Well, it happened.
Trump has tariffed Canada ostensibly over enough fentanyl to fill two potato sacks. However, the underlying theme often mentioned is a nouveau protectionism belief that the US should make everything at home. It is the same playbook from the 1930s that began with the Smoot-Hawley Tariffs and ended with the Great Depression. (‘But this time will be different…’)
A tariff will impact the economy as a supply shock. Prices will go up domestically in the US (regardless if a foreign government pays the tariff nor not, which is complete rubbish), and this is inflationary. The same thing happened after the COVID-19 outbreak when the supply chain got all screwed up, except this time, it is Team USA scoring a goal on their own net.
I have to conclude that this has a real possibility of causing a recession in the US. Canadian economist David Rosenberg (former Merrill Lynch chief economist) said “The US cannot avoid the damage from its own tariffs”
A headline from Reuters said “Atlanta Fed shock sounds “Trumpcession’ warning”. To summarize the article: The Atlanta Federal Reserve publishes a GDP forecast called GDPNow. This GDP forecast has turned from +2.3% to -2.8%. Two quarters of negative growth is a recession. This model has a lot of noise (the numbers jump around a lot) and a month ago, it was forecasting 4% growth. That being said, this model has been remarkably accurate since COVID and I have to stress here that a lot of very smart macro investors follow this model closely.
Looking ahead to this year, my advice is to think about how a recession will impact your business.
The Wall Street Journal had the headline “Canada and Mexico Gambled on a Free Trade Future. The Bet is Turning Sour” as if our economic relationship with the US and Mexico was a stupid idea from the beginning because we foolishly trusted the States. However, when we entered NAFTA in 1988, we had an American President who nurtured relationships with allies and partners because he understood correctly that these relationships are important.
A quote from a 1988 Ronald Regan radio address:
“America’s most recent experiment with protectionism was a disaster for the working men and women of this country. When Congress passed the Smoot-Hawley tariff in 1930, we were told that it would protect America from foreign competition and save jobs in this country—the same line we hear today. The actual result was the Great Depression, the worst economic catastrophe in our history; one out of four Americans were thrown out of work. Two years later, when I cast my first ballot for President, I voted for Franklin Delano Roosevelt, who opposed protectionism and called for the repeal of that disastrous tariff.
Ever since that time, the American people have stayed true to our heritage by rejecting the siren song of protectionism. In recent years, the trade deficit led some misguided politicians to call for protectionism, warning that otherwise we would lose jobs. But they were wrong again. In fact, the United States not only didn’t lose jobs, we created more jobs than all the countries of Western Europe, Canada, and Japan combined. The record is clear that when America’s total trade has increased, American jobs have also increased. And when our total trade has declined, so have the number of jobs.
Part of the difficulty in accepting the good news about trade is in our words. We too often talk about trade while using the vocabulary of war. In war, for one side to win, the other must lose. But commerce is not warfare. Trade is an economic alliance that benefits both countries. There are no losers, only winners. And trade helps strengthen the free world.
Yet today protectionism is being used by some American politicians as a cheap form of nationalism, a fig leaf for those unwilling to maintain America’s military strength and who lack the resolve to stand up to real enemies—countries that would use violence against us or our allies. Our peaceful trading partners are not our enemies; they are our allies. We should beware of the demagogues who are ready to declare a trade war against our friends—weakening our economy, our national security, and the entire free world—all while cynically waving the American flag. The expansion of the international economy is not a foreign invasion; it is an American triumph, one we worked hard to achieve, and something central to our vision of a peaceful and prosperous world of freedom.”
[WFG]