Gary Cohn called it quits yesterday. (“So what! Who’s he anyway?!”)
Mr. Cohn stepped down from his post as Director of the National Economic Council. As such, he was President Trump’s top economic advisor.
His exit from the Administration comes less than a week after President Trump unilaterally announced that he was going to authorize heavy tariffs against foreign-produced steel and aluminum. Gary Cohn, along with virtually every top economist in the country, plus the leaders of Mr. Trump’s own Republican Party, had strongly opposed this move.
Mr. Cohn is a pretty smart guy. Before joining the Trump Administration, he was President of Goldman, Sachs & Company, the nation’s largest and most prestigious investment banking firm. He knows a bit about economics, foreign trade, currencies, and what makes the needle move on Wall Street. And, he knows what bad fish smells like.
Last week, in announcing the proposed tariffs on steel and aluminum, the President tweeted, “Trade wars are good and easy to win.” Virtually every responsible economist in the world disagrees with Trump’s statement: trade wars are bad, and there are no winners.
Mr. Cohn told the President the same thing: “Don’t do it.” He was wasting his breath.
Wall Street took the tariff and Trump’s naive comments badly, and the Dow Jones Index dropped 500 points. When Cohn resigned, the reality sunk in that the President was “winging it” with the economy, the DJI dropped another 300 points.
Trump’s provocative action regarding international trade could be just the beginning of something very bad for our country.
Donald Trump is the only President ever elected despite having no military or governmental experience. His background is, essentially, as a real estate developer and salesman. Trump’s understanding of economics, global trade, and international relations is limited to his real estate ventures and advice he gets from a circle of nationalist kooks, Fox News, and Rush Limbaugh. He pays more attention to Tweeters than he does his Cabinet.
The President’s chief tactics in his private sector career include bluster, bullying opponents, and screwing business partners, investors, and vendors: whoever’s standing at the end “wins” no matter how that was accomplished. This is apparently his mindset when he views any problem.
These traits might work some of the time in real estate, where “one-off” deals are common (i.e. you may never do business with that person, company, or community again). Then, again, Trump’s business history includes many spectacular failures, bankruptcies, and a rather poor reputation in his chosen industry. He lost the Presidential vote in New York, where people know him pretty well, by 2 million votes. In-state he’s known as a general douchebag.
International relations is a whole different animal than simple one-on-one real estate deals because the people that you do business with today will be back next week or next year. The idea of “winning” deals takes on a totally different meaning, because of the geopolitical stakes and the need of America to develop and maintain alliances.
Not that I’m a big fan of this, but, for “strategic reasons”, the United States has 800 military bases scattered around the world in 70 host countries like England, Germany, Spain, Japan, South Korea, and cooperative base-sharing agreements with others like Canada. Those countries (our “allies”) are not obligated to host America’s military wherewithal. Trade relations are a part of the quid pro quo. Protectionist moves, like instituting tariffs which punish those strategic partners, are bad statecraft.
This is something that the Secretary of Defense Mattis and Secretary of State reminded the President before he ignored them last week and threw his international trade tomahawk.
Virtually all economists agree that free trade promotes economic expansion, which promotes development of smaller countries, and their improved quality of life means the ability to purchase more goods, hence enhancing trade opportunities for all nations. It is sometimes in America’s interest to make trade agreements that are negative in the short-term but enhance American export markets in the long-run. More customers mean more business.
The President doesn’t seem to understand this. He thinks that any trade deal in which the U.S. comes out in second place is bad, even if, in the long run, we prosper economically and in stature.
America (hence, Donald Trump) needs to focus on the “big picture”, the way we did after World War II when the United States was the driving force in shaping the current world economy. Our main emphasis was developing other countries’ economies so they could buy American goods. The United States now has 4.4 percent of the world’s population but 24.3 percent of the world’s Gross Domestic Product. That’s pretty good by any measure.
Protectionist moves, like slapping a tariff on importation of a particular foreign-made product to assist domestic suppliers of the same product, is typically a bad idea. The short term benefits might be saving a few local jobs and breathing some air into a struggling industry. But, in many cases, that industry is struggling because its labor costs are high and/or it is using old technology (making it non-competitive). Or, worse, it’s becoming obsolete.
