Photo by Guillermo Ferla
This is it, folks. The battle for control of the universe has begun.
Donald Trump’s plan for a new, tariff-based approach to international trade has generated more heat than light. East Asia’s elite financial bureaucracies in particular are sullenly hostile. As I pointed out here on January 23, they were likely to make their point by dumping U.S. stocks and bonds. And so they did!
The result as of April 4 was that the S&P 500 index had dropped more than 17 percent. Trump is now being offered an unappetising choice: either accept more pain for U.S. stocks or else back off fast on tariffs.
What the American media rarely mention (and for the most part don’t seem to understand) is that tariffs work – at least they do if they are structured intelligently.
The empirical truth is that throughout most of its history the U.S. economy has been (1) one of the world’s most protected, and (2) one of the world’s fastest growing. The relationship is causal: tariffs cause higher growth (among other things by boosting a nation’s savings rate).
This is not the place for a full discussion of tariffs but the fact is that tariff protection was the pattern in the United States throughout the nineteenth century and into the twentieth.
Assuming Trump backs down promptly, the Chinese and other East Asian nations will soon go back to buying truckloads of U.S. bonds and equities. They need to if the world trading system is to work. Markets will then quickly stabilize. Wall Street will land on its feet. And the ultimate question of whose universe it really is will have been put off for another day.
Little noticed, however, the Chinese will have made their point: the world economic system is no longer America’s to dispose of.
© Counter Punch