Now We Know Trump Wasn’t Bluffing on Tariffs

(Bloomberg Opinion) -- Tariffs are always seen as tomorrow's challenge. The problem is that tomorrow keeps getting closer.

Before the first U.S. tariffs against China went into effect, the conventional wisdom was that they would be painful for the U.S. economy. Then they went into effect, and they weren’t. The prevailing opinion then was to watch carefully, because if things escalated it could be really bad. The consequences were seen as a future risk.

In the meantime, stock markets preferred to focus on a blissful earnings season, and central banks showed confidence. Even as they spoke of risk in meetings and press conferences, few changed their behavior. The Federal Reserve not only raised interest rates in June as foreshadowed, but also upped the number of increases projected for this year. The Bank of England and the Bank of Canada flagged further monetary tightening. (Canada followed through on Wednesday.)

If everyone sees the risks, why are these players gaily proceeding as though there were no trade war? At first at least, many assumed that the Trump administration knew deep down that the world's two largest economies needed each other. The 25 percent tariffs on $34 billion in imports from China could be absorbed, along with the $16 billion supposed to follow. That was the $50 billion we knew was in the pipeline. Tweets from President Donald Trump about a further $200 billion and perhaps another $200 billion to follow weren't taken very seriously.

It's time for a reappraisal.

Consider the risk: There's still room for Trump and Chinese President Xi Jinping to strike a deal, if Trump wants one, or find some fudge to de-escalate. The public comment period on the $200 billion runs through the end of August. That's almost two months for something to give and lobbyists to have at it. The tariffs proposed are 10 percent, down from 25 percent. While Chinese-made goods aren't as cheap as they once were, they are still fairly cheap. To the extent it contributes to inflation, it will be on the margins and might actually be welcome. For most of the time the Fed has targeted 2 percent inflation, price increases have run below that level. Remember all the angst about the failure to reach the target?

It’s no longer reasonable to assume that the Trump administration will make the U.S. economy a priority, or protect U.S. consumers. Now we know that those “empty threats,” all that pandering to a xenophobic base, was actually a straightforward plan for how Trump would deflate the economic expansion he inherited. For one thing, we should take more seriously Trump’s threats to withdraw from the World Trade Organization, rather than seeing them as an outlier.

Every now and then, there are noises from Capitol Hill hinting that Congressional Republicans might stand up for free trade, on behalf of American investors, corporations, voters and consumers. But no. The Hill majority continues to acquiesce.

A couple of months ago, I wrote that Trump appeared to be bluffing on trade. I was too sanguine. And yet the doomsayers were off as well, at least on their timing, because the American economy keeps not collapsing and global markets keep not imploding.

Both the early hysteria and early hopes seem to have been misguided. But the consequences of protectionism are less and less “tomorrow's problem.”

©2018 Bloomberg L.P.

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