Trumponomics is becoming a two-track story. One track is a strong core economy. The other track is policy disarray that threatens the underlying economy. This week, both were on full display.
The jobs report for April was stellar. Employers added 223,000 new jobs, about 30,000 more than economists had expected. That’s a strong number, especially considering that we’re in the late stages of an economic expansion, when it’s typically hard to find workers. “This is just a fantastic jobs report,” Kevin Hassett, chairman of Trump’s Council of Economic Advisers, told Yahoo Finance. “As you get closer and closer to full employment, it’s hard to create more than 200,000 jobs. A 3.8% unemployment rate is the lowest in 18 years.”
With things so good, the stock market ought to be charging upward, right? Well, it’s not, and one of biggest reasons why is Trump’s trade policy, which became more alarming this week. Trump surprised markets by saying allies including Canada, Mexico and the 28 nations of the European Union would not be exempt from the tariffs on steel and aluminum imports he announced in March. Temporary exemptions expired June 1, putting the tariffs into effect on those trading partners. Most said they’d slap a like amount of tariffs on US imports to their countries. So the Trump trade wars are ON.
The next question is whether Trump, enraged that anybody would dare place new tariffs on American goods, will retaliate further. One development this week suggests how he might. Trump directed the Commerce Department to investigate whether auto imports threaten national security. It sounds ridiculous, but if Commerce finds this to be so—which could be a foregone conclusion—it would establish a pretext for new tariffs on imported cars, which could be as high as 25%, according to some reports. Here’s what that might mean in reality: An imported Toyota RAV4 costing about $25,000 would suddenly cost more than $31,000. And the cost of competing models would most likely go up, even if they’re made in the United States.
Bad news on trade neutered good news on jobs this week. For that reason, this week’s Trump-o-meter reads MEDIOCRE, our equivalent of a C grade.
Trump defenders brush off the tariffs as a mere negotiating tactic, as if they are just temporary measures that Trump will revoke once he gets his way on trade deals. But that assumes Trump will get his way, a dubious proposition. Trump’s demands put the leaders of trade partners such as Canada, Mexico and China in a precarious position, because they’re not willing to harm their own economies just so Trump can fulfill campaign promise. They also need to look strong at home, which means they’re unlikely to cave to Trump’s bullying.
Besides, if Trump has a broader strategy on trade, it’s not clear what it is. We know he wants China to buy more American goods and stop stealing US intellectual property, both worthy goals. But how does he get China to go along with that? China can probably ride out whatever tariffs Trump imposes on its imports to the United States, in part because Chinese President Xi Jinping doesn’t face the same kind of domestic political opposition Trump does when the public feels economic pain. China is planning for 2025, 2040 and beyond, while Trump seems to be driven by today’s or tomorrow’s impulse.
Trump hasn’t clearly articulated what he wants from Europe, and he expects Canada and Mexico to adopt labor practices that would basically shift more production to the United States. Why would they do that? Because they’re scared of tariffs? Apparently not: Negotiations to revamp the North American Free Trade Agreement have stalled, and may drift into 2019. Leaders of both countries, meanwhile, are talking tougher about Trump, a sign that they’re getting fed up and feeling emboldened.
It’s possible this really is just a big sideshow, with breakthroughs coming that give Trump the “fair trade” he demands. But it seems more likely that Trump is backing himself (and the US economy) into a dead-end alley with no easy way out. The economy is strong enough, at the moment, to provide Trump with some headroom for policy failures. It won’t stay that way forever.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman