U.S. Stock Markets Keep Voting Against Trump's Protectionism

U.S. Stock Markets Keep Voting Against Trump's Protectionism
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One of the economy’s best indicators gave protectionism a big thumbs down this week. As of early afternoon, the Dow Jones Industrial Average had recovered much of the ground it lost the previous day. The reason? The Administration announced it would hold off on tariff increases on most goods from China until mid-December. In other words, this should be recognized as another sign of the negative economic impact on any country that imposes tariffs. The market is voting with its portfolios - and the vote is solidly against protectionism.

The Administration’s decision to back off temporarily was clearly driven by fear of the downward impact of the Trump tariffs. Economists at Goldman, Sachs, Morgan Stanley and Bank of America all issued warnings in the past few days that the ongoing trade war with China is hurting the U.S. economy even more than had been generally predicted.

They all said that a trade war increases the prospect for a recession in the next year. Morgan Stanley’s chief economist warned a recession could begin within nine months if President Trump imposes a 25 percent tariff on an additional $300 billion of imports from China. Goldman lowered its forecast of second-half growth for the U.S economy by about half a percentage point to 2 percent, and increased its forecast of rate cuts by the Federal Reserve.

Bank of America warned Monday that there is a one-in-three chance of the U.S economy slipping into a recession within the next year, blaming the increased pessimism on uncertainty surrounding the ongoing trade war with China for weighing heavily on world stock markets. The bank said three of five indicators that track business performance - industrial production, auto sales, and the aggregated number of hours worked - are worrying.

It is not surprising that the financial institutions are worried. The slump in long-term rates since last fall, from a peak of 3.2 percent to just over 1.6 percent, indicates investors are increasingly jittery about the economy. Long-term rates are significantly lower than short-term rates, a yield inversion that has traditionally been a precursor to a recession.

As well, a key measure of U.S consumer prices unexpectedly accelerated last month, signaling inflation may be firming as the Federal Reserve debates whether to lower interest rates further.

Meanwhile, turmoil has worsened in global markets. Fresh data from Germany indicated rocky seas ahead.

These factors, combined with sharp stock market losses Friday and Monday, seem to have pressed the Administration to budge at least somewhat from its hard-line trade position viz a viz China.

Trump’s delay in a tariff increase seems to be aimed at placating these concerns. Among the products that will now be excluded from the tariff increase are cell phones, laptop computers, video games, game consoles, computer monitors, and some clothing items.

While the markets were cheered by the delay in increasing tariffs, Trump underlined the temporary nature of the move, indicating it was undertaken to spare the Christmas shopping season. He also clung to his oft-expressed claim that the tariffs did not harm U.S companies and consumers, but said they were being delayed “just in case” the tariff increases would have an impact on Americans.

The tariff increases are already having a negative impact on Americans. Farmers are complaining bitterly about the loss of markets in China, some of which may be permanent. Manufacturers are reducing orders and putting expansion plans on hold.

It turns out that trade wars are not so easy to win after all. In fact, they are almost impossible for either side to win.

The stock market boom in response to the postponement of tariff increases was greeted by investors as a positive development. But it is a temporary measure. The only way to win a trade war is not to start it. Or to quit when you are not too far behind.

Allan Golombek is a Senior Director at the White House Writers Group. 

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