Trump’s moves towards ‘Mar-a-Lago Accord’ set off whirlpool of worries
(Originally published March 28 in “What in the World“) Trump said he would impose a 25% tariff on imported cars and auto parts, starting April 3.
Will he? Won’t he? Who knows? It’s all part of the carousel of caprice U.S. President Donald Trump has inflicted on the U.S. economy. If this isn’t a trial balloon or some negotiating tactic and he follows through, the new tariffs will jack up costs to U.S. drivers for new, imported cars, reduce car sales and production, and disrupt the global supply chains and profits at carmakers in the U.S. and abroad. Last year, Americans spent $214 billion for roughly 6.2 million imported cars, almost 40% of all the cars they bought, and spent $192 billion on imported car parts.
The latest industry to cry “uncle” in response to Trump’s whirlpool of whimsy is his cherished domestic oil and gas sector. Shale executives responding to a Federal Reserve Bank of Dallas survey said the uncertainty surrounding what he might or might not do from day to day has up-ended any plans they might have had to “drill, baby drill.” So, winning.
Trump says tariffs are worth the pain they cause because they’ll eventually bring manufacturing and factory jobs back to the U.S.—as though working on factory lines is something citizens of one of the most developed and richest nations in the world aspire to do. In the meantime, economists warn, tariffs are likely to lower consumption, production. They’re also likely to spark retaliatory tariffs and less favorable trade terms overall hurting net exports. That’s a combination that will hurt economic growth and jobs. As a preview, Canada’s new Prime Minister, former Bank of England Governor Mark Carney, suggested Thursday Ottawa would seek to renegotiate the 2020 United States-Mexico-Canada trade agreement.
Trump also justifies tariffs as an additional revenue to pay for deeper tax cuts. Many economists say any potential revenue is offset by the fact that higher tariffs will reduce overall imports. And the Congressional Budget Office projected last week that, if tax cuts Trump made in his first term are extended without spending cuts, the U.S. government’s $36 trillion debt—now as large as the U.S. economy—would rise to 214% of GDP by 2054. Even if they’re allowed to lapse, the CBO warned in its baseline projection this week, government debt is on track to exceed its post-World War II peak, climbing to 107% of GDP by 2029, 118% by 2035 and to 156% by 2055. The rising cost of servicing this debt while paying for America’s aging population will result in slower economic growth, the CBO said.
How long these or any other U.S. government economic forecasts are likely to be useful is an open question. Economists now worry that efforts by the White House’s “Dept. of Government Efficiency,” headed by Trump’s multi-billionaire donor Elon Musk, to guy government staffing will undermine the reliability of federal economic statistics.
While the White House explains Trump’s policies as part of a broader vision to re-make international trade and finance in a way fairer to the United States, a “Mar-a-Lago Accord.” But the sum of these disparate parts is an economic bag of worms. As former J.P. Morgan currency strategist and Council on Foreign Relations senior fellow Rebecca Patterson explains:
He wants to keep the dollar globally dominant but weakened to support U.S. exporters. He wants tax cuts that will increase the budget deficit but lower Treasury bond yields. He wants to raise tariffs on other countries to reduce the U.S. trade deficit but strengthen America’s standing as an attractive destination for foreign investment.
The danger, Patterson warns, is that Trump’s efforts disrupt the U.S. Treasury market, which would reverberate across global financial markets and the economy and ultimately up-end the dominance of the U.S. dollar and U.S. markets in the global financial system.