Day after day, financial markets have roiled as the U.S. and China trade threats over tariffs.
Stocks dropped sharply after President Trump announced on August 1 that he would impose new tariffs on an additional $300 billion of Chinese imports. They plunged even more when China fired back with an implied threat to start a currency war. When Trump briefly backed off, markets rallied in relief — only to crash yet again when he vowed to raise tariffs even higher and “ordered” American companies to stop manufacturing in China.
“What we’re seeing right now is very, very abnormal,” says Shotts.
For starters, he says, the timing is strange: Trump is picking trade fights when the U.S. economy is growing. Beyond that, the president has a view of trade that’s “foundationally different” from the “win-win” approaches that Republicans and Democrats alike have pursued for decades, and he doesn’t seem to have a clear strategic goal.
The New Normal
“It’s normal to see trade clashes during recessions, when you have oversupply of production and companies want to keep imports out,” Shotts says. “We saw that with President Clinton on steel, and then with Bush Jr. on steel. But now we have one country, the United States, that’s instigating fights on its own at a time when its economy has been growing for a long time.”
More important, says Shotts, Trump seems to view foreign trade as almost inherently threatening to American interests. That’s wildly at odds with policymakers in both parties, not to mention with investors and most economists.
“I don’t think Trump is pandering,” Shotts says. “His mental model is very, very different from previous policymakers. He really thinks that trade is not in the U.S. interest, or at least that the U.S. is getting a raw deal. But both Republicans and Democrats before him have taken the approach of being fairly open and fairly engaged in the world trading system. They’ve seen it as good for the United States and good for the world.”
Bigger Shocks to the System?
As volatile as the markets have become over Trump’s rhetoric and actions, Shotts argues that periodic plunges so far haven’t reflected the full economic stakes. That’s because the swings so far have only been in response to threats and changes in the probability of a trade war — not yet to a full-blown trade war.
“We’ve had big changes in the stock market due to small changes in policy,” Shotts says. “If we have big changes in policy, you’ll have a huge reaction and potentially huge amounts of value could be destroyed.”
Because Trump pays close attention to the stock market, often viewing it as a barometer of his presidency, he could be vulnerable in his negotiations.
“If the stock market tanks, that makes Trump look bad,” Shotts says. “If I were the Chinese government, I would get things to look bad enough so that any deal is better than the current bad expectations. I would be trying to put together a deal Trump can feel good about and brag about, but that accomplishes my strategic industrial policy goals.”
Changing the Rules Forever?
Regardless of how the clash with China plays out, Shotts says Trump is undermining the very essence of the international trading system that evolved after World War II. In July, for example, Trump challenged the World Trade Organization, the international institution that adjudicates disputes in multinational deals, calling it “broken” and saying it abetted “cheaters.” He then issued a 90-day ultimatum to change a rule that lets countries designate themselves as “developing,” and vowed to use “all available means” if he didn’t get his way.
“Trump’s approach is foundationally different,” Shotts says. “He’d really like to blow up the international institutions. That scares me, and it scares the markets.” Those institutions are not perfect, he says, but they have been a foundation of global economic growth for decades. “It’s the best kind of foreign aid policy that the United States could have, and it’s been good for this country, too,” he says.
Trump’s approach, Shotts says, is to browbeat each country over trade separately, trying to force it into submission. The problem, he continues, is that one-on-one fights between powerful actors can lead to “cycles of punishment” and even higher trade barriers.
“Getting out of these cycles of retaliation is very important, and it requires somebody who’s got the authority to say this is how it’s going to end,” Shotts says. “That’s been an important role of the WTO, but if you’re trying to get rid of the WTO, you make it harder to get out of the cycle.”