos, in which the customers lose and the house wins. Trade wars are not “easy to win,” as the president tweeted; they don’t have winners at all. Rather, both sides benefit from trade, and both sides lose when they are prohibited from trading.
Second is that Trump does not seem willing to embrace the intricacies of trade deficits. Such deficits are a sign of economic strength (the United States has the ability, and the currency, to import goods from other countries; Venezuela doesn’t). When deficits rise too high, they can be painful, but right now, U.S. unemployment is at a longtime low.
A further intricacy: Tariffs are unlikely to “cure” the deficit. Trump insists on viewing trade as a bilateral phenomenon. If the United States, though, were to immediately cease importing goods from China, it would import the same goods from someplace else. The vivid example of the iPhone, assembled in China from parts made elsewhere, shows that much of our Chinese imports aren’t, for the most part “from” China.
A further intricacy is conflating Chinese theft of intellectual property, which is a diplomatic, legal and political issue, with trade. By responding to Chinese theft with classical trade remedies (tariffs), Trump winds up punishing allies with whom the United States trades and who do not engage in theft.
This is a final and most pressing concern: that Trump’s tariffs — and his serial moves to abandon the Trans-Pacific Partnership, to threaten to abandon the North American Free Trade Agreement, to pressure American allies to rewrite trade rules, and to undermine the World Trade Organization undercover of diplomatic darkness — will alienate U.S. allies.
If he has any strategy, it seems to be to pressure each nation, individually, to bend to American will, to create a new trading pax Americana. He was able to pressure South Korea into concessions, but then again, South Korea relies on the United States for military protection against nuclear North Korea.
The fear is that by undermining the open, multilateral trading sphere of the postwar period, Trump will clear the ground for a new era of mercantilism in which every U.S. business will depend on presidential favors and protection and in which individual nations will have to curry favor with state-directed mercantilist giants such as China.
This is pretty much what the market was saying. For once, at any rate, a bunch of stock traders were more coherent than anything coming out of the Oval Office.