When the party is over.

Yesterday the opening salvos of a new trade war began. Despite what Trump believes, trade wars are not easily won. In fact, in the end, nobody wins and everybody loses.

Consider what happens when a tariff is enacted. Overnight, the price of the affected items goes up. Since the price goes up, industries that rely on such products or commodities are now unable to afford to buy as much. Take automobile manufacturers for instance. They rely on steel to produce cars. If steel goes up in price, they cannot buy as much steel and consequently they produce fewer cars. If they’re producing fewer cars, they have need for fewer employees and will begin reducing their workforce. As unemployment goes up, fewer people can afford to buy new cars, and a vicious downward spiral of reduced employment leading to reduced economic activity begins. It doesn’t stop there either, because now that demand for steel is going south, so goes the jobs for steelworkers.

Then consider the countries who we enact such tariffs against, and how they will respond. They could slap tariffs on automobiles for instance, leading to reduced exports and further deepening the reduced need for automobile and steel workers. It’s mutually assured self destruction economically speaking.

How do we know that this is what happens? There is a whole history of protectionism, tariffs and trade wars to draw from (google the Smoot-Hawley act, which preceded the Great Depression). If the Trump administration continues to pursue protectionist policies, expect it to chip away at the record low unemployment. We may also expect it to halt the historic, decade long bull run on the stock markets. Nobody has ever won a trade war, because it’s not a winner take all, zero sum game. It’s a draw, with numerous casualties for all parties involved.

 

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