Trade Wars Are Bad, Nobody Wins


Trade Wars Are Bad, Nobody Wins

Read the weekly economic commentary from Chief Economist Scott Brown.

March 5, 2018

Tariffs on imported steel and aluminum are unlikely to have a major direct impact on U.S. economic growth. However, President Trump’s decision last week has significantly raised the risk level for the U.S. and global economy.

Economists disagree on a lot of things, but there’s a lot more that we do agree on – for example, the idea of comparative advantage and the benefits from trade. There is an overwhelming consensus that protectionism has a negative impact on economic growth.

The 25% tariff on imported steel and 10% tariff on imported aluminum will raise costs for U.S. firms – and there are lot more people employed by firms that use steel and aluminum than employed by the firms that produce the stuff. China, which has already been ramping down its capacity in steel production, may not care much, although Chinese leaders have threatened in the past to retaliate if Trump proposed trade barriers against their country, and will likely want to send a message back to the White House. More importantly, the tariffs apply to all countries, and will be felt significantly by our key trading allies.

Already, retaliatory efforts have begun. The European Union is preparing to impose tariffs on Harley-Davidson motorbikes, bourbon whiskey, and Levi’s jeans in response to Trump’s planned tariffs. Canada’s Foreign Minister Chrystia Freeland said that “should restrictions be imposed in Canadian steel and aluminum products, Canada will take responsive measures to defend its trade interest and workers.”

Remember, on day 100 of the Trump administration, the president came close to pulling the U.S. out of NAFTA on a whim, but was persuaded not to at the last minute. Reports suggest that the White House was in turmoil ahead of the announcement of steel and aluminum tariffs, with staff uncertain whether the announcement would even be made.

Financial market participants are justified in their fears that we could see a much broader range of trade conflict. There is no such thing as U.S. manufacturing. Our firms get raw materials, parts, and supplies from around the world. Over the last year, many of these firms have worked, at some cost, to secure alternative supply chains. However, a broader trade war would still take its toll. Supply chain disruptions would add to inflation pressure. The uncertainty may, in fact, already be having a dampening impact on international investment. Trade decisions do not turn on a dime and uncertainty over trade policy could have longer-term effects on U.S. firms’ decisions to expand overseas – and emerging economies are where a lot of global growth is expected to occur over the next 10-20 years.

To be sure, increased global trade can cause painful dislocations to some segments of the economy over the short run. However, the same can be said of technology change, mergers and acquisitions, and general economies of scale. Few would argue for abandoning the work going on in artificial intelligence and robotics to favor jobs. Multilateral trade agreements such as the Trans-Pacific Partnership or the North American Free Trade Agreement, are preferred to a series of bilateral agreements. One proposal would have us revisit trade agreements every five years, with the option of pulling out if we don’t like the result, but that uncertainty would work against making long-term international investments.

If the U.S. runs a trade deficit, it must balance that with a capital account surplus. That means trade dollars coming back, partly into the bond market, which helps keep interest rates low. Protectionist efforts to reduce the deficit would add to inflation and raise long-term interest rates, likely crowding out domestic investment. It’s unlikely that we’ll see a dramatic deterioration in global trade, but the risk is there.

Over the last year, a possible misstep on trade policy has been seen as a significant risk to the economic outlook. We now have one major misstep. Granted, Trump campaigned on a platform that included protectionist policies, but investors seemed not to take that at face value (“He was only appealing to his base”). We won’t get much clarity on trade policy in the near term, and that is likely to add to financial market volatility. 

The opinions offered by Dr. Brown should be considered a part of your overall decision-making process. For more information about this report – to discuss how this outlook may affect your personal situation and/or to learn how this insight may be incorporated into your investment strategy – please contact your financial advisor or use the convenient Office Locator to find our office(s) nearest you today.

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates (RJA) at this date and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete. Other departments of RJA may have information which is not available to the Research Department about companies mentioned in this report. RJA or its affiliates may execute transactions in the securities mentioned in this report which may not be consistent with the report's conclusions. RJA may perform investment banking or other services for, or solicit investment banking business from, any company mentioned in this report. For institutional clients of the European Economic Area (EEA): This document (and any attachments or exhibits hereto) is intended only for EEA Institutional Clients or others to whom it may lawfully be submitted. There is no assurance that any of the trends mentioned will continue in the future. Past performance is not indicative of future results.

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