WASHINGTON, March 1, 2018: Thursday’s Wall Street action seems like an instant replay of Wednesday’s disaster. Stocks attempted – twice – to recover from a modest Thursday morning swoon. Averages were initially buoyed by less bearish comments from new Fed Chair Jerome Powell. But investors and algorithms panicked mid-afternoon. That’s when President Trump announced he’d impose long threatened steel tariffs on imported foreign steel next week.
The tariffs also include similar measures on foreign aluminum imports.
As reported by CNBC,
“The U.S. will set tariffs of 25 percent for steel and 10 percent for aluminum, the president said. It is unclear whether they will apply to all imports or only metals from certain countries.”
In reaction to the news, major stock averages instantly imploded. Today’s massive market faceplant left few survivors in any sector. Well, few survivors except for the steels and related mining sectors. Having a good day: Steel Dynamics (symbol: STLD), Olympic Steel (ZEUS), Nucor (NUE), U.S. Steel (X), AK Steel (AKS) and others steel manufacturers rose sharply. Ditto beleaguered iron ore mining company Cleveland-Cliffs Inc. (CLF), which jumped 10 percent almost immediately upon the news.
The Dow does a tariff header
As we write this article (3:05 p.m. ET), the Dow is off a massive 544 points (-2.11 percent) and attempting to sink further. The broader-based S&P 500 is off 48.07 points (-1.75 percent) and the tech-heavy NASDAQ is down a whopping 117 points (-1.6 percent).
Today’s largely needless selling panic builds on Wednesday’s negative action. That is itself perhaps the result of tariff fears coupled with Powell’s badly interpreted comments on inflation and interest rates.
After attempting to recover from a deep February swoon, market averages had been approaching the breakeven point again for 2018. But today’s vicious action sent all three averages back into negative territory.
Corrections are to be expected, particularly after our recent and massive bull run. But this one is starting to get vicious. The initial market drop in February was in excess of 10 percent. That earlier hit already exceeded the technical definition of an official market correction. Today’s decline raises fears among some investors that markets might get hit with a 20 percent smackdown before it’s all over.
More on tariffs
As for those tariffs,
“‘That could really spook the market,’ said Marc Chaikin, CEO of Chaikin Analytics. ‘The biggest wildcard would be a trade war and nobody should be excited for that.’ Chaikin also noted some of the pressure seen in stocks is in response to the news on tariffs.”
Clearly, Chaikin made those remarks on CNBC somewhat before the tariffs were announced. As of this writing, the markets are indeed “spooked.”
Analysts and machines alike seem to have a knee-jerk reaction every time the Federal government even thinks of imposing anti-dumping tariffs on foreign free-trade abusers. Visions of sugarplums aren’t dancing in their heads. Instead, tired, worn-out visions of Smoot-Hawley and the Great Depression are driving investors and hedge fund computers today. It’s as if another Great Depression is already a done deal.
Pros and cons of tariffs
We’re of two minds on this issue here. This writer actually worked his way through college via the steel industry in the late 1960s and early 1970s. This was a huge and viable industry back then. What’s left of industry is now leaner, vastly more efficient, and cheaper. But U.S. industry is still not cheap enough when compared with countries possessing vast steel overcapacity. Awash in products manufactured in their own countries, they dump their surplus production over here at vastly reduced prices. More irritating and provocative: They slap U.S. exports with tariffs of their own as a way to protect their own domestic industries. Worse, many foreign producers enforce outright bans on competing foreign imports. Like ours.
For years, the U.S. mostly took this kind of obvious trade abuse on the chin. One major result: Victimized American industries have become shells of what they once were, or they don’t exist at all. Industries like shoe manufacturing and textiles essentially don’t exist today in America compared to their importance in the post World War II period.
To some extent this dynamic is understandable. A combination of union and corporate greed over the years led to higher and higher prices for processed steel and aluminum. These higher prices were routinely passed on to consumers – particularly consumers of autos and major appliances.