A tariff which protects an struggling industry like this allows it to remain complacent and ignore the reality. Tariffs stave off decision-making and innovation, creating less incentive for a business to pull itself up by its own bootstraps. And, the workers are lulled into a false sense of security, not realizing that the trap door is about to open under their feet, and giving them no time to re-train in a more viable industry.
And, of course, tariffs introduce barriers to trade, not to mention increasing costs to American consumers.
The General Agreement of Tariffs and Trade in 1947, and the World Trade Organization in 1995, are the result of the open, rules-based system of international free trade that the United States helped to create in order to foster democracy, international law and collective security. That system is designed to minimize the imposition of tariffs, particularly spurious ones enacted for limited, local political purposes.
The politically-inspired steel and aluminum tariffs proposed by President Trump, to “protect” American workers in those industries, fly in the face of the internationally-accepted norms. In particular, because the Trump Administration is justifying the tariffs on the basis of national security, which everyone in the world knows is a sham excuse. Even Secretary of Defense Mattis said so.
If enacted, the proposed tariffs will be met with retaliatory measures from other countries. This will likely generate counter-measures from the Trump Administration, and it is possible that the “trade war” that the President covets could crater the international free trade system.
As (Republican) Senate Majority Leader McConnell said yesterday, he has a “high level of concern and fear” that these proposed tariffs “could metastasize into a larger trade war”.
(Republican) Speaker of the House Ryan is also quite concerned about the “unintended consequences” of Trump’s proposed tariffs.
The No. 2 Senate Republican, John Cornyn, is concerned about this move “jeopardizing the economy”.
A Wall Street Journal editorial called the tariffs Trump’s “biggest policy blunder”.
That last one is a significant comment, considering the steady stream of economic nonsense coming out of the White House for the past 14 months.
Mr. Trump seems hell bent on goosing the American economy to its absolute productive capacity. First, he got Congress to pass a large tax cut (financed by borrowing). Second, his budget goal is to increase government spending ($1.5 trillion), again with borrowed money. Third, he’s doing his damnedest to reduce government regulations, making it easier to begin new investment and construction projects. Fourth, Trump is exhausting every “protectionist” tool in his arsenal to limit competition from foreign workers and businesses by restricting immigration and imports.
The collective impact of these policies is to super-stimulate demand and shrink supply.
There were attempts in the 60’s and 70’s to stimulate a “hot” or “high-pressure” economy like the one Trump seems to want to emulate. They failed miserably, generating double-digit inflation, frequent recessions and public demoralization. In the decade of the 70’s, the total inflation was 103 percent…prices doubled. It was not a happy time for Joe Sixpack…the kind of guy who voted for Donald Trump.
The President seems oblivious of this. Or, maybe with his ego, he feels that they will now work because he is Donald Trump.
The target countries of Trump’s recently-announced tariffs (on washing machines, steel, aluminum, solar panels) are quite attuned to American politics, our key leaders, and the politics that got them elected. European Union leadership, incensed at the proposed tariffs, have announced that they are looking into retaliatory tariffs on Harley-Davidson motorcycles (Speaker of the House Ryan), Jack Daniels whiskey (Majority Leader McConnell), agricultural products from the Midwest and the South (home of Trump’s political base).
Of course, foreign government pissed at our President could hurt retaliate where it will really hurt Donald Trump: in his own pocketbook.
If we have learned anything from the Russian meddling into the 2016 elections, it would be that foreign governments understand how to manipulate U.S. voters. Strategic retaliatory tariffs could very quickly deflate any Trump claim of a trade war “win”.
And, as if the President doesn’t have enough to worry about, one of the European Union’s economic leaders mentioned yesterday that “You keep those dossiers in the top drawer for a rainy day. We know where the bodies are buried.” That would be a not-so-subtle reference to the “Steele Dossier” which was compiled by a British ex-MI6 operative and has identified a bunch of potentially damaging matters of political embarrassment to President Trump. It is very likely that the intelligence agencies of our erstwhile “allies” have similar file folders on The Donald’s many escapades over the years.
