There's a New Tariff in Town

Let's get this out of the way right up front: I don't like tariffs.  I'm a free-trade guy.  However, I also understand this simple, fundamental truth:

Trade is not a unilateral endeavor.  It's a two-way street.  Takes two to tango.

And just as it's not fair for one team's batters to use pine tar all the way up the barrels of their bats (right, George Brett?), or for one team's quarterback to under-inflate his footballs (right, Tom Brady?), it's unfair in trade for one country to impose tariffs while their trading partners don't.

Other countries impose tariffs on U.S. exports, dump goods on the U.S. market at cheap prices, and otherwise engage in unfair trade practices to our disadvantage.  So we can either a) persuade them to stop, which has proven unsuccessful, or b) give them a taste of their own medicine.

Now, that's not a statement in support of President Trump's recent announcement that the U.S. will impose tariffs on steel and aluminum imports.  Again, I don't like tariffs.  Instead, I will briefly address why fears of a trade war are overblown, and, by extension, why the market's reaction has been overdone.  (There's a method to my madness: I'm teeing up my next post, which will focus on the recent gyrations in the financial markets.)

Most of the people who read the Facebook posts decrying the tariffs and warning of a trade war don't even understand what a trade war would look like.  (Nor, apparently, so those who write those posts.)

It's simple: do China and Japan want to engage in a trade war with the U.S.? To take actions to limit our exports to those countries (more than they already do)?

No.  The U.S. market is too important to China and Japan.  The Chinese economy would not be where it is today without the U.S. market, nor would Japan's economic growth in the 1980s have been possible without the U.S. market.

Who are the four largest steel producers in the world?  China, the EU, Japan and India.  (We're fifth.)

Who is China's number one export market?  The EU's?  Japan's?  India's?

You guessed it: the U.S.  We account for approximately 18-20% of each of those nation's exports.  That's a lot of yuan, euros, yen and rupees.  You think those countries want to piss off that market?  Guess again.  They need us more than we need them.

Need proof?  Okay.  Who are the U.S.' top export markets?  The EU, which is among the top four steel producers.  Then Canada and Mexico, which are not.  Then China, then Japan.  Some of this is merely a function of the relative size of those nation's economies, but the appearance of Canada and Japan that high on the list is disproportionate on that basis.

Yes, tariffs are bad from a free-trade perspective.  But there is no bilateral free trade with any of the countries mentioned above.  (Yes, even the U.S. already imposes tariffs, on everything from asparagus to corsets to auto parts.)

Our tariff on auto parts hasn't made cars too expensive for Americans to afford.  We still eat asparagus.

The bottom line is this: there will be no trade war.  The cost of goods we consume will not skyrocket.  And a 400-point sell-off on the Dow in the aftermath of the tariff announcement is simply a disconnect.

***Update

After yesterday's close, Gary Cohn, President Trump's top economic advisor, resigned over the tariff issue.  Good for him.  He proved he's a man of principle, which is as rare in Washington as a curling athlete in Saudi Arabia.

The market's reaction?  The Dow was down more than 300 points mid-day, but ended the day down just 83 points, proving that a) the market is still irrational, but b) it comes to its senses eventually.  The Trump administration will be fine in terms of its economic advisors.  It's not like he's going to appoint some pro-tariff dove like Larry Lindsey to the post.  Probably more likely that he appoints a hawk like Larry Kudlow who talks him off the ledge of tariffs.

Moreover, the tariffs are in part a response to China's theft of our intellectual property, and are still subject to negotiation if China toes the line (which they likely won't, any more than North Korea will drop its nuclear weapons program if we promise to talk to them, pursuing diplomatic channels like previous administrations would have done).  And there is the possibility of carve-outs for some trading partners subject to successful re-negotiation of trade agreements such as NAFTA and TPP.  Let's not put this cart before the horse.  The market is overreacting, proactively.