President Donald Trump came to office breaking the laws of US politics, knocking over Democrats’ blue wall in the Rust Belt and remaking the GOP in his own nationalist image.
He basically spent 2016 saying there was a different political reality than the one politicians and most voters knew, and it turned out he had a point.
There’s a similar alternate reality emerging where it comes to the President’s use of tariffs, first against an economic rival – China – and then against our closest trading partner – Mexico – as well as potentially against an ally like Australia, according to The New York Times.
The laws of the economy suggest markets should react and prices should rise.
But the economy is not adhering to those laws. The Dow Jones Industrial Average, while down in May, was not frighteningly down and is still up for the year. Unemployment remains low, though Friday’s jobs report revealed that the US economy generated only 75,000 jobs in May, during which Trump expanded his trade wars. Consumers haven’t felt the pain of the trade war in their wallets yet, either.
Trump has promised tariffs on just about everything coming into the US from China. Those measures were supposed to be temporarily deployed during trade negotiations. But with talks stalled, Trump upped the ante in a punitive way, delivering on a promise to raise the tariffs on $200 billion worth of goods to 25%.
It’s not that there haven’t been consequences.
China, Mexico, India, maybe Europe. Who’s next?
China was the United States’ largest trading partner in 2018, according to census data. The tariffs have helped knock it down to third place so far in 2019. The new number one US trading partner? Mexico, where Trump is threatening to tariff every import to encourage the Mexican government to stop Central American refugees from traveling through Mexico to the US border.
A contraction of trade between the US and Mexico could crown Canada as the new number one. Would Trump find a reason to slap tariffs on them? (Maybe!)
The list of targeted countries continues to grow. The White House removed special trade status for India last week, which should raise prices on goods coming from the US’s ninth largest trading partner. Possible new tariffs of 25% on foreign automobiles would target Europe.
Upending ‘economic orthodoxy’
Promises of pain to consumers have not drastically shaken US markets and other economic data keeps plugging along, for now, which has emboldened the President and some of his advisers to argue that the perceived rules of the economy do not apply.
“I get that, that’s the economic orthodoxy that when tariffs go up, consumer prices go up,” said acting White House chief of staff Mick Mulvaney in an interview on Fox News on Sunday. “But the proof is in the pudding. There is no inflation. Prices have not gone up. We put tariffs on China, we’re putting tariffs on Mexico and inflation is still under control. That’s because that old-fashioned economic orthodoxy doesn’t work when it’s relatively easy to substitute other goods, prices from China have gone up.”
Set aside that Trump’s nationalism was first sold as a way to bring jobs from China back to the US, not send them to other Asian countries, like Vietnam. In the case of Mexico, the tariffs are being employed as a political stick and could actually complicate the trade deal with Mexico that Trump wants Congress to ratify.
Mulvaney was also trying to make clear that Trump is dead serious about the blanket tariffs on Mexico, which would start June 10 at 5% and rise to 25% by October. There’s some possibility that people think he’s bluffing about possibly raising the price of their avocados or futzing with the supply chain for the auto industry. Chipotle is warning of a 5-cent-per-burrito increase if the tariffs become permanent, which a lot of people might not mind or notice at a time when Americans who want jobs generally have them and consumer confidence remains very high.
But tariffs upon tariffs could have a compounding effect as they add to prices here or there. And that 5 cents per burrito will mean more to Chipotle than to an individual consumer. The lesson of Trump’s strategy may ultimately be that these things take time to affect the economy.
Encouraging the UK to get free of shackles
Heading into Europe for a state visit and to commemorate the 75th anniversary of D-Day, Trump seemed to nudge the UK toward the same type of gonzo trade bravado with an oblique reference to “shackles” that could only be a reference to Brexit.
Most Brits want to strike an exit deal with the European Union to blunt the shock to their economy, but Trump’s political allies there, like the former foreign minister, Boris Johnson, who wants to replace outgoing Prime Minister Theresa May, say they’ll take the country out of the EU, deal or no deal, come a new October deadline.
Trump seemed to be invoking Brexit and and teased a US-UK trade deal “once U.K. gets rid of shackles.”
The message is he’d reward Britain for a stronger break with Europe.
Conventional wisdom is that tariffs pose a threat to the economy
Meanwhile, as Trump continues to rack up tariffs and project confidence, business leaders are increasingly skittish.
A majority of economists surveyed by the National Association for Business Economics said protectionist trade policies were the biggest threat to the economy in 2019.
You wouldn’t know it from Trump’s Twitter feed, which is all about the price he’s making China pay and his complaints about how its government actively subsidizes industry.
“China is subsidizing its product in order that it can continue to be sold in the USA. Many firms are leaving China for other countries, including the United States, in order to avoid paying the Tariffs. No visible increase in costs or inflation, but U.S. is taking Billions!”
That claim about Treasury coffers being filled by billions in tariffs is overblown and has been debunked, but he keeps saying it. He has not mentioned how the tax law he signed is expected to explode US budget deficits.
His outgoing economic adviser did, though.
Kevin Hassett has been Trump’s chairman of the White House Council of Economic Advisers for two years, was previously an advocate of free trade and raised the alarm about the large national debt, although those views have been tempered during his time in the White House.
Hassett’s impending departure, announced late Sunday, had nothing to do with Trump’s tariffs or the debt, he told CNN’s Poppy Harlow.
He admitted there are growing questions about the economic outlook.
“The uncertainty about the forecast is much higher than the last time we talked,” he said, referring to an interview a month ago. He said growth was likely to fall below Trump’s promised 3% but that he’s not worried about a recession.
Why worry in Trump’s economy?
This story has been updated to reflect Friday’s jobs report.