By Michael Every of Rabobank
Do historical economic analysis or be history(?)
Fed Chair Powell’s Sunday TV slot said a March rate cut was “Gone in Sixty Minutes”, hitting Treasuries on Monday, along with a hot ISM services PMI - but that wasn’t what grabbed my eye most. Rather, it was him stressing US global engagement as “supporter, leader, and defender of democracies,” and a “critical voice in security and economic arrangements,” has been “enormously beneficial” to it, and hoping “that would continue for the benefit of the people that we serve.” Was this an anti-isolationist statement in an election year? Is there Fed research showing NATO and the WTO, etc., are “enormously beneficial” to the American people? Or does being World Police require Fed help to serve the people – and if so, how? (On the fiscal front? Or via a strong dollar via high rates?) Recall the ECB’s Lagarde has already got openly geopolitical.
That’s as the Houthis say they will escalate attacks on ships to respond to US/UK airstrikes; the diversion of global shipping around Africa continues; France’s CMA CGM just stopped going through Suez too, leaving on two big Chinese firms, a Taiwanese, and an Israeli. Central banks talk down the impact of the Red Sea crisis, but the economy will likely feel it soon. Indeed, even US ports are now warning of increased congestion ahead. note that the ISM survey prices paid leaped to 64, the highest since early 2023, with one respondent noting, “transportation impacts of the Suez Canal… and the issues at the Panama Canal are impacting both costs and schedules for the transport of goods.”
And on (supply) shock-and-awe, Trump just proposed a tariff on China of over 60%, as well as removing its permanent most-favored nation trade status. I had recently flagged Wall Street was wrong in thinking it was ‘reading Trump right this time’ when it --inaccurately-- modelled a 10% tariff ahead: I had warned 10% was likely to rise because the aim is to shake the global box, not do something markets can live with. Yet Western markets shrugged this all off anyway.
It’s easy to see why The Street doesn’t want to grapple with a 60%+ tariff. You don’t need to be an economist to understand just how much the global box would be shaken by them, even if they would likely be threatened at some point in the future to give firms a chance to adapt before the drawbridge was raised on Castle Trumpula. Yes, markets survived the first China tariffs, and Biden not removing them, but: 1) they prompted a real shift in supply chains; 2) 60%+ is a game-changer; and 3) this looks like neo-Hamiltonian mercantilism, not headline-grabbing.
Logically, a 60%+ tariff on China can mean inflationary boom or inflationary gloom in the US, and inflationary boom in some others (like Mexico?) --though Trump is talking a 10% tariff on everyone else-- plus deflationary gloom in China. It would force a shift in savings and investment balances globally, which must net to zero. Markets would swing wildly as this happened. Indeed, Chinese this was one reason why Chinese stocks collapsed yesterday despite a floated market bailout rising from $278bn to $1.4trn. Only another $5.6trn to add and everyone gets their money back in stocks; but doing the same for property would take double or triple that, which is why stocks still flounder.
Markets don’t grasp that you can’t have the central importing economy in a global system shift to balanced trade, or net exports, and expect the system to remain intact. Trade, capital, and commodity flows would crumble, stumble, or rumble, while the US dollar would suddenly be hard to earn, yet needed even more to repay Eurodollar debts. And that’s before we get to the obvious geopolitical and military angles.
So, yes, one can see why markets don’t want to think about a 60%+ tariff! But that doesn’t mean it can’t happen. (Though that also doesn’t mean it will either: there is the Republican nomination, the court processes, then the 2024 election… and this is Trump after all.)
Regardless, the warning is that markets need to do more studying if they want to ‘understand Trump’. They need to do some serious reading of economic history instead. There, one can’t go wrong with Schumpeter’s 1,187-page epic, ‘History of Economic Analysis’ (HEA) from the ancient Greeks through the Middle Ages to the mercantilists, the Classical Economists, and Keynes.
One snippet is of particular relevance today:
“Free-trade policy means much more than a particular way of dealing with questions of foreign trade. In fact, it could be argued that this is the least important aspect of it… free-trade policy is related to other economic policies in such a manner that, for political as well as economic reasons, these other policies are difficult to pursue without free-trade policy, and vice versa. In other words, free trade is but an element of a comprehensive system of economic policy and should never be discussed in isolation.” (p. 376)
I made this point in 2016: dump free trade, and all legs of the neoliberal table fall off: what monetary policy keeps out imports? What about capital controls? What should fiscal policy be? And industrial? Energy? Science? Labour? Immigration? Education? Transport? Infrastructure? Defence? Foreign? You need a new ideological guide, or what the HEA calls, “a general political and moral attitude or vision that asserts itself in all departments of national and international life.” And this is happening. Nobody is calling for higher tariffs and ‘everything else the same’ on other policies. Instead, we see shifts on all these other policies in tandem with rising protectionism. Trump’s latest addition is to propose a radical pro-business, low-tax and regulation environment behind a far higher tariff wall – which is part of the US history of mercantilism.
But is this just a passing phase en route to ‘normal’ or ‘new normal’? One point the HEA argues at length and in depth is that we need to look to our social context for what policy emerges next: ideology stems from the world around us, not a vacuum. On which note, are these descriptions familiar at all?
- “None of them had all it wanted; each of them had what others wanted. And they were soon surrounded by new worlds inviting competitive conquest. Because both of this situation and the social structure of the epoch, aggression --or, what is the same thing, ‘defence’-- became the pivot of policy.” (p. 172)
- “Taking account of the circumstances and opportunities of the times, [the infant industry argument] constituted adequate means for securing what with the same proviso were rationally defensible ends.” (p. 320)
- ”This fermenting world… made for strong governments; and strong governments, chronically suffering from political ambitions that went beyond their economic means, were driven to increasingly successful attempts to make themselves still stronger by developing the resources of their territories and harnessing them into their service.” (p. 172)
All describe the birth of historical mercantilism: and to some eyes, there are enough present parallels to the past to suggest some form of it is going to keep coming back, even if 60%+ tariffs don’t arrive via Trump.
This shouldn’t really be a surprise after trade wars, onshoring / nearshoring / friendshoring, “strategic autonomy”, massive state subsidies, capital controls, technology controls, decoupling / derisking, weaponization of commodities, weaponization of the dollar, dedollarisation, Cold War, two hot wars, and constant calls for rearmament – but to many it evidently still is.
Clearly, markets need to look back in order to look forward better, because doing so gives us a broader dataset to forecast from than the very short run of post-Cold War global neoliberalism. Indeed, it’s time to do some historical economic analysis – or to be history(?)
