Even If Trump’s Tariffs Are Effective, There’s One Reason They Won’t Work

Patrick Watson  |

Trade policy is not a popular or well-understood topic among Americans. It’s even less so among younger Americans.

Until now… maybe.

I’ve recently visited the Texas Tribune Festival in Austin. There, Senator Amy Klobuchar (D-Minnesota) said something that made my ears perk up.

She was talking about her visits to high schools around her state and the questions students ask her. Lately, they seem to have a growing interest in soybean tariffs, said the senator.

Not without a reason…

Minnesota is the nation’s third-largest soybean-producing state. It’s a fair guess some of those students come from farming families.

Any of us can look at data and see that China’s retaliatory tariffs are having an impact. But these students seem to know it first-hand.

Now, combine this story with some recent survey data.

  • In Illinois (another big soybean producer), an August NBC/Marist poll found only 23% of adults thought tariffs would help the economy and protect jobs. Some 42% thought the opposite, i.e. the tariffs would drag on the economy.
  • In Pennsylvania, a poll of registered voters had similar results: 28% thought the Trump tariffs would help, 46% thought they would hurt.
  • Here in Texas, the balance was a little closer but still skeptical: 33% positive on tariffs, 40% negative.

Of course, polls can be wrong. The respondents can be wrong too. Maybe the tariffs will work after all.

But here’s the problem: A policy being effective isn’t the same as it being politically sustainable.

We live in a democracy. Unhappy voters can pressure their representatives to change course before the policy has time to work.

So the key question is, how long will Americans—particularly those in key Trump-leaning states—tolerate the economic pain caused by tariffs?

Pain Tolerance

Worse, the pain is only just beginning.

A new 10% tariff just took effect on a much wider list of Chinese goods last month. And it will go up in January if China’s government doesn’t bend. Maybe it will.

Meanwhile, consumer prices will jump for those goods and others derived from them. They may rise faster than wages, which are not rising at all once you consider inflation.

Chinese factory workers are suffering too, of course. Is their pain tolerance higher or lower than that of US consumers? I’ll bet we find out.

This standoff could drag on for years, or it could end next week. How is a business that depends on imports or exports supposed to plan ahead?

Answer: It can’t… which is why I think the policy won’t work.

Here’s the Trump administration’s theory. Import tariffs will raise the artificially low prices of Chinese goods and enable US companies to produce those products domestically. This, they believe, will create jobs and make America great again.

Unfortunately, shifting production from China to the US isn’t like flipping a switch. Businesses need to build facilities, hire and train workers, reorganize the supply chain, and so on. It takes time and, more important, money.

Why make that kind of multi-year investment when the tariffs that make it feasible might come down any time?

Business owners know this. More important, Xi Jinping knows it.

Long Stalemate

The most likely outcome of this trade war, in my view, is a long stalemate. Each government will wait for the other one to break.

That means the US will see price inflation long before it sees outsourced manufacturing return from abroad.

Inflation plus higher interest rates will further strengthen the US dollar. This will make our exports more expensive and encourage other countries to find alternative suppliers.

In other words, US trade policy is unlikely to achieve the desired goals, but it will certainly inflict pain on Americans. The big unknown is how much pain we can take before the political process forces a change.

That’s not an economic question anyone can answer. But it’s an important one.

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Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

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