About 20 years ago, when I took an MBA level Macroeconomics course at UC Irvine, the professor said that free trade is the best use of world’s resources. The theory goes that, if one country provides a product that is produced more cheaply than that same product in another country, then the consumption of the resources used in the production of that product is more efficient than in the other country. The professor who taught us that principle was none other than Dr. Peter Navarro, the current economic trade advisor to President Trump.
Trump announced a tariff on $50B worth of products from China, and when China announced a dollar for dollar tariff response, he requested a list of another $200B of Chinese products to tax from his advisors. And when the EU responded to Trump’s tariffs on steel and aluminum with tariffs on US motorcycles, whiskey, cranberries, and peanut butter, he tweeted that he would put a 20% tariff on German automobiles. These threats, actions, counter-threats, and counter-actions have spooked the stock market, and stalled the most recent NASDAQ index rally and historical peak of almost 7,800.
President Trump’s efforts to use tariffs to increase economic activity in the US and grow the national GDP, could backfire. His strategy seems to be anchored in the fact that, since the US imports more than almost all of our trading partners, then dollar for dollar tariffs favor the US. The US imports more, so the US can tariff more products, and eventually that balance shifts in our favor. However, how much economic pain is Trump willing to endure in reduced exports and reduced economic output, before that balance shift occurs?
The last time significant tariffs were used as a mechanism to effect economic changes was shortly after the 1929 stock market crash and the beginning of the 1930s depression. It can be argued that the Smoot-Hawley Act, an anti-trade tariff laden congressional mandate, actually deepened and extended the depression. Global GDP decreased during the 1930s, as a result of countries trying to protect their nation’s employment and economic conditions by levying tariffs across a broad spectrum of imports. The actions and counter actions of nationalistic agendas almost 100 years ago had dramatic consequences. Will there be a different outcome this time?