The most significant global trade war since Smoot-Hawley and the Great Depression is underway.
It’s a sad day in US history when a president breaks his own trade deals and increases tariffs on our closest trading partners more than anyone else.
But here we are.
Yesterday evening I commented Welcome to the Recession, Trump Hits Canada and Mexico with 25 Percent Tariffs
There’s “No room left” for negotiations says Trump.
There never was any room. Trump campaigned on tariffs and here they are.
The alleged “breathing room” was a month-long ploy to get whatever concessions he could from Mexico and Canada, then ignore them. That game works about once.
Spare me the sap on alleged emergencies. There are no trade-related emergencies. And drugs are no reason to break unrelated treaties.
Trump broke his own “best trade deal in history” so there is no reason for any country to believe he will honor any trade deal he signs.
Upon reflection, I should have said, welcome to the global recession because the world has not seen a tariff shock like this for decades.
Trump Takes the Dumbest Tariff Plunge
The Wall Street Journal editorial board says Trump Takes the Dumbest Tariff Plunge
We’ve courted Mr. Trump’s ire by calling the Mexico and Canada levies the “dumbest” in history, and we may have understated the point. Mr. Trump is whacking friends, not adversaries. His taxes will hit every cross-border transaction, and the North American vehicle market is so interconnected that some cars cross a border as many as eight times as they’re assembled.
I often disagree with the WSJ editorial board, but not this time.
Trumps Claims
- Tariffs will increase revenue enough to balance the budget
- Tariffs will bring manufacturing back to the US
- Tariffs will reduce inflation
- Tariffs will increase exports
Conflicting Economic Madness
Points 1 and 2 conflict. Tariffs cannot simultaneously bring back manufacturing and raise enough revenue to balance the budget.
Points 2 and 3 conflict. Since the US is the world’s highest cost producer of goods thanks to unions, tariffs will not reduce inflation.
Points 2 and 4 conflict. Since the US is the world’s highest cost producer of goods and other countries will retaliate, tariffs will not increase exports.
It’s not clear Trump can achieve anything with tariffs, unless you count a global recession as a victory.
It’s not winning if you lose an arm when someone else loses a leg.
Loss of Trust and Retaliations
Factor in the Loss of Trust and retaliations.
Even if Trump pulls back eventually from tariffs, the threat has already caused lasting damage in cross-border relations. Trading partners won’t have an incentive to open markets to the U.S., allow investments from the U.S., or boost cooperation to curb illegal migration or drug smuggling, trade analysts said.
“We will have a long road back to Canada and the U.S. being trusted economic partners again,” said Matthew Holmes, executive vice president at the Canadian Chamber of Commerce. “Businesses can’t just switch their whole model to avoid tariffs and then go back again, depending on what politicians decide on any given day.”
Canadian Prime Minister Justin Trudeau on Monday said Canada would retaliate with its own 25% tariffs on U.S. products. He called Trump’s decision “unjustified.” Canada has already published a list of commodities it will target with retaliatory tariffs, including poultry, vegetables, liquor, and appliances such dishwashing machines.
“Because of the tariffs imposed by the U.S., Americans will pay more for groceries, gas, and cars, and potentially lose thousands of jobs,” Trudeau said in a statement. “Tariffs will disrupt an incredibly successful trading relationship.”
On Monday, the leader of Canada’s most populous province, Doug Ford, threatened to cut off energy supplies to the U.S. “If they want to try to annihilate Ontario, I will do everything, including cutting off their energy, with a smile on my face,” said Ford. Ontario supplies energy to Michigan, New York and Minnesota.
Mexican President Claudia Sheinbaum said on Monday that her administration was ready to respond to whatever Trump decides, facing the tariff threat with “composure, serenity and patience.”
“There is tranquility, in the sense that whatever the U.S. decision is, we have a plan and unity in Mexico,” she said during her daily news conference on Monday.
Many U.S. lawmakers felt that NAFTA was a way of ensuring that Mexico would lock in free markets because it was inevitable that at some point a populist would be elected president of Mexico, possibly closing Mexico’s economy.