The various potential retaliatory actions of our “allies” might pale in comparison to anything that our actual “enemies” might come up with. China, the second greatest superpower in the world, is a primary target of Donald Trump’s nationalistic trade rhetoric, and was targeted with Trump’s earlier tariffs against solar panels and washing machines. Russia has been in the U.S. doghouse for some while and is presently subject to economic sanctions which inhibit their economic growth.
Using trade as a weapon of statecraft can sometimes have severe repercussions. World War II began with a “currency war” among European nations following WWI in an effort to enhance each nation’s trade balances. A global “trade war” followed that, initiated by the Smoot-Hawley tariffs (by the U.S.) and followed by retaliatory tariffs of U.S. trading partners. Adolph Hitler made political hay in Germany denouncing the various efforts of other countries to depress the German economy. The Japanese had territorial goals in the Far East that were stymied when the United States led an embargo of strategic materials (oil and steel, primarily) to stifle the Japanese economy. What then followed was a “shooting war”.
(Pandora’s Box : a currency war was initiated by the Obama Administration in 2011, and other nations retaliated; and, a trade war is now brewing between the U.S. and (seemingly) any country with whom we have a perceived trade deficit. Let’s hope that there isn’t a rush to the bottom, or we may find ourselves facing off against formidable opponents in another shooting war.)
Why the tariffs in the first place, you may ask? Well, Donald Trump made campaign promises to a variety of Rust Belt voters in the 2016 election. He said that he would save their jobs and resurrect their steel and aluminum production industries. His tariffs on foreign-produced steel would presumably help 140,000 American steel workers by making foreign-produced steel more expensive. So, chalk up a “win” for MAGA, right?
Probably not. Approximately 6.5 million Americans work in steel-using industries. The cost of raw materials to these manufacturing companies will increase because of the tariffs, which will result in higher prices and less demand for their products. Auto manufacturers, airplane manufacturers, construction companies, and defense contractors are among the companies particularly vulnerable to higher input costs. Canned goods manufacturers will also face rising costs.
Consumers are likely to pay higher prices as a result, with the tariffs serving as a “tax” on consumers. Overall, a tariff such as this is inflationary.
The bottom line is that many jobs will be lost. In 2002, President George W. Bush imposed similar steel tariffs, and estimates suggest that the resulting higher steel prices led to 200,000 lost jobs and $4 billion in lost wages in a ten-month period.
So, in protecting some of his base political supporters, the President would be injuring many other Americans. And, that’s the rosy outlook. If the protected steel-makers get smart and decide to put their improved business profits into automation instead of re-hiring employees or giving them raises, then Trump’s political base gets nothing while the rest of the Nation gets screwed.
Myopia like this is inexcusable. President Trump seems incapable of learning anything from history or take advice from real experts. His obsessive need to win “battles” overwhelms any sense of duty to carefully consider the consequences of losing the “war”.
Donald Trump has expressed his protectionist opinions often over the past two decades. However, the world economy has changed a bit since 2000. At that time, China (the main villain in his view) exported more than 40 percent of its goods to the United States. Since that time, however, the Chinese economy has grown substantially thanks to the international free trade model. Now, only 25 percent of its exports land in American ports.
China is now the world’s largest steel exporter. However, it only supplies 3 percent of America’s steel needs. Trump’s tariff on Chinese steel is, therefore, just “for show”; it will look bold, to his political base, but have no significant impact on steel making here in the U.S.
(Because of goofy foreign policy blunders since Trump took office, China is reaping a foreign relations windfall, particularly in the Pacific Rim, quickly closing trade deals with every country it can. The “Open for Business” sign is openly displayed by China, while the U.S. is, seemingly, turning inward.)
What should really concern Mr. Trump is the fact that China holds more than $1 trillion in U.S. debt. We’ve borrowed more from China to support our governmental endeavors (deficit-financed budgets!) than from any other country. Trump’s recent tax plan will produce another $1.5 trillion in debt over ten years, and the proposed budget expenditures are also set to increase by $440 billion in 2018, not offset by cuts or additional revenue. So, President Trump and Congress are embarking on an unprecedented spending spree, planning on using the corporate credit card: U.S. bonds.
