Trading Places

Full disclosure: Last week, I wrote a big, beautiful blog post on how tariffs aren't the best tool for modern economics. Then Trump did what Trump does and took credit for a good day for the stock market by reversing the policy that put it into a nosedive in the first place. So not only did I get to watch my retirement account get pummeled, but I got to do twice the work. 

Here is a slight retooling.

The trade wars that have always been in the background of Trump's agenda roared into full force a couple of weeks ago, and the markets did not take the news well - to put it mildly. The Dow lost about 10%. FTSE lost about 8%. Then Trump changed his mind, hopefully, because the realists in the room were telling him it wasn't working, and put a 90-day pause on everyone but China. After a massive rally on Wednesday, there was an equally enormous sell-off on Thursday due to 145% tariffs on goods from China. European and Asian markets did not experience this whiplash because they have realized that trade barriers with a massive trading partner are counterproductive, to say the least.

Like most protectionist policies, tariffs are built around two assumptions. The first is that the country can and will produce anything it requires independently. The second is that the country is an attractive enough customer that foreign governments will comply with whatever demand is given to access local consumers. Unfortunately for Trump, neither is true nor has it been true for at least 30 years. Let's look at both.

The United States can't or won't produce everything it needs. I won't argue the merits of internationalism when it comes to trade (because there are tradeoffs), but if you look at anything from your phone to your car to the lumber that's in your home, you'll find that it comes from either China, Mexico, or Canada. For assembled goods such as iPhones or Chevy Silverados, it's cheaper to assemble the goods where labor costs are a fraction of what they are in the US. As for raw goods, well, Canada has a ton of space for lumber. Tariffs add extra costs to these products as manufacturers don't pay out of pocket; they merely pass the costs onto consumers by raising the costs of the widget. That's why several European auto manufacturers, such as Land Rover and Audi, paused exports to the US. 

And a slight tangent: many luxury goods, like Land Rovers and Audis, are not made in the United States. While the Musks and Bezoses of the world could afford an overnight 39% increase in MSRP, most Americans cannot. In theory, this would force people towards domestic goods, but in reality, it would take years for consumers to be ready to buy them.

America has outsourced most of its manufacturing to foreign labor markets. In 1980, there were 19,282,000 manufacturing jobs and a national population of 226.5 million, or 11.7% of the total population. Flash forward to today with 347 million people and 12,755,000 manufacturing jobs, or 3.6%. Automation and advancements in technology can be blamed for some of this decline, but so can foreign markets who would love to produce the things the insatiable American consumer market demands. Americans have also become incredibly used to abundant, affordable goods and tend to make electoral decisions based on that alone. Combine that with the fact that manufacturing jobs are not as attractive to people entering the workforce thanks to several generations of focusing on college-educated, white-collar work, and you have a country unable and unwilling to pivot back to a pre-globalized labor force. 

Those are the internal factors, but what about the rest of the world? Surely Madagascar would be willing to bend over backward to avoid a 47% tariff from a country that supplies them with everything they need? This reflects a fatal flaw in the economic thrust of making "America great again." It expects the outside world to be like in 1950 when there were two options: a free market American sphere and a state-controlled Soviet sphere, where if you wanted the freedom-loving choice and Coca-Cola, you'd partner with the United States. But in 2025, Madagascar receives 20% of its goods from China, 14% from Oman, and 9% from India, while America is way down at only 3%. We're not the only choice. The economic world is more complicated than the binary options of 50 years ago. Exporters have options between two large populations of wealthy consumers: the US and the EU. Importers have options between two massive manufacturing bases: the US and China. If the United States opts out of international trade, the EU and China will be more than happy to cooperate, as the European stocks have shown over the past week.

It's not only Madagascar. In 2000, the United States was the world's largest trading partner. Today, China is the dominant force in all of Africa and Asia, Eastern Europe, Australia, and most of South  America. America's economic dominance has been reduced to a rump state centered around North America and the western half of Europe. 

It's also become increasingly evident that this has been a massive mistake by the Trump administration. While he is not one to ever admit a mistake, the fact that the talking point repeated from the White House down through right-wing media was one of short-term pain for long-term benefits, and it was necessary to correct the market because it was overvalued. However, these tariffs did not last a week before being rolled back, at which time right-wing media praised the administration for doing what it took to make the markets roar back (all the while never mentioning it was roaring back because the administration reversed course). Then, the market suffered another bad day on Tuesday when Trump announced 145% tariffs on China. Then, over the weekend, the White House announced that electronics from China would be spared, but I'm not going back to edit earlier when I mentioned iPhones. 

While these actions should allow the markets to return to where they were before, business leaders are now coming to the same conclusion European defense ministers came to in March - the US cannot be relied on. Emanuel Macron has called on European businesses to pause American investments until the trade situation can be sorted. But with a leader as… mercurial as Trump, can it ever be sorted? Even those who believe in free-trade will admit nations have the right to renegotiate trade deals from time to time but few outside of the White House will agree that multiple and seemingly random and massive shifts in policy have not help the long term stability of international trade. Businesses like stability and moving through three trade regimes in as many weeks is anything but stable, and who knows what this week will bring?