Trump’s kryptonite
It’s a bird…it’s a plane…It’s Trump. President Trump appears to be unstoppable. Utilizing the might of the US economy, the president is squeezing the White House’s far reaching power to the last drop. His main weapon: Section 232 of the Trade Expansion Act of 1962. That section provides the President broad power to adjust imports — including through the use of tariffs — if excessive foreign imports are found to be a threat to US national security. And as we have learned already, it appears that in the eyes of the president, everything under the sun is a potential threat to national security.
Now let’s call it as it is. The president has some valid points. He is absolutely right about the border — mostly when it comes to Mexico. He is right about defense spending and he is right about some of China’s trade practices. In many cases he is wrong about Canada. But the reality is that we can point out until we are blue in the face that ex energy, the US is actually running a trade surplus with Canada and that the “$200bn subsidy” figure is totally fiction. That will not help. Logic and data will not work here. But what might soften the president is his kryptonite.
His first and maybe most important vulnerability is the stock market. It’s hardly a secret that the president in many occasions defines success by the performance of the stock market. It’s not a surprise that Canada and Mexico were granted 30-day extensions on the 25% tariff shortly after the stock market reacted negatively to the news. So the current performance of the stock market is not due to the assessment that tariffs are good for the US economy, but the belief that, at the end of the day, the president will not implement measures that will hurt market sentiment.
Another vulnerability is gasoline prices. If he can help it, the president will not allow gasoline prices to rise materially under his watch. And with no easy substitute for oil coming from Canada, any tariff on Canadian energy will be immediately translated into higher prices at the pump. We doubt that even a 10% tariff on energy will be imposed.
Inflation is another vulnerability. In almost any campaign speech Trump used inflation as a weapon against the Democrats. And as we have seen this week, the war on inflation is not over. We can debate by how much, but it’s clear as day light that the first and most visible impact of broadly based tariffs will be higher US prices. And with inflation struggling to clear the 2% target, any additional price pressures will quickly find their way to inflation expectations and might force the Fed to raise rates — another issue for the president who has yet to see rates that are too low. A potential clash between the White House and the Fed is the last thing the market would like to see (see first vulnerability).
Time is also a consideration. While the cost/benefit outcome of broadly-based tariffs is debatable, what’s not debatable is that the cost will be felt much faster than any potential benefit. After all, you cannot impose tariffs on a well-oiled machine that was established on a free trade infrastructure and expect things to change overnight. The president’s vulnerability is that by the time of the mid-term elections, the only visible outcome will be the economic disruption of tariffs in terms of inflation, jobs, and output.
Eventually the President will have to act if he wants to maintain any credibility. But his kryptonite will ensure that the upcoming tariffs will be more limited in terms of scope, duration or magnitude than currently feared.
