Analyzing The Announcement

Seemingly out of nowhere President Trump announced that he was about to slap a 25% tariff on imported steel and a 10% tariff on imported aluminum. Rumor is that he made the announcement out of frustration, blindsiding his economic counselors and the White House staff in the process. I think there may be several things at play here and I’d like to outline them in the following paragraphs. Let’s explore.

The announcement came after a particularly rough stretch for President Trump. Hope Hicks had resigned. People are starting to see through the dog and pony show he is conducting in regard to the latest mass shooting. His son-in-law, Jared Kushner, was stripped of his top secret security clearance and has been the subject of several unfavorable revelations. The stock market is no longer the old fallback that it was until recently. Trump badly needed a distraction and this announcement certainly provided one.

If Trump were to follow through on his threatened tariffs there will be both winners and losers as in an economic move; (more about that below). The problem for the United States is that the losers would far outnumber the winners in the long run. While American workers in the steel and aluminum industries would most likely see a small uptick in jobs many other industries and the American consumer would lose.

Politically all Trump cares about is his base. Tariff lines were applause lines on the campaign trail so naturally Bubba loved the announcement. Like Trump (and George W. Bush) Bubba can’t think a problem through a series of actions and reactions. They all simply think if you raise the cost of an import, say steel, that consumers of that commodity will then purchase domestically causing the manufactures of said commodity to hire more workers. That reasoning is sound in a vacuum. The problem is economies don’t operate in a vacuum.

I was born and raised in a steel and auto Rust Belt city. If domestic steel became lower priced than foreign steel it meant more jobs in the steel mills. Unfortunately that meant higher cost automobiles and fewer jobs at the auto plants. Remember I was raised in the 1950’s and 60’s. In those days the plants and mills (most of which are now shuttered) were much more labor intensive operations. In the extremely unlikely event that those manufacturing facilities were to reopen they would be largely automated and employ significantly fewer people.

If tariffs were imposed, foreign countries are not going to simply sit by and beg Trump for forgiveness. Already foreign trading partners have threatened politically targeted retaliatory tariffs against American exports. Trump can tweet all he wants about how trade wars are good and easy to win; the reality is very different.

While Trump and his base like to portray China as the economic bogeyman (and China is guilty of many unfair trading practices) the country that would initially be hurt the most by these particular tariffs is Canada.

My guess (and hope) is that this is another of Trump’s off-the-cuff empty promises that will happen, “Very shortly” or “In two weeks”. If that is the case negligible long-term harm was done. The biggest repercussion was some panic selling on Wall Street.

Speaking of Wall Street we may have learned a little something about how Trump operates from the stock market. Carl Icahn sold over $30 million dollars’ worth of steel related stocks just prior to Trump’s announcement and their accompanying fall in the market. While Trump is infamous for not listening to his advisors; he is equally famous for making phone calls to friends from his bed seeking advice and venting. Icahn is one of Trump’s buddies. Icahn, like Trump, likes to portray himself as a business genius. I think there are more people who benefit from “insider information” than consistently outthink The Street. Am I the only one who thinks Icahn listened to Trump vent and then strategized about the tariffs?

Trump already gave ultra-rich guys like Icahn (and himself) a giant gift with the Trump Tower Tax Cut. Icahn is probably smart enough not to take investment advice from a four time business bankrupt and known liar; however insider information from the President of the United States is valuable.

Tariffs and trade wars are complicated things where you have to be prepared for the next several moves well in advance. Neither Trump nor his base has nearly the requisite economic ability. Hopefully this is just some early St. Patrick’s Day malarkey from a President who is feeling the walls tumbling around him.

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