With Gary Cohn having bid Donald Trump adieu (or with Donald Trump having bid Gary Cohn adieu, whichever way you prefer to look at it), the world will now hold its breath and hope that someone, although it’s unclear who, will step in and convince the President that his proposed tariffs are a slippery slope.
As usual, it’s unclear how much he truly understands about this issue. Unfortunately, this is one of those cases where his support base knows even less than he does about something and worse still, their opinion on the issue is understandably biased because, in some cases, they’ve been adversely affected by globalization. Of course Trump doesn’t give a shit about their plight and wouldn’t piss on them if they were on fire (although he might hire a Russian hooker to do it so he could watch). But he does give a shit about being able to claim that he fulfilled his “promise” of restoring long-dead American industries. Never mind the fact that by virtue of being dead, they cannot be “restored.”
The main risk here is not the steel and aluminum tariffs themselves (although that’s a problem too), but rather the potential for a domino effect that sends the world marching down the road to an all-out trade war.
On Tuesday, Goldman’s Jeff Currie and Damien Courvalin were out with a close look at the effect of the tariffs on the steel and aluminum markets and now, Jan Hatzius and co. are out with their take on what all of this likely means for the economy.
They begin by reminding you that while the steel tariffs are not surprising and, historically speaking, not unusual, U.S. trade policy “is on a troubling path.”
“This action looks much broader than similar actions in the past and trade protections might be less unsettling for markets if they were seen as an isolated event,” Goldman writes before explaining why the process here was so troubling. To wit:
Sec. 232 of the Trade Expansion Act of 1962 allows the president to impose trade restrictions in the interest of national security, but the law has not been used to impose restrictions in more than 30 years and has been rarely used since it was enacted. This process was used, we believe, because imposing tariffs on national security grounds increases the odds they will take effect. Unlike most other trade protections like antidumping or countervailing duties or safeguard tariffs, the national security-related decision does not require a review and approval by the US International Trade Commission. While tariffs of this level would normally be prohibited under WTO rules, it is quite possible that the WTO dispute settlement could decide in favor of the US in light of the national security exception allowed under WTO Article 21. If trading partners are unable to win relief through the traditional WTO dispute settlement process—this could take more than a year in any case—they are likely to retaliate outside of established mechanisms, weakening the institution in the process. Any decisions by other countries to invoke national security in defense of their own trade protections would weaken it further.
The bank goes on to note what everyone else has said, which is that it isn’t entirely clear how this is worth it considering “the steel and aluminum sectors account for relatively small shares of economy-wide imports, employment, and industrial production, suggesting limited direct macro effects.” Further, Goldman says that in the event there are no exemptions, you should “expect a significant increase in US steel prices” although the effect on core PCE inflation would likely be “modest because the majority of metals is used for investment in equipment and structures, government spending, or exports and because metal-consuming firms (i.e., manufacturers) are likely to absorb some of the price increase through lower margins.” Here’s the math on the PCE estimate:
Of course those are just the direct effects. The second-order effects that would materialize in the event of retaliatory measures by trading partners and (former) allies are likely to be more worrisome. For reference, Goldman reminds you that “the response by the EU to prior US trade protections—the 2002 steel tariffs and an even more important dispute regarding export subsidies in 2004 were the most important—have tended to focus on three categories of goods.” Those categories are:
- The subject of protections (so, steel);
- Consumer products (especially luxury goods);
- Agricultural products (grains, meats);
Although to be fair, Trump has some experience with his “meat” being subject to steep taxation when he misbehaves – just ask Stormy Daniels.
Anyway, the real problem is that Trump isn’t likely to stop at the steel and aluminum tariffs. After all, this most recent episode comes on the heels of the residential washing machine/solar equipment ordeal and on Tuesday evening, just after the Cohn news hit, reports surfaced that that the U.S. is considering imposing broad tariffs on Chinese imports as a result of the U.S. Trade Representative’s 301 investigation into China IP practices. Here’s what Goldman thinks might be next:
- Other product-specific cases are possible. In addition to the usual antidumping and countervailing duties the US and other countries often apply on narrow categories of imports, additional one-off disputes are possible, if not likely.
- NAFTA renegotiations are likely to stall. There is little chance, in our view, that NAFTA negotiations will conclude successfully this year, as the approaching Mexican presidential election (July 1) and US midterm election (November 6) are likely to make an agreement difficult before then. While it is unclear whether the proposed steel and aluminum tariffs substantially worsen the NAFTA outlook, they seem unlikely to help.
- An increasing focus on US-China trade. Over the last year, trade policy discussions have been more focused on Canada and Mexico, as a result of NAFTA negotiations and even the fact that they are greater exporters of steel to the US than most other trading partners. However, we do expect this to change, particularly once the US releases its determination in the Section 301 investigation regarding intellectual property and technology transfer. This seems likely well ahead of the August deadline.
Obviously, there is almost no chance Trump understands all of the above. And to the extent Peter Navarro understands it (which is certainly debatable – just any economist whose name isn’t “Peter Navarro”), he looks at it through his own homemade beer goggles.
But hey, at least Trump is “thinking” about it:
From Bush 1 to present, our Country has lost more than 55,000 factories, 6,000,000 manufacturing jobs and accumulated Trade Deficits of more than 12 Trillion Dollars. Last year we had a Trade Deficit of almost 800 Billion Dollars. Bad Policies & Leadership. Must WIN again! #MAGA
— Donald J. Trump (@realDonaldTrump) March 7, 2018
And look, you can be sure he’ll replace Cohn with someone sensible. After all, Trump only hires “the best people”…
"Ok, everybody we'd like you all to welcome Bob to the White House, he'll be the new senior economic adviser. Please show him where the coffee and donuts are. Bob, do you want to tell everyone a few things about yourself?" pic.twitter.com/wzygbq6q8j
— Walter White (@heisenbergrpt) March 7, 2018