Trump's Trade War With America's Neighbors Is All Cost and No Benefit
What did we learn from yet another escalation in the North American trade war? Not to do it again.
Amid this week's escalation of a North American trade war, the stock market has been sending a clear signal: Stop doing this.
Stocks rise and fall for a wide variety of reasons, of course, but this week's downward spiral was largely driven by one man: President Donald Trump. Trump's announcement on Monday of new 25 percent tariffs on all imports from Canada and Mexico caused the markets to drop instantaneously. The drop continued on Tuesday as Trump vowed in an address to Congress that he'd impose even more tariffs, and over the past two days even as the White House retreated. By the end of the day on Thursday, Trump had postponed tariffs on all goods from Canada and Mexico that comply with the trade deal he negotiated during his first term.
"That move effectively walked back much of the original plan. But the market still sold-off, with uncertainty mounting over the long-term policy," CNBC reported, noting that the S&P 500 was down 3.6 percent for the week, the Dow Jones Industrial Average was down nearly 3 percent, and the Nasdaq composite was down 4.1 percent heading into Friday morning.
The stock market's performance is often used as a shorthand for the relative strength of the economy. That's not quite correct. A more accurate way to think about the stock market is as a reflection of what investors believe the economy will look like in the future—because, at the most basic level, buying or selling a stock is a bet on the future performance of that asset.
This week's selloff, then, is more than just a reaction to the tempestuous trade policy coming from the White House. It is also a signal that many investors believe the instability (at best) and significantly higher taxes (at worst) will continue to drag the economy for the foreseeable future.
It's hard to fault them for thinking so. Trump has been obsessed with imposing tariffs for years. He campaigned on a promise to hike tariffs on nearly all imports. Since taking office six weeks ago, he's threatened, imposed, postponed, and withdrawn tariffs on nearly a weekly basis, only to turn around and start the cycle all over again. It's irrational and economically illiterate, but there's no indication that it's going to stop anytime soon—and so businesses and investors are responding accordingly.
That's why Trump's tariffs on Canada and Mexico are creating serious costs even without being fully implemented. The stock market is perhaps the most visible of those costs—and those losses don't just hurt Wall Street, of course, but also harm any American with a retirement account. Other losses are already piling up, as American businesses lose access to Canadian markets and cross-border supply chains for everything from automobiles to zinc get disrupted.
The stock market might have fallen, but "at least we can cushion the blow with higher prices, deepening job cuts, falling business investment, and export industry devastation," is how Jessica Riedl, a senior fellow at the Manhattan Institute, summed it up in a post on X.
All that for what? Trump and his allies believe tariffs are the key to all sorts of wondrous economic outcomes that will make America more prosperous. In his speech to Congress on Tuesday night, Trump said that tariffs "are about protecting the soul of our country," whatever that means.
But even if you buy those arguments, it should be obvious that tariffs being implemented and then immediately withdrawn (for the second month in a row) will not produce the promised benefits. They won't generate revenue for the government, won't cause businesses to alter their supply chains, and won't stop the flow of illegal drugs. It's the equivalent of looking at a river, declaring your intention to build a dam, and then expecting the river to become a reservoir.
The simplest lesson to be learned from all this is that, as National Review's Dominic Pino points out, tariffs are not the magic wand that Trump believes them to be. If you are inclined to be generous to Trump, you might also conclude that even he is now realizing that fact—hence the quick undoing of the tariffs imposed earlier this week.
The White House pivoted to damage control mode on Thursday, dispatching Treasury Secretary Scott Bessent to reassure investors that costs imposed by tariffs would be "transitory"—an unfortunate choice of words that harkens back to the Biden administration's failed attempts to explain away inflation. The Trump administration also published a "fact sheet" outlining everything the "dealmaker-in-chief" was aiming to accomplish.
The markets don't seem convinced. Indeed, if the stock market was merely a snapshot of the current state of the economy, delaying those tariffs and offering some vague reassurances might cause it to bounce back quickly. Unfortunately, that's not true, and the uncertainty looming over American trade policy will continue to sap economic growth in all kinds of seen and unseen ways. That will be the case until at least April 2, which is the next deadline Trump has created for imposing tariffs once again on goods from Mexico, Canada, and other parts of the world.
That gives Trump a few weeks to learn the lesson he's stubbornly refused for years: Tariffs are tax increases that disrupt supply chains, cost jobs, and have many more losers than winners. If he doesn't, we'll likely have to ride this same roller coaster again next month.
