Markets like to look into the future, and with this latest trade policy, they don’t like what they see.
To understand why the worry about President Trump’s planned steel and aluminum tariffs goes so deep on Wall Street and in corporate America, don’t think of Thursday’s news as being about a new tariff on steel and aluminum.
Rather, think of it as a signal about the willingness of the president to ignore his most sober-minded advisers and put the global economy at risk to achieve his goal of better terms for American trade.
Much of the rhetoric from business and conservative groups has focused narrowly on the potential cost of the tariffs. “Make no mistake, this is a tax on American families,” the National Retail Federation said. It is a “huge job-killing tax hike on American consumers,” said Senator Mike Lee, a Utah Republican.
In terms of direction, this assessment is doubtless correct. The new tariffs will tend, over time, to make automobiles and beer cans and lots of other items more expensive. But in terms of magnitude, it is misleading.
As Commerce Secretary Wilbur Ross argued in a CNBC interview on Friday, for most consumer items we’re discussing trivial amounts of “tax” — an extra fraction of a penny for the can that contains Campbell’s Soup, a few tenths of a percent on the price of a new car.
Steel imports were worth about $30 billion in 2017, and aluminum imports around $17 billion, according to government data. Even in the simplest possible way of thinking of the potential cost of the new tariffs — just applying the 25 percent tax on steel and 10 percent tax on aluminum the president plans — we’re talking about only $9 billion. And that’s before accounting for the resulting shift toward domestic production that is the entire point of the policy.
More complex modeling would be needed to produce a reliable estimate of the cost of the tariffs, but the point is about the order of magnitude. These are not numbers that are enough to cause much damage to a $20 trillion economy, or to justify the $460 billion decline in the value of the stock market that took place between Thursday’s open and Friday midday.
This market drop makes more sense if you look at the president’s announcement not in terms of what it means for imported steel and aluminum, but rather what it says about the president himself.
The most consistent economic idea running through President Trump’s decades in public life has been a conviction that the United States is being duped in the global trade arena. He has denounced China, called for ripping apart the North American Free Trade Agreement, and accused generations of American trade negotiators of being incompetent.
Yet in the first 13 months of the Trump administration, even as the president kept using bombastic language about trade, any formal action was restrained.
An incident from April is instructive. After leaks indicating that Mr. Trump planned to withdraw the United States from Nafta, there was an onslaught of phone calls to the White House from C. E. O.’s and international leaders. And pro-trade advisers worked to get the president’s ear.
He backed off, saying the next day that he would give Nafta renegotiation a try.
When the administration has acted on trade — with tariffs on solar panels and washing machines, most notably — it has been relatively narrow move that fit comfortably with precedent and was unlikely to spark global blowback.
Lately, there has even been talk that the administration might reverse course and move to rejoin the trans-Pacific Partnership, the trade deal that the United States pulled out of at the start of the Trump administration.
More broadly, financial markets spent the first year of the Trump presidency gaining comfort that investors could count on the administration to deliver business-friendly economic policy, regardless of presidential bombast. That came through in such areas as the tax law (which cut the corporate income tax rate substantially) and appointments to key economic posts (like the former private equity executive Jerome Powell as chairman of the Federal Reserve).
Mr. Trump not only overruled his more pro-trade advisers, but he also did so in an impromptu way, seemingly setting policy before the details had been worked out and without buy-in from across his own administration.
And by invoking national security concerns as the rationale for the action, the president was setting a precedent that could give other countries more wiggle room to use security as a reason for imposing tariffs on American goods.
Moreover, on Friday, rather than try to tamp down fears of an all-out trade war, President Trump appeared to relish the idea. In a Twitter message, he said that for a large country like the United States, trade wars are “good” and “easy to win.”
Financial markets tend to extrapolate, looking at small pieces of information today to project what the future will look like. That’s why when a company reports disappointing financial results for a single quarter — missing an earnings target by a few million dollars, for example — markets sometime lop billions from the company’s value.
The United States economy, in the aftermath of the tariff announcement, is the equivalent. The steel and aluminum tariffs are manageable. But if the president is so gung-ho about a trade war, and is now willing to ignore his more cautious advisers, what comes next might not be.
