New week — new tariffs. Since the beginning of May, this rule became a new reality not only for the US president but for the rest of the world as well. Who could have thought that the global economy would face another wave of protectionism and some sort of nationalism?
Does it mean we are unable to learn from our past mistakes?
Unfortunately, there is no simple answer to this question. Instead, there are different truths for different sides.
For example, what does President Donald Trump mean when he says he strongly believes in free trade, at the same time quoting Abraham Lincoln as saying “abandonment of the protective policy will produce want and ruin”?
According to American economist Walter Williams, “any time somebody claims they are in favor of ‘free trade but fair trade,’ that claim is always followed by a call for some type of protectionist trade policy to make international trade subjectively ‘more fair’ — but only for domestic producers.
In other words, ‘fair trade’ is really a code word for ‘protectionism,’ and is always therefore only ever ‘fair’ from the viewpoint of domestic producers who benefit from protection against foreign competition, with no regard ever for the viewpoint of the consumer.”
One thing is for sure — consumers are the ones who pay the price. A
growing number of US companies have warned about the negative impact of tariffs on US consumers.
Nike and 172 other footwear companies have urged Trump to remove footwear from a list of imports facing a proposed extra 25% tariff, warning the move could cost consumers an additional US$7 billion a year.
Walmart, the world’s largest retailer, and department-store chain Macy’s have warned that prices for shoppers will rise because of higher tariffs on goods from China
Walmart, the world’s largest retailer, and department-store chain Macy’s have warned that prices for shoppers will rise because of higher tariffs on goods from China.
The one thing that may benefit the US is that consumers would want to buy locally made products in place of foreign imports.
But what if we miss something? It makes no sense to fight over something that does not benefit your own people. According to a study conducted by two British researchers, this sort of retaliation is politically motivated.
The retaliation response of most countries involved in the trade dispute targeted US exports, such as bourbon whiskey, which is produced in Kentucky, the home state of Mitch McConnell, the Senate majority leader. China (as well as Mexico) targeted pork and soybeans, with the latter being one of the most important US agricultural exports to China, which disproportionately affected Iowa, the home state of Charles Grassley, an influential Republican member of the Senate Agriculture Committee.
All this could have remained in the realm of theory if last week Trump had not said he would apply tariffs of 5% on Mexican goods on June 10 if that country did not halt the flow of illegal migration, largely from Central America, across the US-Mexican border.
“Mexico is sending a big delegation to talk about the Border. Problem is, they’ve been ‘talking’ for 25 years,” Trump tweeted. “We want action, not talk. They could solve the Border Crisis in one day if they so desired. Otherwise, our companies and jobs are coming back to the USA!”
However, what he actually achieved with the threat of increasing tariffs on Mexico, one of America’s largest and most important trading partners, was to amplify fears about slowing economic growth.
The VIX index, which measures the level of implied volatility on put and call options on S&P 500 stocks, rose from a low at 12.74 on May 1 to over the 19.00 level on June 3.
Therefore, it should be no surprise that investors have been shifting money into bonds over concerns that economic growth will be crimped by the ongoing trade war.
In conclusion, everything suggests that the probability of recession continues rising. Now the question is not whether it will happen, but when it is going to take place.