For a time, U.S. consumers took this in stride. After all, their own paychecks were increasing at roughly an equal pace.
Employees on the economic downslope
Beginning in the mid-1970s when paycheck growth began to slow, the earlier “pass-along-the-costs” game abruptly ended. The brilliant idea of outsourcing domestic production more cheaply offshore largely enabled targeted industries to to avoid the consequences of unfair foreign price competition until the Great Recession. They just outsourced the work abroad, effecting huge labor savings allowing them to lower the price of finished goods and even raw materials.
But the U.S.-based employees of these companies were not so lucky. It’s been Downsize City in the U.S. since roughly the end of the Vietnam War. Oh, the industry jobs are still there. But U.S. plants have closed on a massive scale. Those jobs are now taken by cheaper foreign workers or by immigrants legal or otherwise.
Early on, some of this dislocation was easy to absorb. The U.S. was by far the largest economy in the world. We could “easily afford” to let a lot of these jobs go, thereby helping to increase living standards abroad. In turn, this was supposed to create new consumer classes outside our borders that would then clamor for American goods they’d once been unable to afford.
Well, the job exodus worked for our competitors at least. Outsourcing did raise incomes substantially in China and elsewhere for those workers who hapily took on the good jobs America threw away.
But where was all that foreign buying our elite Federal economists and money gurus claimed would happen? It never came. That’s because all the countries that benefited from the American jobs exodus promptly slapped tariffs on our exports in order to favor their own now-growing domestic product.
In other words, we gave away American jobs and factories for nothing. Yes, maybe American consumers benefited by paying lower prices for imported consumer goods. But when the resulting exodus of jobs from the U.S. puts millions of workers out of work and out of money, who would be left to buy all those cheaper foreign goods? And how would the U.S. benefit?
What is “free trade” really?
Bottom line: “Free trade” must be a two-way street. Even Steven. A win-win situation. It’s not likely we’ll see a trade war based on Trump’s anti-dumping tariffs on imported aluminum and steel. After all, over the past decades, it’s been anti-competitive foreign governments that have been imposing the bulk of tariffs and trade restrictions on American goods, not the other way around.
So why are Trump’s tariffs a big deal, particularly if they lead to serious negotiations that might address this longstanding trade imbalance?
Our big problem is that today, academics and foreign competitors routinely denounce anything the U.S. does to fight back against unfair foreign trade practices. Ditto, protecting American jobs or even bringing at least some of them back to this country. The U.S. has every right to fight unfair foreign trade practices. Indeed, for too long, we’ve rolled over and played dead in the face of such provocations. Steel tariffs are a step in the right direction. Donald Trump won the presidency largely because he offered the hope of redressing these longstanding U.S. grievances, which have damaged the incomes and lives of countless Americans who don’t live on either coast.
Tariffs don’t directly lead to trade wars, nor do they lead to recessions. The hope hear is that steel and aluminum dumpers will make a rational decision to re-calibrate and negotiate new trade agreements with the U.S. that put these and related industrial back on a more even keel.
A strong U.S. trade policy is a good thing, not a bad thing, no matter what the Obama administration might have opined in the past. Spot tariffs, carefully imposed on the worst abusers, send a message. If they don’t receive that message, it’s unfortunate. But that’s still less unfortunate than simply submitting to the destruction of various U.S. business sectors without a whimper.
Gloom and doom? Not impossible. But at the moment, not likely. Today’s stock dump-a-thon, wherever it finally ends up, is a knee-jerk overreaction to a more robust trade policy that at last attempts to restore American jobs – and the American middle class – back to health after decades in the wilderness.
Let’s give these steel and aluminum tariffs some time to effect a solution. Automatically politicizing Trump’s long-threatened action is a reactionary game that, in light of obvious foreign economic predation, simply makes no sense at all.
UPDATE: The Dow closed down 451.53 at 4 p.m. Thursday, off 1.8 percent on the day. The S&P 500 and the NASDAQ were off about 1.3 percent each.