Goldman Sach’s Gary Cohn has resigned from the Trump Administration, allegedly over Trump’s threat of imposing tariffs on steel and aluminum. It is not the resignation of Cohn that is causing the jitters (there are plenty of smart, free trade advocates around). It is the realization that a destructive tariff may be a reality (and the resulting retaliatory tariffs).
(Bloomberg) — The prospect of escalating protectionism depressed European and Asian stock markets on Wednesday as President Donald Trump’s plans to punish foreign imports appeared to gather force. U.S. equity futures slumped, while most government bonds climbed.
The Stoxx Europe 600 Index headed for the first drop in three days, led by mining and auto shares. Gauges in Asia slid earlier as investors mulled the implications of the resignation from Trump’s administration of economic adviser Gary Cohn, a free-trade proponent. News that the White House is considering clamping down on Chinese investments and imposing broader tariffs added to the gloom.
Cohn’s resignation “shows that within the Trump administration the pendulum is swinging toward anti-trade,” said James Cheo, an investment strategist at Bank of Singapore. “What we should be watching out for is how other countries react in response to the tariffs.”
As a general rule, trade tariffs are a BAD idea. They are often levied by a country to protect it’s industries from foreign competition. The history on tariff wars is bleak, such as the Smoot-Hawley Tariff Act that was signed into law on June 17, 1930. The act raised U.S. tariffs on over 20,000 imported goods, allegedly to protect infant industries.
Retailitory tariffs followed from other countries and this helped make The Great Depresssion even more depressing.
George W. Bush put a tariff on steel into place in 2002. The result of Bush’s tariffs was a $30 million hit to the economy, according to a lengthy government report from the U.S. International Trade Commission in 2003.
The reaction in the markets from Bush’s steel tariff?
Senator Mike Lee from Utah hit the nail on the head: “The tariffs proposed by the president this week would be a huge job-killing tax hike on American consumers. While I am sympathetic to the issues facing domestic steel manufacturers, there must be a better way to address the steel industry’s concerns, and I hope Congress and the executive branch can identify an alternative solution before these tariffs are finalized next week.”
Like the Dodd-Frank legislation, Trump’s tariff threats mask a much more complicated problem. The US has stringest Environmental Protection regulations that has led steel production to move to countries with more lax restrictions, like China. Aluminium production in the US had fallen under the Obama Administration, but tariff wars are not the solution (as Senator Mike Lee has stated).
Given that the US has higher wage rates and stricter environmental standards than many of its competitors, tariff wars won’t solve the problem. It will only make the problem work.
To be sure, other countries have protectionist tariffs for THEIR industries. I encourage President Trump to seek other remedies, remembering that tariffs are (as a general rule) a BAD idea.
Here are Hawley and Smoot in 1929, who bear a slight resemblence to Trump and McConnell.