Michael Baxter takes another look at Donald Trump's recent tariff proposals.
Dollar expected to dance, as interest rate perfect storm brews
Charles Goodhart made the point. The economics professor and former member of the Bank of England’s monetary policy committee once said: “When a measure becomes a target, it ceases to be a good measure.”
It’s known as Goodhart’s Law and is applied in lots of different circumstances. Back in the days of the Soviet Union, a nail factory was given a target for the number of nails it should produce and responded by producing lots of tiny nails. When it was given a target for nail production measured in tons, it produced a small number of giant nails.
President Trump wants to reduce the size of the US current account, so he is slapping tariffs on imports of steel and aluminium. Analysts are warning that the end result may be a higher dollar, creating a worse trade deficit.
A case of Deja vu?
We have been here before - George W Bush tried something similar. His stated rationale for his steel tariffs was different. Dubya’s justification was price dumping by competitors. President Trump uses security concerns. The Bush tariffs were only ever meant to be temporary - this does not seem to be the case with the Trump plans.
The Bush move didn’t work of course. It has been calculated that the hit on US consumers and industries that imported steel cost $200,000 for every US job created. Besides, Bush eventually introduced so many exemptions to the tariff that they lost meaning.
Last week US Senator Lamar Alexander said: “We found there were 10 times as many people in steel-using industries as there were in steel-producing industries. They lost more jobs than exist in the steel industry.”
President responded: “Lamar, it didn’t work for Bush, but nothing worked for Bush.”
The big fear relates to retaliation, of course. Capital Economics put it this way: this is "another example of Trump's favoured negotiating tactic of announcing punitive measures in the hope of extracting concessions. The trouble is that key trading partners like the EU now appear more focused on retaliation than negotiation.”
Then again, there seems to be a growing number of exceptions this time around too. Talk is that the tariffs won’t apply to Canada and Mexico - Britain, somewhat vulnerable in these post Brexit times, has thrown itself prostrate upon the Trump alter, pleading the case for it to be afforded mercy, while the EU, in-between threatening retaliation, has asked to be excluded too.
You can see the respective ideas. After-all, why would someone who is half Scottish want to be all beastly to the UK? Then there is the art of the deal, that’s the Trump negotiating tactic - talk tough, make your opening point pretty extreme. That’s the Trump approach with Kim Jong-un, but he respects those who practice the art, the EU threatens trade war - Trump may be moved by that one.
For his part, the President of the European Central Bank, Mario Draghi said: “There is a certain worry or concern about the state of international relations, because if you put tariffs on your allies, one wonders who your enemies are.”
But he also warned that when the US put trade restrictions on countries in the past, the result was a surge in the dollar.
That’s the curious thing about the US. Trade wars are not good, only anarchists would disagree with that one. But trade wars are bad for everyone, and in times of trouble, money tends to flow into US Treasuries, pushing upwards on the dollar.
Trade wars also have the effect of reducing potential output - and if potential output falls, inflation threats grow.
And that brings me to the latest US jobs report. It was a humdinger. February saw a 313,000 increase in non-farm payrolls, the biggest monthly jump in a year and a half. Data on the two previous months was revised upwards too, and to the tune of 54,000. This time last month, impressive, but not as impressive, job figures led to the big slump in stock markets that made the headlines. This time around, there was no sign of panic - in February, average hourly earnings rose by just 0.1 per cent, the lowest growth rate since last October. Weak earnings growth means less inflation pressure, and the markets find that reassuring.
End of boom
Right now, the US is enjoying its second longest run of uninterrupted economic growth ever, but nothing lasts forever. It will end in tears, because everything does. I suspect that the end of this growth period will come if we see rising interest rates and oil prices at the same time.
We know US rates are going up, possibly three times this year, maybe four. They may well rise a couple of times next year.
So far, the markets are pricing this in.
But, if we do see some kind of trade war, at a time when unfunded Trump tax cuts create a massive fiscal stimulus when there is very little spare capacity, the result will probably be further hikes in interest rates. If we see oil prices rise too, which I suspect we will soon - that will precipitate the next crisis. For me the big question relates to whether this will be before or after the next US election.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.