Fri Dec 7, 2018 AT 3:58 PM EST
Volatility in the administration is leading to volatility in the stock market. When President Donald Trump made it sound as though he had worked out a trade deal with China, or at least a temporary halt in the escalation of hostilities, markets rose smartly. When Trump tweeted that tariffs are wonderful and a fine substitute for a deal, stocks fell even faster.
The market verdict is clear: Trade conflict is bad for the expected value of American companies. But so far Trump has not heeded the market signals. What might make investors blanch even more is that Trump may, from the standpoint of his re-election prospects, be right to ignore them.
Tariffs typically impose more costs than they yield benefits for the country that imposes them. George W. Bush’s tariffs on imported steel were estimated to have destroyed more jobs in steel-using industries than they saved in the steel industry itself. Barack Obama’s tariffs on tires imported from China had a similarly negative effect.
Yet presidents have resorted to such tariffs anyway. They have had a variety of motives. In part, though, they were responding to the same political logic that might ultimately make the tariffs pay off for Trump.
The political virtue of tariffs is that while the costs may exceed the benefits, the costs are diffused and the benefits concentrated. (The same pattern holds for many other government policies, such as farm subsidies.) The winners from a tariff generally have a bigger stake in imposing and keeping them than the losers have in stopping them. The losers, such as the people who would have gotten a job at a carmaker if not for tire tariffs, may not even know that they are paying a cost at all. Read More at Bloomberg.com