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President Donald Trump on March 8 imposed a 25 percent tariff on most steel imports, a move that was announced a week earlier amid immediate threats of retaliation from trading partners around the world.
The order concludes a process that began last April when Trump directed the Commerce Department to conduct a Section 232 investigation of the impact of steel imports on national security. In January, the agency submitted a report to Trump that concluded that “the present quantities and circumstance of steel imports are ‘weakening our internal economy’ and threaten to impair the national security.” Trump also announced a 10 percent tariff on aluminum imports from most countries, which were also the subject of a Section 232 investigation.
“A strong steel and aluminum industry are vital to our national security, absolutely vital,” Trump said. “Steel is steel. You don’t have steel, you don’t have a country.”
The tariffs will go into effect on March 23 and, at least initially, will not apply to Canada and Mexico, which Trump said present a “special case.” The United States is currently negotiating revisions to the North American Free Trade Agreement (NAFTA) with those two countries, and Commerce Secretary Wilbur Ross said that “the action the president took today is a further motivation to both Canada and Mexico to make a fair arrangement with the United States.” In addition, the administration indicated that exemptions for other close allies would be considered.
Trump’s March 1 announcement of his decision to impose tariffs was met with condemnation within his own party, a stock market plunge and at least one resignation from his administration. Senate Majority Leader Mitch McConnell, R-Ky., said, “There is a lot of concern among Republican senators that this could sort of metastasize into a larger trade war,” while Speaker of the House Paul Ryan, R-Wisc., warned of “unintended consequences” that could hurt the economy. Meanwhile, the Dow Jones Industrial Average, which had been rebounding following a nearly 3,000 point drop in early February, fell almost 1,200 points between Monday, Feb. 26, and Friday, March 2, ending the week at 24,536.06. And on March 6, Gary Cohn, who opposes the tariffs, resigned as Trump’s top economic adviser, though he did not publicly cite the tariffs as a reason.
Outside the United States, the “unintended consequences” that Ryan warned of began to emerge. The European Union commissioner for trade said the tariffs would “put thousands of European jobs in jeopardy, and it has to be met by a firm and proportionate response,” and a spokesman for China’s National People’s Congress said his country would implement “necessary measures” to respond to the trade restrictions. Officials there are already investigating imports of certain U.S. agricultural products.
With economists and analysts warning of the harm that a trade war could do to the economy, the move would seem to work against Trump’s oft-stated goal of having the United States consistently achieve a 3-4 percent annual growth rate. In the fourth quarter of 2017, gross domestic product expanded by 2.5 percent, the Bureau of Economic Analysis said at the end of February. This was a slight downward revision from its previous estimate of 2.6 percent growth. The first three quarters of the year came in at 1.2 percent, 3.1 percent and 3.2 percent.
The economy exceeded expectations in February by adding 313,000 jobs, the most since July 2016, according to the Bureau of Labor Statistics. The unemployment rate remained at 4.1 percent for the fifth straight month, the lowest it has been in 17 years.
The Federal Reserve’s Federal Open Market Committee (FOMC) did not meet in February, so the target range for interest rates remained 1.25 to 1.5 percent. With the economy showing signs of strength, the Fed is expected to raise rates several times in 2018. At least one member of the FOMC, though, warned of the negative impact the tariffs could have on economic growth, noting it could be significant enough that, “we might want to revise our economic forecast downward.”
“Protectionism is often not helpful for the broader economy,” Federal Reserve Bank of Atlanta President and CEO Raphael Bostic said. “You have wins on one side, but you have costs and losses on the other side, and how that all shakes out is often not positive. … Europe has signaled they would hit a whole host of other products that are not aluminum or steel. There is just not certainty as to which products are going to get pulled into this. Anyone who is engaged in any kind of international trade space has got to be concerned.”
A few days before Trump’s announcement, The Conference Board reported that its January Consumer Confidence Index had reached its highest level since November 2000 – 124.3. (The index’s baseline is 100 in 1985.)
“Despite the recent stock market volatility, consumers expressed greater optimism about short-term prospects for business and labor market conditions, as well as their financial prospects,” the board’s director of economic indicators said. “Overall, consumers remain quite confident that the economy will continue expanding at a strong pace in the months ahead.”
The University of Michigan’s Index of Consumer Sentiment, meanwhile, in February recorded its second-highest rating since 2004 – 99.7.
“The highest proportion of households since 1998 reported that their finances had improved compared with a year ago and anticipated continued gains during the year ahead,” researchers said. “Economic news heard by consumers continued to be dominated by the tax reform legislation and net job gains, which was untarnished by the consensus view that interest rates would increase and stock prices would remain volatile.”
Confidence in the manufacturing sector, as measured by the Institute for Supply Management’s Purchasing Managers Index, is also at its highest point since 2004, with the February index, which is based on a survey of supply executives, coming in at 60.8.
“Comments from the panel reflect expanding business conditions, with new orders and production maintaining high levels of expansion; employment expanding at a faster rate to support production; order backlogs expanding at a faster rate; and export orders and imports continuing to grow faster in February,” the institute said.
Housing starts in January increased nearly 10 percent over December and were 7.3 percent higher than in January 2017, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales in January, however, slipped 3.2 percent month-to-month and fell 4.8 percent from a year earlier, the National Association of Realtors reported. The association’s chief economist said, “It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.”
Car sales in February were 12.6 percent lower than they were the previous February, but light-truck sales were 3.8 percent higher, according to Motor Intelligence. Year-to-date, car sales were down nearly 12 percent, while truck sales were up almost 6 percent.
The dollar closed the month trading at 0.82 euros, 0.73 pounds, 106.61 yen and 6.33 yuan.
Most economic indicators are positive, which should mean that strong growth is ahead, especially following the passage of tax reform legislation. There seems, in fact, to be only one thing standing between the United States economy and growth that could rival pre-Great Recession levels, and that is President Trump’s inexplicable commitment to what Republican Sen. Ben Sasse of Nebraska describes as “kooky 18th century protectionism [that] will jack up prices on American families.” One need not go back to the 1700s to see the folly of such trade restrictions, though. In 2002, then-President George W. Bush imposed tariffs of as much as 30 percent on steel, and at least one study found that this led to higher steel prices that caused 200,000 Americans to lose their jobs, a total that exceeded the number of people employed by the domestic steel industry at that time. Unless Trump changes course, U.S. consumers will be paying more for vehicles and other products and this country’s producers and manufacturers will have a more difficult time selling goods overseas. Such a fundamental lack of understanding of business and economics would not be acceptable from a contestant on The Apprentice, much less from America’s first CEO president.
Courtesy: AIIS