The Trump economic uncertainty effect isn't going away

The second round of arbitrary tariffs are a random walk through Trump's mind and mood. There's no reason to think that the walk has reached its final destination.

A common reaction, domestic and international, to Donald Trump’s second round of arbitrary tariffs goes like this: Yeah, these tariffs are bad. But at least now we know what they are and have some certainty and predictability.

In a press release announcing, rather defensively, an agreement with Trump, the European Commission said: “This political agreement restores stability and predictability for citizens and businesses on both sides of the Atlantic.”

Now, I understand other countries reaching lopsided tariff agreements with Trump. He is committed to a protectionist trade policy for the United States. An agreement mutually reducing trade barriers, which has been the objective of U.S. trade agreements since World War II, wasn’t in the cards. The only option available was to negotiate the least unfavorable access to the U.S. consumer market possible.

However, I can’t understand any belief or profession that these tariff rates and conditions provide an iota of “stability and predictability”. Unless the courts rein in Trump’s asserted unconstrained ability to impose tariffs of any size for any reason at any time, any expectation or hope for stability and predictability is a delusion.

For Trump, tariffs are an all-purpose policy tool. He imposed a punitive tariff on Canada for drug smuggling and supposedly not being a good ally. He imposed a punitive tariff on Brazil for pursuing an investigation of a crony of his, that country’s former president Jair Bolsonaro. He threatened higher tariffs against Thailand and Cambodia if they didn’t abandon their border skirmish.

For Trump, tariffs are, in part, an economic policy. He believes in a protectionist tariff. That might be the only policy measure in which he truly believes. However, he also clearly regards tariffs as a tool that he can use to impose his will on other countries.

Why the belief that, after this second round of arbitrary tariffs, he will abandon that second use of them, as a tool to impose his will on other countries? If some other country does something that offends him, or that he doesn’t like, does anyone really think that he will say: I really don’t like that. But we have this trade agreement, and I have to honor that. The second-round arbitrary tariffs themselves violate numerous trade agreements entered into by the United States, including some reached by Trump himself.

The arbitrary structure of the second-round tariffs also suggests their fragility and likely ephemeralness. Britain has a tariff rate of 10%. The EU, Japan, and South Korea rate is 15%. Canada’s rate, on goods not covered by the USMCA treaty, is 35%. Switzerland’s is 39%. There is no economic principle or condition that rationally yields such disparate treatment. It’s all a random walk through Trump’s mind and mood. There is no reason to believe that the random walk has reached its final destination.

Among MAGA apologists, there’s a refrain that goes like this: Since we haven’t yet entered into a recession, all the criticisms of Trump’s tariffs and economic management are invalid. However, the sluggishness of the American economy is quite obvious. As is that part of the blame, and perhaps most of it, lies with the uncertainty Trump has created with his vacillating tariffs, dictates to private businesses, shakedowns of others, and attempts to bully the Fed.

Trumpians are trying to have it both ways on the recent report that showed a sharp reduction in new hiring. On the one hand, Trump states that the stats were phony and that economic conditions are actually rip-roaring. Then he fired the chief statistician. On the other hand, the report is being used to argue that a weakening job market justifies a Fed rate cut.

However, if the problem is Trump-created uncertainty, a rate cut won’t do much. If businesses have decided to stand pat and defer investments and new hiring due to uncertainty, a lower interest rate is unlikely to induce them to abandon their caution.

Trump wants a Fed rate of 1%, saying that will reduce the borrowing costs of the federal government. Inflation, however, has been persistently stuck at around 2.5% to 3%. That remains a disruptive level, both economically and politically. If the Fed did what Trump wants, it would likely send federal borrowing costs rocketing, since it would signal an utter abandonment of any pretense of maintaining the value of the dollar. Instructively, the two recent dissents from the Fed leaving interest rates where they are only advocated a quarter of a percentage point decrease, which would still leave the rate at 4%.

The economy needs a steady hand. That, however, isn’t the Trump way.

Reach Robb at robtrobb@gmail.com.