Donald upped the tariffs on China, and China responded in kind. S&P 500 has fallen 4% from its all-time highs on concerns over a trade war.
On Friday, Trump raised tariffs from 10 percent to 25 percent on $200 billion of Chinese goods after Washington and Beijing failed to reach a long-sought trade deal despite days of intense talks.
China vowed to fight back, and officially did so Monday, announcing it would increase its own tariffs on $60 billion of American products. Around 5,000 items will now have duties increased up to 25 percent; those penalties will go into effect on June 1, according to China’s finance ministry.
“China’s tariff move is in response to the US unilateralism and trade protectionism,” the ministry said in a Monday statement. “China hopes that the US will return to the right track of bilateral trade talks, work together with China and meet each other halfway, to reach a win-win and mutually beneficial agreement on the basis of mutual respect.”
My prediction for these latest round of tariffs is the same as in 2018. There won’t be much of an economic impact. No uptick in inflation, no slowdown in GDP growth. It will neither help nor hurt Trump’s approval rating. Since early 2018 when Trump began the tariffs, the media has been saying that businesses would pass the costs on , but CPI just doesn’t budge. The scope of the price increases is small and limited.
One could even make the argument that because the tariffs are deflationary rather than inflationary , their purpose is to give the fed justification to lower interest rates, which should give the stock market a big boost and further help Trump. Bond yields have fallen since Trump increased the tariffs 2 weeks ago, which is not only deflationary, but consistent with QE, so the tariffs act as a sort of monetary stimulus. That shows how policy can have unintended secondary consequences.
Vox Day put out a video about the tariffs:
This reminds me of early 2019 when he was overly enthusiastic about the shut-down and the wall. He’s vastly overestimating Trump’s efficacy and the economic significance of these tariffs. “Trust the plan” “Trump’s unpredictable” “Trump will deliver” he said. There was a plan and he did deliver–an impotent immigration bill that appropriates a pittance for wall funding and has an amnesty backdoor. Getting bested by Schumer and Nancy was not part of the ‘grand plan,’ I imagine.
As I predicted a month ago, Trump’s first term, as far as domestic policy is concerned, is effectively over. We cannot expect much from Trump until at least early 2021 (assuming he’s reelected). Maybe if we’re really lucky Trump will sign some diluted healthcare/drug bill with the promise of lowering prices a bit (but won’t).
Due to a misunderstanding of how GDP is calculated, Vox also keeps repeating the falsehood that cutting imports boosts GDP. It does not, as I discuss here. It’s also explained in the article Is the Trade Deficit a Drag on Growth?:
Not only is the idea that trade deficits cause slow growth wrong in theory, it is also wrong in practice. While the U.S. economy experienced strong growth between 2002 and 2005, the trade deficit went further in the red: from a little over -4% of GDP to close to -6% of GDP (see chart). In contrast the trade deficit shrank sharply during the darkest days of the Great Recession from 2008 to 2009 (the period between the orange and brown lines).
Furthermore, the problem is, Trump has about 6 more months until he has to enter campaign mode, and I predict there will be scant or no wall progress, but rather US military escalation in Iran. Trump knows he can get a boost of support by showing that he’s hawkish against a universally disliked target, that being Iran, similar to how Bush’s approval ratings surged after 911 and after invading Iraq. During the campaign trail, Trump will also promise, having secured funding, to actually build the wall if reelected.
Vox’s problem is he’s looking at this through the lens of European politics, but American politics is unique in that unlike other countries, it’s dominated by special interest groups, entrenched institutions that have been around for hundreds of years, advocacy groups, and think tanks, all which impart influence on policy and who’s elected. These institutions act a fourth or fifth pillar of government and a moderating force that upholds the status quo and can override the electorate and the other branches government–not literally, but through influence. This is very much in keeping with the tradition of east-cost Protestantism and communitarianism, in which power is more decentralized, in contrast to Catholicism and centralized power of Eastern Europe. For former, power is held by a handful of powerful, opaque, paternalistic institutions; in the latter, it’s either held by a combination of a monarch and parliament, or the citizenry (direct democracy, such as in Latin America).
But aren’t tariffs supposed to be inflationary? It depends. For an economy with reserve currency status, such as the U.S. or Japan, fiscal and monetary policy can have the opposite expected or intended effect. If tariffs are supposed to be a tailwind on growth by causing inflation, then rather than high inflation, this triggers a ‘flight to safety’, the result being a stronger dollar and lower long-term bond yields, both of which are deflationary. The strong dollar boosts imports and lowers inflation. This is why many libertarians, who predicted high inflation juxtaposed with economic weakness (stagflation) as a result of Trump’s tariffs, were wrong. This is also why there was no trade war. For economies that lack such reserve status, actions that are supposed to be inflationary, tend to actually result in inflation (and stagflation in the case of tariffs). This is because foreign currencies and bonds experience an exodus when there is a loss of confidence in the economy, hence causing inflation and a boost to the CPI. In the U.S., there is the exact opposite (an inflow). Someone wrote awhile ago that if TARP had failed, that there would be inflation due to the money printing. I argued that due to the ‘flight to safety’, rather than the money printing causing inflation, the dollar would surge and the yield curve would flatten