Being a disordered personality of the first order, Trump has acted as a cheereleader for both rising stock valuations and trade protectionism despite the latter being anathema to the former in the opinion of most conventional businesspersons. Insofar as American businesses with operations abroad favor a relatively open and predictable environment for international trade, further moves Trump makes to antagonize the United States’ trade partners may make stocks drop even further than they have in recent days.
Speaking of which, Trump’s minders (babysitters for us critics) have been able to hold protectionist policies–if not necessarily rhetoric–in check by precisely making the argument that outsized stock market gains until relatively recently have been made possible by not erecting more trade barriers. The problem is that with the stock market now tanking, it is harder to make the argument that rising stock markets and trade openness go together. Axios’ Jonathan Swan writes:
- One of the strongest arguments Gary Cohn and Steven Mnuchin have been making to Trump to persuade him not to blow up NAFTA or take hardline protectionist trade actions is ‘Mr. President, the economy is booming and the stock market is setting records under your leadership. Why would you risk that with these trade actions?'”
- “My question: if they no longer have that argument, what else do they have in their quivers to persuade Trump not to follow his most hardline instincts on trade?
Also keep in mind that, in contrast to Trump’s campaign promises to reduce to the US trade deficit, it’s been exploding as of late, and we can only expect it to rise further due to recent tax cuts passed that will further increase the US budget deficit and put even greater upward pressure on the external deficit:
The U.S. trade deficit jumped to the highest level in nine years, according to a Department of Commerce report on Tuesday. Despite President Donald Trump’s repeated promise to shrink trade deficits, it rose 12.1% to $566 billion during his first year in office and leaped 5.1% in December alone.And this may be just the beginning of an upward trend following Trump’s tax cuts, according to economists. Derek Scissors, resident scholar at American Enterprise Institute calculates the tax cuts may boost the trade deficit by $200 billion. A BofA Merrill Lynch Global Research report also expects the share of the trade deficit in GDP to grow 0.2 percentage points by 2020.
So, if Trump no longer buys the argument that stock market will do well because of avoiding trade protectionism that upsets the status quo, what happens? It might set the stage for more protectionism over the coming months:
The Trump administration is working on trade measures that will make the recent tariffs on solar panels and washing machines look minor by comparison. At best, these potential measures could protect the U.S. from unfair foreign competition. At worst, they could ignite trade wars that end up harming everyone.
China in particular is in Trump’s crosshairs and might well fight back against any effort to restrict its exports. “I have been told by certain officials that yes, definitely, there will be retaliation” from China if the U.S. slaps new tariffs on Chinese-made products, William Zarit, chairman of the American Chamber of Commerce in China, said at a briefing in Beijing on Jan. 30.
Couple a falling stock market with a soaring trade deficit under Trump and, however misguided his ideas are about their causes, expect the blustering fellow to make even harder moves against trade openness through China-aimed sanctions and the like.