Tariffs are a zero- to negative-sum game. They produce cost-push inflation.
Top White House economic adviser Larry Kudlow (historically a free-trader) tried to reassure markets this week, but it's hawks like U.S. Commerce Secretary Wilbur Ross and National Trade Council chief Peter Navarro who actually have President Trump's ear.
To me, the views that animate Navarro's policy prescriptions demonstrate his economic illiteracy. There's no inverse relationship between U.S. imports and America's gross domestic product, as Navarro asserts. In fact, there's a strong positive relationship between changes in trade deficits and changes in GDP.
Still, both Navarro and Ross support Trump's proposed steel tariffs, which are aimed at helping U.S. steelmakers compete with Chinese and other competitors. But a byproduct of these tariffs could be rising steel costs that ripple across the U.S. economy.
After all, the tariffs seem likely to hurt U.S. factories that use steel much more than they'll benefit the smaller number of American companies that actually make steel. And in reality, the U.S. economy depends on China. We're living in a flat, networked and interconnected global economy, which means:
- The Chinese export market is important to U.S. companies;
- China produces low-cost goods that benefit American consumers;
- China funds our federal budget deficit, in essence sending their surplus of savings to the United States. If China ever stops buying U.S. Treasuries, where will we get alternative funding from?
Frankly, I think we need more Kudlow and less Navarro --- but I'm afraid that the Navarros of the Trump administration will prevail. If so, more shareholder wealth could be destroyed and CEO confidence (and spending plans) might be damaged.
Unfortunately, the differences between running a private real estate company and running the U.S. government are profound -- something President Trump doesn't really understand.
Cheap, incendiary words and impulsive "on-the-fly" policy pronouncements might play well with the president's relatively small base, but they'll negatively impact lots of people's lives -- and are beginning to adversely influence markets as well.
Personally, I remain bearish and opportunistic in my stock purchases.