There’s a distinct shift unfolding in President Trump’s economic policy in his second year: He is moving from prioritizing a pro-business agenda of tax cuts and deregulation to a populist agenda of trade barriers and immigration restrictions. Put another way, he is deviating from the mainstream Republican agenda.
For those who have known Trump for decades, this is not a surprise. He has long argued that China — and other nations — were beating up on the United States on trade and that these countries needed to be dealt with. “People are tired of watching other people ripping off the United States,” he told CNN’s Larry King in 1987. Three decades later, Trump made renegotiating trade deals and curtailing immigration central tenets of his campaign, much to the cheers of blue-collar voters who supported him.
But for the Wall Street Republican set, Trump’s protectionist turn is an unwelcome one, and it’s ushering in a period of great uncertainty for markets and companies. There was a belief — or at least a hope — among some business leaders that Trump wouldn’t do anything to threaten the uptick in economic growth that’s underway, but now they’re not so sure.
“If we do get into a trade war, even a small one, it will hamper growth. And you can see that in the stock market, people don’t like it,” said economist Art Laffer, an informal adviser to Trump who helped sell the president’s tax plan last year.
Business leaders don’t know how to read this new phase of “MAGAnomics,” and they don’t have the same sway over Trump’s inner circle of advisers as they did when former Goldman Sachs executive Gary Cohn and staff secretary Rob Porter, a more traditional Republican, had Trump’s ear.
Trump’s new inner circle of economic advisers often contradict one another, adding to the confusion. On Friday, Treasury Secretary Steven Mnuchin said there’s “potential” for a trade war, while new National Economic Council Director Larry Kudlow kept stressing that talks were underway and that the standoff was likely to end without tariffs going into effect.
Corporate executives, who only weeks ago thought they had successfully contained Trump’s impulses on immigration and trade, are now unsure what is coming next or what it will do to the economy. One look at the U.S. stock market tells the story: After surging nearly 19 percent last year, the Standard & Poor’s 500-stock index is in the red so far this year as investors fear a trade war between the world’s two biggest economies. The Dow Jones industrial average has fallen into a “correction.”
“The one thing Trump’s been consistent on for four decades is he does not believe in free trade. At heart, he is a protectionist,” said Joe Brusuelas, chief economist at accounting firm RSM.
Business leaders had hoped Trump’s fixation on the rising stock market would keep him away from protectionism, which spooks investors. They praised Trump for passing a “once in a generation” overhaul of the tax code in December and cheered his regulatory rollback, comparing Trump to President Ronald Reagan, but Trump kept insisting that trade had to be part of his agenda.
“The Trump administration is best characterized as the ‘populist right,’ ” said Michael Strain, director of economic policy studies at the right-leaning American Enterprise Institute.
Part of the surprise at Trump’s populist turn this year is that so much is going right in the U.S. economy. Few in the business world thought Trump would do anything to jeopardize that.
Growth over the last three quarters of 2017 topped 3 percent — a threshold administration officials had touted repeatedly as their goal — and the economy continues to add jobs at a steady pace. Small business and consumer optimism are at the highest levels in years, and manufacturing jobs are surging. Since Trump took office, the economy has added 263,000 manufacturing jobs, a welcome boost after the industry saw job losses in 2016.
Chad Moutray, chief economist at the National Association of Manufacturers, credits tax cuts, regulatory reform and the rebounding global economy for the latest jump in manufacturing jobs.
While many economists and business leaders are urging Trump not to disrupt the upswing, the president and his top advisers argue that any short-term pain from a trade spat or changes to immigration will be worth it because it will lead to far larger gains down the road.
“We want to sell more goods around the world. This is a terrific opportunity for U.S. companies if they are treated fairly,” Mnuchin said Friday on CNBC.
There’s consensus across the political spectrum that something needs to be done with China, but tariffs make many uneasy, especially in the GOP. The risks are high if the strategy fails. While China has more to lose economically in a trade war with the United States, China’s President Xi Jinping does not face reelection, shielding him from the type of public and corporate pressures Trump faces.
The U.S. is also running a large deficit, especially after the tax cuts and hefty spending bill that just passed Congress. Trump won’t be able to do much more stimulus, if any, and he will need investors around the world to keep buying U.S. debt.
For now, the bulk of the tariffs are just threats. China and the United States are talking, and the two nations have at least a month — and probably longer — to come to an agreement to avoid a worst-case scenario that could have damaging impacts on both economies. But in a single week, Trump went from threatening tariffs on $50 billion of Chinese imports to threatening tariffs on $150 billion of imports. China responded by saying it was ready to put import taxes on nearly 40 percent of U.S. products sent to China.
The odds are still good that the trade tiff ends with China giving Trump some small to moderate concessions before the full-blown tariffs take effect. Laffer, who speaks with the president and his top economic advisers, said Trump told him the tariff threats were just a bargaining tactic.
“I don’t think we should lose sleep over the tariffs. They are bad economic policy, and both sides have got far too much to lose to build this trade skirmish into an all-out trade war,” said David Kelly, chief global strategist at J.P. Morgan Asset Management.
But the biggest risks to the U.S. economy right now are inflation, a stock market freakout and a corporate or consumer pullback on spending. Enacting tariffs would make all three of the risks greater.
In a trade war, U.S. consumers would probably see higher prices on TVs, shoes and other “made in China” items at stores, the stock market would continue to sink, and businesses might decide that they don’t want to make as many new investments after all, because they don’t know what the tariff situation is likely to be in the coming months.
Republicans certainly want to avoid any damage to the economy ahead of the midterm elections, but if the GOP loses heavily in November, Trump might return to protectionism. He would struggle to get anything else done with a Democratic Congress, and trade is an area where he can act quickly — and mostly on his own.
“With respect to the Trump administration, its political success will rise and fall with the economy,” Kudlow said Friday.