Trump’s Tariffs Have McKinley Turning in His Grave The 25th president used reciprocity to press for an expansion of trade. The 47th is going backward.
By Phil Gramm and Donald J. Boudreaux in the WSJ:
(…) On April 2, President Trump plans to take his protectionist policies global. If he does, it will be the beginning of the end of the trading system that built the modern world.
Mr. Trump’s policy turns the traditional meaning of reciprocal trade on its head. He wants to achieve reciprocity only by raising tariffs, almost certainly triggering retaliation.
Reciprocal trade policy as envisioned by President William McKinley, whom Mr. Trump often cites as his role model, recognized that by the dawn of the 20th century America had emerged as an economic colossus capable of producing an abundance of products that could be profitably exported. As McKinley explained, “the expansion of our trade and commerce is the pressing problem. Commercial wars are unprofitable.”
McKinley’s reciprocal trade policy was aimed at opening markets for U.S. products with agreements that lowered tariffs on imported products proportionately as other countries lowered theirs on U.S. products. President Franklin D. Roosevelt used reciprocal trade policies to back the world out of the Smoot-Hawley tariff. His successors used reciprocal trade to lift the majority of the world’s population out of poverty and achieve 75 years of peace and prosperity.
The Trump perversion of reciprocal trade co-opts a politically appealing phrase to justify his preferred policy. While the president uses European and Japanese tariffs on American cars to justify comparable tariffs on U.S. imports, nowhere does he propose real reciprocity.
He could eliminate the 25% U.S. tariff on imported trucks as an inducement to other countries to eliminate their tariffs on U.S. automobiles. Mr. Trump denounces high tariffs on U.S. exports to Central and South America and would use his theory of reciprocity as an excuse to raise U.S. tariffs on imports from those countries. But real reciprocity would be achieved by eliminating the quota on U.S. imports of sugar, for which Americans pay twice the world price, in return for Central and South American countries lowering their tariffs against U.S. products.
The timing of Mr. Trump’s actions could hardly be worse. America now dominates the tech industries. Because of our strong comparative advantage in high-tech and artificial intelligence, these industries are obvious targets for retaliation.
There is something to the claim that history repeats itself. The trade wars that wrought havoc in the 20th century occurred because of America’s efforts to protect agriculture from foreign competition in the 1920s and ’30s, when we had seized a strong comparative advantage in industrial production. World War I had crippled European agriculture as millions were pulled off farms to fight. Crop prices soared and American farmers enjoyed an economic heyday. But when the war ended, agriculture production recovered in Europe and world farm product prices plummeted.
Because the farm vote was the marginal vote in national elections, Congress rushed to pass the 1922 Fordney-McCumber tariff to protect American agriculture. When that tariff failed to alleviate the agriculture distress, Herbert Hoover, running for president in 1928, promised to support additional farm tariff protection. Efforts to provide that protection ultimately produced the Smoot-Hawley Tariff Act of 1930 as industry piggybacked on the support for farm tariffs to pile on industrial tariffs as well.
The result helped turn a financial panic into a worldwide depression.
Tragically, the 1922 tariff made it virtually impossible for Germany to pay its war debts, triggering devastating hyperinflation. We all know what happened next: Smoot-Hawley helped usher in a global depression with its economic and political carnage.
Politics in America sped the collapse of the world market in an effort to protect agriculture when it was a declining source of employment and income. At the same time, this protectionism denied a world market to U.S. manufacturing, where employment and wages were rising.
Why was the 2024 election so focused on manufacturing jobs? The percentage of jobs in manufacturing has been in secular decline for more than three quarters of a century. Wages in manufacturing are lower on average than wages in the service industries. Technology has continued to expand America’s industrial capacity while employment in manufacturing as a share of total nonfarm employment has fallen by 75% since 1946.
Manufacturing jobs were at the center of the 2024 election because industrial workers have become swing voters. We are today taking actions to protect manufacturing jobs the same way we did with agriculture a century ago. In the process, we are imperiling our access to the world market in high-tech and AI, which are the economic future.
There is no lesson in the second kick of a mule, but it is important to remember that under the protectionist policies of the first Trump administration the trade deficit rose, employment in manufacturing as a percentage of total employment continued to decline, and economic growth, which reached a 13 year high in 2018 under Mr. Trump’s deregulatory and tax-cut policies, slumped under his tariffs. This was all before the pandemic started.