The question is: Who’ll buy them? Probably not China, the obvious target of President Trump’s “trade war”.
Other targets of the President’s ire include Canada and Mexico. He’s not happy with the North American Free Trade Agreement (NAFTA), so he’s trying in every way to arm-wrestle our neighbors into concessions in a new deal. Probably the main loser in the announced proposed tariffs on steel and aluminum is Canada: it is the top exporter to U.S. markets of both steel and aluminum. Simultaneously, Canada is the biggest importer of U.S. steel and aluminum.
As with tariffs of any kind, there would be repercussions if Canada really had to absorb this blow to their economy. However, the overall impact to U.S. steel-using manufacturers would be higher costs, and this tariff might actually cause a number of steel- and aluminum-using American manufacturers to relocate their plants north of the border. Thus, Trump’s “job creation” initiative might end up causing the loss of thousands of U.S. jobs.
That’s how the “Law of Unintended Consequences” works.
The whole trade deficit “enemies” bogeyman that Trump is fixated on, i.e. that we should punish countries that don’t export to us as much as we import from them, is pretty silly on its face. We are the richest country in the world, with the biggest economy. Our manufacturers and consumers buy a lot more goods, and we produce more, than any other country. So, it stands to reason that we would be in a trade deficit position with just about any country…and that’s not a bad thing. It means that our economy is humming along pretty good and we’re prosperous. We should be happy to be in this position; almost every other country would be/is envious. “Count your blessings!”
Free trade pacts over the past 70 years have got us to this exalted position.
Greed seems to be the only motivation to “rub it in” to the other, less fortunate countries. Rather than “noblesse oblige”, Trump opts for nationalistic chest-thumping and strong-arm tactics. “Let them eat cake”, he says.
The President and his buddies should be very careful about pushing all their chips to the middle of the table right now. Economic “recessions”, i.e. when the gross economic product recedes, have occurred in America on the average of once every ten years since 1970. The last one was the “Great Recession” which started in 2008; it was a whopper, and negatively impacted every American.
The economy has been growing since that time. Investor confidence is reflected in the Dow Jones Index. Until January of 2018, it was on a 100-month continuous upward climb. Since January, it has declined…something not seen in 9-plus years.
We are due, maybe overdue, for an adjustment. Virtually every economist agrees that stocks, bonds, and credit are in a “bubble” right now. In other words, ripe for a significant downward adjustment.
Of all times that a government would want to re-experiment with failed ideas to super-charge an economy, this is probably the worst. Folks with all of their retirement savings in the stock market would be well-advised to cash-out a portion, because…an adjustment will be forthcoming.
It’s a scary time right now in Washington D.C. The sharpest advisors that President Trump could recruit are jumping ship, because he won’t take serious advice. Responsible “experts” won’t return his calls. Thus, Trump will be bringing on lesser talents and outright kooks to replace them.
Heaven forbid that his unprovoked trade war turns into a shooting war; who knows what this mentally unbalanced idiot would do.
UPDATE (3/15/18): President Trump bragged at a fundraiser about misleading a close ally, Canadian Prime Minister Justin Trudeau. Canada would be the most aggrieved victim of Trump’s recently-announced steel and aluminum tariffs. In a man-to-man conversation, Trump (according to himself) told Trudeau that America has a trade deficit with Canada, even while Trudeau was attempting to correct him. Trump admitted that he didn’t know, for sure, but told Trudeau, “You’re wrong, Justin.” In a tweet on Thursday, Trump repeated the falsehood that the U.S. has a trade deficit with Canada.
In fact (not that our President cares about those), in 2016 the United States exported $12.5 billion more in goods and services than it imported from Canada, leading to a trade surplus, not a deficit.
We all know that our President is a liar, as embarrassing as that is, but to lie to a long-time ally is unacceptable behavior for a chief of state. To top that, though, it appears that Trump’s basis for imposing steel and aluminum tariffs on Canada (supposedly to correct a trade deficit) is factually incorrect…and he seems to be proud of the fact that he’s punishing Canada for no purpose.
What in the Hell is wrong with this man? Maybe it’s time for him to get a mental exam?
