Will Donald Trump’s Trade War Spark a Recession?

When everyone agrees, I head for the exit. Rarely do I side with the crowd.Trump tariffs

This time is different. This time the crowd is right. The crowd – composed of investors and economists of all political stripes – knows that President Trump is wrong, and horribly so.

Trump’s horrible idea — tariffs — won’t make America great. To the contrary, they’ll make America a pariah.

Unfortunately, our president has a fetish for tariffs.

First, it was tariffs imposed on the United States’ archenemy – Canada. Trump imposed a 21% tariff (a tax, really) on imported Canadian lumber, thus protecting the rice bowl of his U.S. lumber cronies from competition.

Anyone who has crawled through economics 102 (beginning microeconomics) could have foreseen the consequences: Heritage Foundation data show that the Canadian lumber tariff has lifted the average cost to build a home by $1,360.

Trump followed the lumber tariff with a 30% tariff on the first 2.5 gigawatts of imported solar cells.

Perhaps Trump wants to resurrect Solyndra. If so, his resurrection comes at a steep cost. The Solar Energy Industries Association says the tariffs will cost the industry 23,000 jobs and billions of dollars of new investments.

Steel and aluminum are the latest industries to be bestowed with protection, privilege, and taxpayer largess. Trump plans to impose a 25% tariff on imported steel and a 10% tariff on imported aluminum.

Trump’s commerce secretary, Wilbur Ross, attempted to sell America on steel tariffs using a Campbell’s soup can as a prop while on CNBC. Ross says the can constitutes $0.025 worth of steel. If steel prices rise 25%, the steel costs in the soup rise only six-tenths of a cent.

This might be unbeknownst to Mr. Ross, but steel has other uses than as a soup-can container. Steel is used in everything from automobiles to refrigerators.

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The Big Risk of Tariffs

Those who fail to learn from history are doomed to repeat it.

Former President George Bush kissed the ring of steel-industry executives in 2002 when he passed tariffs to protect U.S. steel producers from a few competitors. U.S. steel producers expressed their gratitude by jacking up steel prices with nary a new hire.

As for the rest of us, the consequences of the Bush tariffs included difficulties obtaining steel in the quality and quantity desired. Some companies shifted to sourcing finished parts from overseas and relocating U.S. steel-consuming facilities abroad. According to one estimate by Trade Partnership Worldwide, 200,000 U.S. jobs were lost in downstream industries.

But what about “fair trade,” you ask? What if foreign governments are subsidizing their industries?

Here, it helps to engage in second-tier thinking that includes the “unseen.” Let’s think of the “unseen” and let’s think of the “unseen” at the extreme.

Let’s say that the world engages in the most unfair trade and simply gives the United States steel. The U.S. steel industry would be obliterated and all 140,000 employees would lose their jobs. That’s the “seen” cost.

Consider the “unseen” benefit. Everything made with steel costs less.

Cars would cost hundreds of dollars less, locomotives would cost thousands of dollars less, skyscrapers would cost millions of dollars less. Consumers would have more money to spend on other products and services. Investors would have more money to invest in companies that produce other products and services.

Now, consider another “unseen” cost of Trump tariffs. This won’t remain unseen much longer: the great retaliation.

Trump Tariffs Prompt EU Threat

The European Union said it will target $3.5 billion of U.S. imports by imposing its own 25% tariff.

Harley Davidson (NYSE: HOG) and Levi Strauss have been mentioned by name. In addition to these iconic brands, the EU has said that its tit-for-tat tariffs could be applied to everything from steel bars and motor boats to t-shirts and orange juice.

The EU will have a retaliatory partner. China has also threatened to retaliate with tariffs. China has yet to offer specifics, but aerospace and agriculture – political constituencies important to Trump – are likely targets.

The rationale behind the Trump tariffs is not only wrong, it’s delusional. Just consider a recent tweet from the President:

“When a country [United States] is losing many billions of dollars on trade with virtually every country it does business with, trade wars good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore – we win big. It’s easy!”

Good grief! Will we win when products and services ware e want are no longer available at the prices we want to pay?

The fact is that countries don’t trade. Individuals within countries trade.

I buy a smartphone from a manufacturer in China, the trade doesn’t occur between the United States and China. It occurs between me in the United States and an individual (or group of individuals) in China.

The individual in China is no more obliged to buy from me than the employees or shareholders of Wal-Mart (NYSE: WMT), a store I frequent regularly, to buy from me. (My “trade-deficit” with Wal-Mart is astronomical.)

Trump is shielded from the costs of his delusions, as so often is the case in politics. Unfortunately, you and I are fully exposed. Tariffs produce immediately higher prices. Down the road, tariffs drag on economic growth longer term, corporate earnings, and eventually investment returns.

The Trump tariffs are a horrible idea, but why care when you can score a few political points while passing the cost onto you and me? After all, that’s the essence of politic “solutions.”

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Published by Wyatt Investment Research at