Maybe President Trump’s trade war will be more of a trade skirmish. That seemed to be the stock market’s conclusion yesterday.
It was a notable shift from last week when there seemed to be a full-blown panic over already announced tariffs on about $40 billion worth of steel and aluminum imports and looming tariffs on another $60 billion of Chinese imports. Politicians, economists, and journalists were making doom-laden predictions: One study estimated Trump’s steel tariffs alone would kill 146,000 American jobs. Wall Street responded with the worst single-week fall for U.S. stocks in two years.
Then, on Monday, news broke that China and the U.S. are open to negotiations. Wall Street promptly had its biggest one-day surge since mid-2015.
This new, calmer take on Trump’s trade policy makes a fair amount of sense. And not just because of Monday’s news.
Let’s begin with the economic effects. This involves answering a lot of questions: Will companies eat both sets of tariffs as production costs, or pass them on to customers? Will customers reduce their spending, buy American alternatives, or buy other imports? If jobs lost directly to the tariffs spark further job losses, how strong will that effect be? No one knows the answers to any of these questions. But economic models require values for these variables, so economists just have to take their best guesses. Read More...