The economic picture has been rosy
For the past year, there has been a temptation for the Trump administration to leave their own mark upon the US economy - an economy which they argued was losing strength relative to global competitors in the run-up to Election Day. Despite the rhetoric, economic conditions have actually been stable and positive, even if the coordinated gains of a global economic expansion was diluting the relative strength of the US economy.
However, the campaign promises from the Trump campaign often focused on nationalist “America First” policies including blue-collar populist positions, a focus on industrial manufacturing, reversing trade deficits, and protectionism. These policies represent a radical departure from establishment, pro-business Republican dogma. These incompatible positions between establishment Republicans and the growing Trump wing created tension, but for the past year both sides have been able to successfully navigate policy decisions. First, upon winning the White House and solidifying control of Congress, markets cheered. There was a marked jump in consumer and market sentiment as a Republican administration, widely regarded as the pro-business party, took control of the three branches of the government. So the administration could simply ride the wave of positive investor sentiment, claim victory, and focus their attention on non-economic elements of their agenda. Second, the Trump administration has been able to make some tweaks on the periphery of policy, rolling back regulations which, by definition, stifle economic activity – appeasing both wings of the Republican coalition. Third, the year-end plan to reduce corporate taxes was a major success for establishment Republicans and benefitted from enthusiastic support from the President himself, rallying his grassroots supporters to the cause.
Then came the proposed tariffs
For all the off-the-cuff comments from the President, very few actually represent potential economic proposals. Until recently, there seemed to be few differences between Trump’s written economic proposals and traditional Republican principles. That changed in the past few weeks when Trump announced new tariffs, 25% on steel and 10% on aluminum imports into the United States.
Investors, worried about the potential impact of a global trade war between the US and trading partners sent markets reeling downward. Political allies in Congress and advisors to the administration expressed alarm. Unable to convince the President to reverse course, Gary Cohn resigned as top economic advisor for the White House.
We, at Westminster Consulting, have already expressed our negative opinion on tariffs. Interested readers can browse the internet to find equally persuasive articles from right-leaning sources like National Review, left-leaning sources like Slate, and economic-centric publications like Forbes or Bloomberg which all agree the proposed tariffs are self-destructive. Could this be the beginning of the end of the global growth and recovery? How much bite will these tariffs actually have?
The take down
Within a few short weeks, and despite the loss of key allies, the President formally approved the tariffs on March 8th. However, the stipulations on those new tariffs have robbed them of a significant amount of their impact and damaging potential.
- First, it appeared that the administration was taking a hard line on tariffs by framing their existence as necessary for national security under Section 232 of the Trade Expansion Act. Thus, these tariffs were originally proposed “without exceptions”.
- Second, key trading partners, Canada and Mexico, were given a 30 day reprieve from these tariffs. It appears these tariffs represent a heavy-handed tactic to spur stalled NAFTA re-negotiations and they could be ignored if a favorable deal is struck.
- Third, other countries have been given a 15-day window to negotiate exemptions. Again, this represents the White House trying to earn easy political talking points through concessions from other trading blocs, like the European Union & China, with material trade imbalances with the US. Some countries which already generate trade surpluses for the US, like Australia, or key military allies might also become exempt from the new tariffs.
- Fourth, the argument for national security was almost immediately undercut by these time limits for negotiation and carve-outs for exemptions. The World Trade Organization does not allow for tariffs as a negotiating tactic, which lowers the chances these tariffs will stand in perpetuity. The WTO has struck down US steel tariffs before, notably in 2002.
- Fifth, Congressional Republicans have already taken steps to undermine the tariffs. For example, Republican Senator Flake of Arizona is drafting a bill to directly nullify the tariffs and more than a hundred House Republicans have gone on written record against them.
There is still the potential for these tariffs to spark retaliation which could escalate into a conflict which slows global trade and prosperity. Already some trading partners have drafted counter-tariffs against US agricultural commodities and iconic American brands (like Kentucky Bourbon, Levi’s Jeans, Harley-Davidson motorcycles). For now, however, it appears that the worst case scenario is less presumptive than it seemed as recently as one week ago. Furthermore, key players outside the administration are trying to circumvent the White House, despite Trump’s eagerness for an “easy to win” trade war. In short, risks remain, but these tariffs look a lot more toothless than initially feared.