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Never mind the trade war, economists should instead be asking: who are these tariffs really for?

US tariffs on steel and aluminium are now in place, but how much does it really signify?
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Is this the limit, or just the beginning?
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The US economy is now into the second longest economic expansion it has enjoyed since 1900, with only the period 1991 to 2001 to beat, according to analysis by Saxo Bank.

If growth continues until June 2019, then this will be the longest unbroken period of economic expansion in modern history.

Given that the US was already the world’s largest economy in 1900, that’s some serious track record of growth we’re talking about over the course of the past 119 years.

But before any Americans start patting themselves on the back and talking over-loudly of manifest destiny, it’s worth considering what’s likely to come next.

There is certainly a case to be made that greater understanding and insight into the nature of human behaviour and economics has helped specialists mitigate the worst effects of recent downswings.

But this expansion has gone on so long, that it may be nigh on impossible to stop the bust, when it comes, from causing significant damage.

Into this mix comes Donald Trump with his counter-intuitive message of making America “great” again.

It seems that American economic expansion on its own is not enough. The real issue is staying ahead of the competition. And this is harder, when the economic expansion in question relies on global trade and mutual prosperity.

Cue Mr Trump and his not exactly unexpected introduction of tariffs. 

The problem is that the ongoing US economic expansion has been uneven. All the rhetoric has been around manufacturing, as we know, but actually, the truth about US manufacturing more subtle than is usually presented.

It’s true there was a steep decline after the global financial crisis in 2008, but a recovery was underway by the second half of 2009 and by 2014 all the lost ground had been recovered. There’ve been a few peaks and troughs since then, but according to statistics collated by the US Federal Reserve here – [https://fred.stlouisfed.org/series/INDPRO] manufacturing output is now at its highest level for more than 100 years.

How then does this translate into the picture of economic decline that Donald Trump presents to justify his introduction of tariffs?

The answer is that output doesn’t have a vote, workers do. And employment in the manufacturing sector has dropped by nearly five million over the past 20 years or so.

This isn’t a manufacturing problem, it’s an employment problem. But in the blue-collar world in which much of Mr Trump’s electorate runs, the difference isn’t really meaningful.

So, while much of the economic literati get themselves in a lather about the coming trade war that Mr Trump looks intent on starting, it’s worth remembering which audience these tariffs are really designed for.

Is it China, which won’t be that badly affected?

Is it the European Union, which is talking about tit-for-tat measures against key global trade staples such as bourbon, table sauces and oranges?

Or is it the US worker who wants to see his President standing up for his industry on the global stage?

Already there are carve outs for near-neighbours Canada and Mexico, countries which, incidentally, serve as source for most of the imported metals concerned.

Some have speculated that these carve outs might yet extend to the European Union, the biggest trading partner the US has by value.

But perhaps more interesting was the counter-rhetoric employed by European Commission Vice-President Jyrki Katainen.

“We don’t need to go to the 1930s,” he said.

“It’s enough to go to the beginning of the 2000s when the U.S. authorities imposed steel tariffs for Europe. It meant in practice that in the U.S. they lost thousands and thousands of jobs.”

And it may have been a similar type of analysis that prompted the resignation earlier in the week of President Trump’s top economic adviser Gary Cohn.

Cohn was regarded as Wall Street’s representative in a populist White House, was a supporter of much that Donald Trump has done so far in terms of tax, but was also a known advocate of free trade.

In that advocacy, he’s well in line with market opinion, and it wasn’t therefore too surprising that the markets reacted with nervousness when he walked away from the White House. Could it be here that Mr Trump and stock markets part ways?

It’s quite possible. The tariffs as a whole are fairly small beer. But they rip up an economic orthodoxy that amongst other things has got US manufacturing output at its highest levels in more than 100 years.

 

 

 

 

 


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