On Monday, the Dow Jones industrial average had a nearly 700-point rise, thanks to the decreasing likelihood that we’re going to get into a trade war with China. Well, Wall Street might be right or wrong about how many tariffs we’re going to have – President Trump, Wilbur Ross, and Robert Lighthizer all rather like tariffs, which is a pity. But what this does do for us consumers is the more basic question — are tariffs good for the American economy?
The correct answer is a resounding no.
Think about what Wall Street is, the collective wisdom of those who work with and manage money. They’re entirely apolitical in their work, their judgments of what is good or bad depend solely upon the effects on dollars and cents — not upon what is good for steel workers, nor political theories like the shoring up of a political base. Wall Street only cares about what effect an action will have on the economy. If it’s going to make the economy grow, if people will be better off in aggregate and in general, then stock market prices will rise. If something is a bad idea economically, then prices will fall.
The entire calculation is entirely impersonal and fact-based. Which is why it’s such an interesting verdict, isn’t it? “Cooling trade tensions with China fueled a rush back into U.S. stocks Monday.” Less trade tension, fewer worries about tariffs being imposed, makes stock prices rise. It’s quite an effect too. “The Dow surged 669 points — its third-biggest point gain in history — and had its best day in two and a half years.”
Be careful about point gains, of course. The higher the index, the more likely you’ll see record point changes, as opposed to percentages, which is what really matters. But still, that’s a pretty rousing vote in favor of lower trade tensions, isn’t it? “U.S. stocks are coming off the biggest weekly decline in more than two years.” But what was it that caused that decline?
That’s the bit that we know, isn’t it? As Trump’s rhetoric about how we’re going to “protect” American industry and the economy increased, the people who actually work out the effects of these things for a living were fleeing in panic. Because the effects of trade tariffs aren’t, at all, to protect industry or the economy at all. The net effects – after we’ve thought about the effects on the specific industries being protected but also looked at the effects upon everyone else as well – are negative. Trade tariffs, let alone a trade war, make us all poorer.
As the tariffs looked more likely, the stock market sank. As the tariff threat receded, the market rose again. This is something we should take note of, isn’t it?
Let’s not accept the promises of politicians, the waving of airy theories about the way the world might be. Instead let’s take the verdict of reality – seems like a sensible enough idea. Those who know about such things, the people who run America’s entire financial system, think that trade tariffs make us all poorer, while the absence of them will make us richer. That really is a lesson we should learn, isn’t it?
Tariffs and trade wars make us poorer so let’s not do that sort of thing, eh?
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