“Nobody thought it would be a populist president of the U.S. who would close off the market,” said de la Calle, now the director of a CMM, an economics and trade consulting firm in Mexico City.
Tariffs will push Canada and Mexico into recession. They will buy fewer US goods as a result.
New Era of Protectionism
Also consider Trump Tariffs Usher in New Era of Protectionism
Uncertainty is already affecting the economy by slowing business orders and making it harder for companies to plan. This comes as the economy is hit by other forces, including mass layoffs of federal workers, cutbacks to government-funded programs and restrictions on immigration.
Manufacturers are feeling the pinch. “Tariff threats and uncertainty are extremely disruptive,” noted one respondent to the Dallas Fed’s February manufacturing survey, released last week. “This is a time of uncertainty for manufacturers, very difficult to make business plans,” another respondent said in the Kansas City Fed’s February manufacturing survey, also released last week.
If tariffs remain in effect, they might push up inflation in March, April and May as firms raise prices to make up for higher import costs, said Michael Feroli, chief U.S. economist at JPMorgan Chase. The tariffs also might hurt U.S. exporters if Canada’s and Mexico’s economies take a hit and if they retaliate with tariffs of their own. “If those countries go into recession, that alone is a reason to expect U.S. exports to those countries to slow,” he said.
Is there modern precedent for these tariffs?
The U.S. has raised tariffs on major trading partners in the past, but increases tended to be gradual, said Douglas Irwin, a Dartmouth College economist who wrote the book “Clashing Over Commerce: A History of U.S. Trade Policy.” Substantial tariff hikes such as the Smoot-Hawley tariffs of 1930 affected a smaller part of the U.S. economy because some goods were exempt and because the country was less trade-dependent then, Irwin said.
In 1807, Congress implemented a virtually universal embargo on foreign trade in response to interceptions of U.S. ships by British forces during the Napoleonic Wars. “It was enormously destructive to the U.S. economy,” Irwin said.
China Retaliates Against U.S. With Tariffs, Controls on U.S. Companies
China was prepared and acted immediately. The WSJ notes China Retaliates Against U.S. With Tariffs, Controls on U.S. Companies
China’s finance ministry said the country is imposing an additional 15% tariff on U.S. chicken, wheat, corn and cotton products, and an additional 10% tariff on sorghum, soybeans, pork, beef, seafood, fruits, vegetables and dairy products. The new tariffs from China are set to go into effect on March 10.
The country’s commerce ministry said it added 15 American companies to an export control list. They include drone maker Skydio, as well as Andreessen Horowitz-backed artificial-intelligence startup Shield AI, which makes AI-powered systems for drones. Inclusion on the list would prohibit Chinese export of dual-use items, which can be used for both civilian and military applications, to those companies.
The commerce ministry also added 10 American companies to China’s “unreliable entity” list. These firms are prohibited from exporting or importing in China or from making new investments in the country, according to the ministry.
The ministry said it would prohibit U.S. biotech company Illumina from exporting gene sequencers to China after Beijing added the company to the “unreliable entity” list in retaliation for President Trump’s first round of tariffs in February.
GDPNow Nowcast Plunges to -2.8 Percent
This morning I explained the recent two plunges in GDPNow, first to -1.5 percent, then to -2.8 percent.
Some of this is a trade-related anomaly, that is partially a mirage. But even if we assume it’s entirely a mirage, Real Final Sales, a bottom line estimate of GDP is still negative.
Please see GDPNow Nowcast Plunges to -2.8 Percent, What’s Going On?
The short explanation is recession. The long answer is more complicated and related to tariffs.
Finally, we have not yet felt the hit on small manufacturers do to extremely unwise tariffs.
For discussion of the small business hit, please see How One Small Business Owner Is Coping With Trump’s Tariffs
Fifty-four percent of small businesses polled said that tariffs would negatively affect their companies, while just 11 percent said they would benefit.
Please read the above post and multiply it by tens of thousands of small businesses.
Welcome to the global recession.