Politics Aside, Tariffs Are Bad Policy


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Even though what I write here are essentially opinion pieces, I generally try and stay clear of politics, or at the very least remain neutral on the subject. I consider it a compliment when I am accused of being both a shill for the oil companies and an unrealistic tree-hugger, or a Wall Street pig and a socialist agitator, especially on the occasions when one article has elicited both responses.

I hold that markets are generally apolitical and objective, and that politicians have much less outcome on the economy than many people, and certainly politicians themselves, believe. What they can do though is enact bad policy that does damage to even the extremely resilient U.S. economy, and that is what we are currently seeing.

Dating back to when it became clear that the Trump administration were actually going to pursue protectionist policies, I have made it clear that I view them as, to put it simply, bad economic policy. No doubt there are short-term political advantages to looking tough on the world stage, but the undesirable effects of a trade war such as we are seeing now are completely predictable.

An aggressive seventeenth century trade policy may enable a politician to go to some places and say that they are doing something to protect dying industries, but unless we give up on capitalism altogether, those industries will still die. Protectionism just makes it likely that other jobs will be destroyed too.

There are multiple reasons for the job cuts announced by GM (GM) yesterday, for example, but tariffs on steel are a contributory factor. American consumers have shown a marked preference for trucks and SUVs recently, with smaller cars finding their market in other countries.

Given that, GM’s decision has an unavoidable element, but would still be unpopular most of the time. In a protectionist world however, where both imports of steel to the U.S. and export of those cars are taxed, the argument can be made that doing anything other than shifting production of those models overseas would be a dereliction of management’s duty to shareholders.

The economic damage done by adherence to protectionism is increasingly evident, but the irony here is that it also does political damage eventually. The GM cuts involve closing plants in Michigan and Ohio, two swing states that went for Trump in 2016. Tariffs on steel, aluminum and other products may save a few jobs in those states, but the job losses at those plants and at suppliers will be far more impactful.

One could make a case, as Trump has tried to do, that this is down to bad management at GM, but tariffs and trade wars are a ready-made excuse that management will utilize.

The other big trade-related comments today are about Apple (AAPL), and the same dynamic applies there. Donald Trump may think that threatening to apply a tariff to imported iPhones will put pressure on China to give concessions or force Apple to shift phone assembly to the U.S., but he is probably wrong on both counts.

Whatever the eventual outcome, there will be retaliation, and not just from China.

Far be it for me to give advice to someone as smart as Tim Cook, but if it looks like Trump is going to go through with that threat, there is an obvious response: Cook has simply to announce that because of the tariffs, Apple must cut x-thousand jobs here in America.

Mind you, Apple doesn’t have to actually make those cuts; just announcing the intention to do so and making it clear that the tariffs are directly responsible will make the point clearly. As we have seen from GM, that is a response that will quite likely be received positively by the market and will get a ton of publicity that paints the company as the victim, not the aggressor.

For a long time, the market has celebrated the pro-business policies of this administration and ignored the threat inherent in its trade policy. The belief was that it was a negotiating ploy and that the eventual deals would be worth the disruption. That, however, assumed that such a deal would come before any lasting damage was done to the economy.

The GM announcement, the threats to Apple and the doubling down on bad policy indicate that it may be too late for that, and the market is reacting accordingly.

Protectionism was and is a bad idea, but there is hope. After the mid-term results, the President needs a win of some kind, so the pressure is now on him to reach a deal with China. Of course, that hands control of the negotiations to the Chinese, which makes a bad deal for America much more likely.

But Trump understands that is not the point. Few of his supporters will analyze the details of a trade agreement, and any deal right now can be painted as a “win” for the U.S. If that happens, it might cause the market to rally, but it would leave America in a worse position than before this all started.

It is a sad reflection of our times that concluding from the evidence that protectionist policies are inevitably damaging is seen by many not as an obvious truth, but as evidence of political bias. If you are one of those people, there is nothing I can say that will change your mind. The rest of us can only hope that the political imperative forces an end to this nonsense soon, before any real, lasting damage is done, damage for which we will all be left footing the bill.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.










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