There has been a strange dichotomy over the past several
months. The market keeps hitting all time highs on positive earnings, low
unemployment and the expectation for a continuing stable economic
environment. However, Washington DC keeps floating out proposals with the
potential to drastically transform the business environment. It’s true;
some of the proposals have the potential to improve US growth rates, such as
lowering corporate tax rates and repatriating overseas cash. However,
there have been at least an equal number of policy proposals with the potential
to whipsaw the slow-and-steady US economy into recessionary territory.
Last week, the administration floated the possibility of a 20% tariff on
Chinese steel, with the possibility to expand to other imports.
Let’s ignore the potential for a trade war and assume the
tariff is implemented without international retaliation. Let’s also
ignore the possibility the steel tariff expands into other goods from China or
to other trading partners. Who would benefit from such an action?
The administration may hope US steel producers will account for a higher
proportion of steel purchased for use in the US. However, US producers
won’t produce as much steel at the price our consumers would have originally
purchased it at. Additional costs mean fewer projects are economically
viable wherever steel is a raw material (like car manufacturers), so total US
GDP shrinks even if US steel producers directly benefit. Moreover,
impediments to trade and additional costs will decrease the total global
consumption of steel – that’s just basic supply and demand. In other
words, both US and International combined production and consumption should
both slow down from the tariff.
According to news reports, no final decision has been made,
but could happen this week. If the tariff comes to fruition, the effect
will, at a minimum, slow down the rate of economic growth. The markets
are supposed to be looking forward so the only presumption we can make is investors
do not take this threat seriously. It’s all political bluster; nothing
bad has actually happened yet. To the market optimists’ credit, there
have not been any material changes to the engine of the economy over the past
few months. The broad sweeping policy changes have not materialized at
all. It has all been bluster, with no real effect thus far. We have
no magic ability to rate the odds of policy outcomes, and pessimistic scenarios
may in fact be deeply unlikely. However, we don’t want to simply turn a blind
eye to the potential danger.