Criticism of President Trump’s reported plan to impose steep tariffs on imported steel and aluminum has focused on the danger that these trade measures will lead to tit-for-tat responses from our trading partners, possibly sparking growth-stultifying trade wars and damaging industries that use the metals in manufacturing such as autos and appliances.
These are serious concerns and should not be taken lightly.
But there’s a broader concern for the health of the whole economy. Trump’s new trade restrictions, by increasing inflationary pressures, will encourage the United States Federal Reserve to raise interest rates more quickly than markets anticipate. Such a move would have severe negative consequences for the overall US economy totally unrelated to the use of steel and aluminum.
Tariffs and other trade restrictions of ‘intermediate’ goods like metals are inflationary. It’s not just the price of aluminum that goes up behind the tariff wall; it’s the price of beer cans and ultimately beer that will go up to consumers — and it won’t take long for the inflationary cancer to spread. Given protection from the trade wall, domestic business can be relied upon to swiftly raise prices.
What happens with beer, will happen with trucks and farm equipment and everything else made with metal. The costs of more expensive transportation and equipment will be passed through to goods that have no metal at all, eventually leading to price pressures on tomatoes and paper.
The Federal Reserve understands that new potential trade restrictions add an inflationary push to the overall economy at the same time Washington tax cuts and spending increases have their own potential to drive inflation. The Fed cannot afford to turn the other cheek to these pressures — and it won’t. Jerome Powell, the new Fed chief, is being tested.
The likely result will be that instead of the three interest rate hikes markets are pricing in from the Fed this year, there will be four or even five.
Have you seen the stock market lately? The sell offs so far have been in response to anticipation that the Fed might raise interest rates four times this year. What happens to the market when expectations go to five interest rate hikes for the year?
But there’s more to fear from the trade restrictions than just stock market volatility. Higher interest rates will mean a stronger US dollar — not for good reasons but for bad ones.
The dollar will soar not because our growth outlook has improved encouraging foreigners to get their money in on a good thing. On the contrary the dollar will soar because the Federal Reserve will go on an interest rate tear to ward off potential inflation thanks to the impact of Trump’s tariffs combined with tax cuts and spending increases. That kind of dollar strength makes the economy weak.
And why is President Trump putting the whole country through this misery? Politics. Trump wants to increase support for the Republican Party in steel-producing and aluminum-producing states. It’s the same reason he is so hostile to immigration; because he knows the immigrants are likely to vote Democratic. Politics trumps sound economic policy every time in the Trump White House. What Trump is doing is giving us a tax cut with the left hand while taking it away with the right. Average Americans are going to end up worse off.
Published in Daily Times, March 5th 2018.