Protectionism has an unblemished record of failure both economically and politically throughout American history. Yet the Trump administration seems determined to employ protectionist policies that failed the first time it employed them and that have never spurred economic growth. Protectionism now threatens not only the prosperity that could be created with deregulation, budget-deficit reductions and tax cuts, but also imperils America’s world leadership and the peace and prosperity that leadership has produced.
There’s more to the McKinley story that Trump should know:
As an Ohio Congressman, McKinley had authored the Tariff Act of 1890 (known as the McKinley Tariff), which significantly increased import tariffs and earned him the nickname “Tariff Man of the 1880s”. This legislation raised average duties across all imports, making it one of the highest tariff regimes in American history.
The tariff was not well received by Americans who suffered a steep increase in prices. The 1890 tariff was also poorly received abroad. Protectionists in the British Empire used it to argue for tariff retaliation and imperial trade preference.
Inflation was particularly high on what the NYT called “necessaries” such as farm products (+6-8%), textiles (+4%), metals and metal products (+6%), building materials (+5%) and “miscellaneous” (+11%) per BLS research.
In the 1890 election, Republicans lost their majority in the House with their number of seats reduced from 171 to 88.
In the 1892 presidential election, the Senate, House, and Presidency all fell under Democratic control. Lawmakers immediately started drafting new tariff legislation, and in 1894, the Wilson-Gorman Tariff passed, which lowered US tariff averages.
Trump’s contention that the 1890s were “probably the wealthiest ever because it was a system of tariffs” also does not verify.
Real GNP fell about 4% from 1892 to 1893 and another 6% from 1893 to 1894. By 1895 the economy had grown past its earlier peak, but GDP fell about 2.5% from 1895 to 1896. During this period, the population grew at about 2% per year, so real GNP per person didn’t surpass its 1892 level until 1899.
McKinley was reelected in 1900. By 1901, as he began his second term as president, McKinley had come to believe that it was time for the United States to liberalize its trade relations with other countries. He intended to build public support for this new program through a series of speeches during the fall of 1901.
On September 5, 1901, just one day before he would be fatally shot by an assassin, President William McKinley delivered what would become his final public address in Buffalo, NY. In this historically significant speech, McKinley made the now-famous statement that “commercial wars are unprofitable,” signaling a notable shift in his economic philosophy toward more open international trade relations.
The complete statement was:
The period of exclusiveness is past. The expansion of our trade and commerce is the pressing problem. Commercial wars are unprofitable. A policy of good will and friendly trade relations will prevent reprisals. Reciprocity treaties are in harmony with the spirit of the times; measures of retaliation are not.
The Trade War Will Pound Stocks High American asset prices require a large U.S. capital surplus, the mirror image of a trade deficit.
By Greg Jensen, co-chief investment officer at Bridgewater Associates in the WSJ:
(…) No matter how the spat is settled, American partners are realizing that they can’t rely on the U.S. Allies shouldn’t expect this to be only a four-year fever dream. Germany’s announcement of a major defense and infrastructure plan last week is a signal of this shift. Major allies will find a way to live in a new world order.
Markets will be slow to price the ramifications of this global push for self-sufficiency. Asset prices require a large U.S. capital surplus, the mirror image of a trade deficit. The U.S. push to reduce trade deficits and escalate tensions with key allies puts at risk the ability of U.S. assets to draw in capital from the rest of the world.
Foreign countries hold far more U.S. assets than the U.S. holds in foreign assets. Europe and Japan have for years stashed their surpluses in the U.S. Major institutional investors are reassessing the wisdom of having such a disproportionate amount of their assets in the increasingly unreliable U.S.
Foreigners don’t need to sell those assets to create a rout; if they stopped buying them it would be devastating for U.S. asset prices. (…)
U.S. multinationals can expect retaliation from countries facing headaches from Trump administration policies. Countries that run trade deficits have the upper hand because they import more than they export. China’s decision to add more U.S. companies to its “unreliable entities” list and launch antitrust investigations into Google are a taste of what would occur in a trade-war escalation. The reimposition of digital service taxes in Europe, which would disproportionately hit Silicon Valley, is also a possibility.
Beyond trade policy, the Trump administration’s push to reduce fiscal deficits will alter the environment for U.S. equities. Strong profit growth has been in part the consequence of rising fiscal deficits. Total savings need to add up to total investment, and for corporate profits to rise, some other player in the economy must spend.
