President Donald Trump’s March 22 announcement that he’s moving to impose steel tariffs of up to $60 billion worth of Chinese imports rattled financial markets and touched off a fresh economic debate.
The U.S. Chamber of Commerce was not happy as they chewed their rubber chicken and eyed their chocolate pudding, saying that “imposing taxes on American consumers and job creators in the form of new tariffs” is not the way to achieve fairness in the U.S. trade relationship with China.
On the other hand, some labor unions put down their lunch pails to applaud the move. The United Steelworkers union says Trump is taking a “balanced approach” by pushing the tariffs, investment restrictions on China and a case with the World Trade Organization.
The nervous nellies on Wall Street showed their disapproval as the Dow Jones Industrial Average fell sharply on the news that Trump was planning to confront China but – after further reflecting that they could make some money – regained some of its earlier losses in afternoon trading.
“It is the largest deficit of any country in the history of our world,” Trump hyperbolized, speaking of the U.S.-China trade imbalance, blaming it for lost American jobs.
He said his action would make the country stronger and richer.
China warned it will take “all necessary measures” to defend itself, raising the prospect of a trade war between the world’s two biggest economies.
So are we in for a “Trade War” similar to those that followed the Republican passage of the protectionist Smoot-Hawley Tariff Act of 1930? Smoot-Hawley, which just sounds like the 1930s, raised duties on hundreds of imports and evoked retaliation from Canada and Europe.
Despite the fire-breathing rhetoric of Trump, KC Mathews, executive vice president and chief investment officer at UMB Bank thinks a full-blown trade war is unlikely.
“The big question, I believe, will be, ‘Is this a trade war or a trade spat?’ ” he said. Trade wars, he noted, have a negative impact on the stock market and are therefore much rarer. Matthews said the infamous Smoot-Hawley Act may not have caused the Great Depression, but some research indicates it did prolong it.
Matthews, based in the bank’s Kansas City, Missouri, headquarters, was in Fort Worth on March 22 for a meeting with clients at the Petroleum Club at 777 Main. He recently authored a paper on the impact of tariffs and trade wars as the war of words was heating up between the Trump administration and the world.
“Trade wars are interesting in that we haven’t seen too many,” he said. “You have to go back to 1922 when you had a 40 percent tariff on a broad basket of goods.”
Many former presidents – Johnson, Carter, Nixon, Reagan, Bush, Obama – and now Trump, he noted, have used tariffs for different reasons. “Tariffs are strategic and they can be used such as to protect an industry that is in its infancy,” he said.
Matthews compares the concept of free trade to unicorns and leprechauns.
U.S. tariffs on foreign goods are consistently lower than foreign tariffs on U.S. goods, he said.
The U.S. has only a 2.5 percent import duty on Chinese cars, while China imposes a 25 percent tariff on all imported automobiles from the U.S. “Free trade?” he said. “Hardly.”
While the steel industry favors imposing the tariffs, Matthews thinks it could backfire. “You’ve got to think about capacity,” he said, noting that if steel production increases the industry will hire more workers and will pay for them dearly with unemployment at such a low rate.
But at present, Matthews believes the current situation is part of Trump’s negotiation strategy, and that it falls under the trade spat definition.
“Trump’s negotiating tactic is to first punch you in the nose,” said Matthews. “And then he talks to you. I believe that’s where we are.”
Robert Francis is editor of the Fort Worth Business Press.