WASHINGTON, DC – FEBRUARY 10: U.S. President Donald Trump takes a question from a reporter after … More
Stocks around the world continue to slide on President Donald Trump’s nuclear tariff option. The recent actions from Washington have served to elevate uncertainty, raise global fear, push stock prices down, and increase animosity against America. Does Trump have a master plan? Is there a historical lesson we can use to help understand what may come?
A Lesson From History?
Today’s tariffs have caused many to reflect to 1930, when President Herbert Hoover signed into law the Smoot-Hawley Tariff Act. Although there are some differences between today’s tariff environment and the environment at that time, there are several similarities to consider. Here’s how the tariffs in 1930 unfolded.
Senator Reed Smoot (R) and Representative Willis Hawley (R) were the two sponsors of the Smoot-Hawley Tariff Act. The U.S. House passed its version in May 1929 by a vote of 264 to 147, with 244 republicans and 20 democrats voting in favor of the bill. The following March (1930), the Senate passed its own version of the tariff bill by a vote of 44 to 42, with 39 republicans and five democrats. After merging the two bills, it was sent to Hoover’s desk for signature. Interestingly, Hoover was not in favor of the bill having campaigned, in part, on international cooperation. Additionally, over 1,000 economists urged Hoover to veto the bill, along with Henry Ford, Thomas Lamont of JPMorgan, and other business leaders. Despite opposition, congressional Republicans pressured Hoover to sign, and it was reported that Hoovers cabinet threatened to resign if he didn’t. Ultimately, Hoover succumbed to the pressure and signed the Smoot-Hawley Tariff Act on June 17, 1930.
After signing, retaliatory tariffs began. These counter measures were imposed on the U.S. by Canada, Cuba, Mexico, France, Italy, Spain, Argentina, Australia, New Zealand, and Switzerland. Canada also strengthened its trade ties with Great Britain. Actions from our trading partners, coupled with Smoot Hawley, helped create a vicious trade war, which led to a 66% drop in global trade between 1929 and 1934. Most economists and business leaders believe the Smoot-Hawley bill prolonged the Great Depression and made it much worse.
The economic fallout from the 1930 tariffs hurt Republicans for decades as Democrats retained complete control of Congress for approximately 52 of the next 64 years. This issue was also a major reason Franklin Delano Roosevelt defeated Hoover in the 1932 presidential election.
As mentioned, there are differences today, compared to 1930. Today, our economy is strong. At that time, the Great Depression had been in place for several months, so the economy was weak. Even though our economy is strong, the data indicating this measures the period prior to Trump’s tariff announcement. Currently, most corporate CEOs believe the U.S. economy is weakening and some believe we are already in recession.
Are Trump’s Tariffs Reciprocal?
Trump’s Rose Garden announcement last Wednesday stated that the new tariffs were reciprocal. He showed a chart with figures on what other countries were charging the U.S. and how we were only going to charge them about half of that. Now we learn Trump’s tariffs are not reciprocal at all. According to experts, the formula used to derive the new tariff figures has little to do with reciprocation. It has more to do with the trade deficit with specific nations. But there’s more.
Peter Navarro, Trump’s senior counselor for trade and manufacturing, used Vietnam as an example. On CNBC Monday morning, Navarro said that even if Vietnam reduced its tariff on U.S. goods to zero, it would not be enough. He said it’s “non-tariff cheating that matters.” Navarro spoke about non-tariff barriers, including: 1) how much we buy compared to how much we sell to another country; 2) intellectual property theft; 3) the VAT tax; 4) currency manipulation, and a few other issues. Let’s look at some of these.
The first item compares how much we buy from another country versus the amount they buy from us. Navarro referenced how for every $15 dollars in goods we buy from Vietnam, Vietnam only buys $1 from us. Trade deficits with other countries are only one of the factors built into the Trump tariff formula. Is this reasonable? The GDP of Vietnam is about $245.2 billion, similar in size to the economy of South Carolina ($246.3 billion). Vietnam is also much less wealthy than America. Should we expect that a small country with much less wealth, will buy the same amount of goods from us that we buy from them? Probably not. Especially since the need in America is far greater than that of Vietnam.
Another item incorporated into the Trump tariff calculation involves the value added tax. A VAT tax is a tax imposed on goods and services. Think of it as a national consumption tax. In Europe, the VAT tax ranges from 17% in Luxembourg to 27% in Hungary. Each country sets its own VAT tax rate in accordance with EU regulations. Navarro cited the VAT tax as another non-tariff barrier. The problem is, to expect all of Europe to eliminate the VAT tax is asking the region to radically alter its revenue collection system. This would require a change to EU’s regulations.
Since Navarro referenced the VAT tax several times and said non-tariff barriers were the most important issues, don’t look for Europe to cave on this anytime soon. Therefore, if these non-tariff barriers are the most important issue, and Trump will not relent until these issues are resolved, the current trade war could continue for quite some time. And, like republicans in the 1930s, this could come back to bite them if they’re not careful.
Stock Market Reaction To Tariffs: Then And Now
How do stocks react to tariffs? Let’s go back to the Smoot-Hawley tariffs. When the depression began in 1929, stocks initially fell around 50%, then recovered about half their losses. After the Senate passed its tariff bill in March 1930, it was merged into the House version. Stocks peaked on Apr. 17, 1930, then began to fall to an ultimate bottom which was 89% lower than their peak in 1929.
Today, stocks fell over 11.0% in the two days following the April 2 announcement. Despite only falling 11.0%, it could easily get worse if America fails to reach new deals with our trading partners. White House economic advisor Kevin Haslett, in an interview Monday morning, said Trump was considering a 90-day pause. The Dow Jones average rose 1,800 points in the next seven minutes on the news. Then Trump said that was “fake news” and stocks fell again. It’s impossible to know what to expect with such conflicting messages emerging from the White House.
The biggest impediment to a thriving stock market is uncertainty. When corporations don’t know the rules, they sit on the sidelines until they do. Several companies are talking about layoffs. Larry Fink, head of BlackRock, believes the U.S. is already in recession. He said this sentiment is held by many CEOs he has spoken to.
Tariffs: A Negotiating Tactic Or A Long-Term Policy?
Are the tariffs a negotiating tactic or a longer term, revenue producer for the federal government? Both have been cited by the administration at various times, and both are at odds with each other. If the tariffs are a negotiating tactic, they will be short lived. In that case, it’s hard to see companies spending the time and money to build new facilities in the U.S. Why? Because it takes between three and five years from start to finish for a new plant to be up and running. If the tariffs remain for that long, the stock market and economy could experience significant pain. If the tariffs are designed to bring manufacturing back to the U.S. and raise revenue, then negotiations today would be unnecessary. Trump has said the tariffs are both. Which is true? Perhaps no one knows, not even the president. The rules are changing daily.
America has entered a period of great uncertainty with the economy teetering and stocks plummeting. Only time will tell if the outcome will be as the president has stated. In the meantime, all we can do is wait and see since no one really knows what’s going to happen.