Since the pandemic, the sector that has overspent the most in the U.S. is government, and the U.S. has also run higher deficits than most other economies. These deficits have worked their way through the economy to support corporate profits, and the reduction in deficits will turn previous support for U.S. equities into a drag.
Investors should be prepared for what the Trump administration’s trade policies will mean for their portfolios. It’s a dangerous time to be overexposed to U.S. assets, and almost everyone is.
Trump also claims that he will balance the budget with the help of Musk and his DOGE trolls.
Ironically, while we all know that correlation is not necessarily causation, it can be argued that government deficits are an important source of corporate profits since government spending flows to consumers and corporations.
Federal government expenditures were 18.6% of GDP in 2000. They are now 24%.
This first chart shows the inverse relationship between federal deficits and corporate profits over time.
- Federal debt and profits:
- YoY changes:
The Tariff Man and the Chainsaw Man may not be friendly to equities unless tax cuts and productivity timely counterbalance.
The other related risk is potentially declining multiples from their current high perch. P/E ratios importantly feed on confidence and visibility.
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ECB’s Lagarde Warns of Severe Global Fallout From a Trade War
- Bank of France Chief Says Trump Economic Policy Is a ‘Tragedy’
The S&P 500’s Meltdown Into a Correction Only Took 16 Days
This marks the seventh-fastest correction in records going back to 1929, data compiled by Bloomberg show. It took 16 sessions for the S&P 500 to sink 10%. Three of the seven fastest drawdowns happened under President Donald Trump – in 2018, 2020 and now. (…)
Credit markets are now beginning to confirm the growth angst that’s fueled a more than $5 trillion equity wipeout since late February.
The cost to protect high-grade debt against default has hit the highest intraday level since August. Hedging across popular high-yield ETFs jumped, while at least six companies opted to postpone bond sales.
It’s more evidence that the intensifying trade spat is threatening America’s investment and consumption cycle.
“If credit spreads continue to widen much more from here, I think it tells you that the market is starting to price in a high chance of a recession,” said Priya Misra, portfolio manager at JP Morgan Asset Management, who has decreased credit risk exposure recently.
Fear is everywhere, even at Tesla. This is too funny!
Tesla warns Trump administration it is ‘exposed’ to retaliatory tariffs Elon Musk’s electric-car maker says levies could make it costlier to produce vehicles in the US
(…) In an unsigned letter addressed to US trade representative Jamieson Greer, Tesla said it “supports” fair trade but warned that US exporters were “exposed to disproportionate impacts when other countries respond to US trade actions”. (…)
The group said in its letter that tariffs could increase the costs of making vehicles in the US and make them less competitive when exported overseas. It also urged the administration to avoid making minerals that are in short supply in the US — such as lithium and cobalt — even more expensive to import.
One person familiar with the process of sending the letter said: “It’s a polite way to say that the bipolar tariff regime is screwing over Tesla.”
The person added: “It is unsigned because nobody at the company wants to be fired for sending it.” (…)
- US firms are paying a substantial premium for aluminum over London prices. (The Daily Shot)
Why Cooler Inflation Isn’t Lifting Markets
February’s inflation data provided conflicting stories. Both the CPI and PPI came in cooler than expected, but neither cheered the stock and bond markets. That’s because the components of both gauges that feed into the Fed’s preferred PCED inflation rate were actually a bit hotter. In addition, January’s PPI increase was revised up from 0.4% to 0.6%. So it’s unlikely that the Fed will lower the federal funds rate (FFR) anytime soon even if economic growth slows.
It won’t be until March, or perhaps even sometime during Q2, that Trump’s tariffs start to boost the inflation data. (…)
Empty bus seats, cancellations en route to Jays spring training
One of Rob DeNure’s charter buses arrived in Myrtle Beach, S.C., this week with just three passengers on it.
The owner of DeNure Tours in Lindsay, Ont., said demand for American travel has plummeted since U.S. President Donald Trump won the election, and the only reason the bus set off for Myrtle Beach is because just enough tourists are booked for a return trip to Canada on it. (…)
DeNure would usually operate weekly tours from the Toronto-area to Myrtle Beach and more trips to other destinations. Instead, he’s cancelled around 10 trips this year.
“We feel like we’re back in the pandemic where demand has dropped to just zero,” he said. (…)
He said bookings to U.S. destinations dropped by roughly half since the election last November and have almost stopped entirely since the trade war. (…)