That was a hell of a thing. The week opened with the Dow dropping 719 points and then recovering, closing down “only” 617 points, one of the worst days Wall Street has seen in quite a while. And things had been going so well. Unemployment had never been this low. Corporations were making giant profits and now could pay next to no taxes, thanks to Trump’s targeted tax cuts. Even workers’ wages were edging up, slightly – not enough to outrage those corporations, of course, but just enough to allow this president to claim he had ended income inequality in America and everyone – every single American – was now rich beyond the dreams of avarice. And anyone who said differently was lying – that would be “fake news” – and that was that. Things were fine. No, things were far better than they ever had ever been at any time in this planet’s history.
Yeah, well, he talks like that, but things were going well. So he messed things up. He does that too, as the New York Times’ Matt Phillips reports here:
Investors are dealing with a painful new reality: The trade war between the United States and China could last indefinitely.
That anxiety spread across the stock markets on Monday, as investors around the world tried to divine the potential fallout to economic growth and corporate profits. Bonds and commodities, too, flashed warnings of a slowdown.
Hard times were coming, because Trump hadn’t been kidding:
For months, investors had assumed that the trade war, a major hazard for the global economy, would end soon. Just weeks ago, the S&P 500 reached a record high.
That illusion has been shattered, as concerns mount about slowing growth and rising costs. China said on Monday that it would increase tariffs on nearly $60 billion of goods, in response to a similar move last week by the Trump administration.
The S&P 500 fell 2.4 percent on Monday. It was the American stock benchmark’s worst day since early January. In all, the S&P 500 is down 4.6 percent in May.
The drop continued early Tuesday as the trading day began in Asia, with stocks opening mostly lower. But futures markets suggested Wall Street would open higher.
That’s not surprising. Wall Street calls that a Dead-Cat Bounce. When dropped from a sufficient height, even a dead cat will bounce. There are always bargain hunters the next morning, buying what they can from the wreckage, for pennies on the dollar. But the markets will be going lower:
Companies in trade-sensitive sectors like agriculture and semiconductor manufacturing were particularly hard hit. The tech-heavy NASDAQ composite index fell 3.4 percent, its worst decline in 2019.
The selling has come even as the American economy continues to show significant momentum. The economy expanded at a robust 3.2 percent annual rate in the first three months of the year. In April, unemployment fell to 3.6 percent, the lowest level since 1969.
But the declines in the financial markets raise the prospect of a negative feedback loop: As worries about the economy send stock prices lower, the weakness could prompt concern among the executives whose decisions drive economic growth.
That’s a death spiral, and that seems likely:
On April 9, the International Monetary Fund reduced its growth forecast for 2019 to 3.3 percent, which would make it among the slowest years of growth in the past decade.
In adjusting its forecast, the fund cited, in part, the tensions between China and the United States. It also said it expected about 70 percent of the global economy to slow this year.
Economists say further rounds of tariffs from both China and the United States will most likely slow the world’s economy even more. As both sides take new measures, it will be hard for businesses and consumers to avoid the fallout.
And there will be new measures:
Now that the Trump administration has raised tariffs on some $200 billion of Chinese goods to 25 percent, its next major escalation could cover nearly every product imported from China. The White House is weighing levies on another $300 billion of imports that includes a range of consumer products, from cellphones to computers and toys, that have so far been largely unscathed by the fight.
And no one wins here:
If consumers are forced to pay for those increases, they could be forced to cut back on spending. If the increases are absorbed by businesses, that could prove to be a drag on profit growth.
Or perhaps everyone wins here:
During an early afternoon appearance in the Oval Office with Hungarian Prime Minister Victor Orban, the president appeared unfazed by the market jitters.
He boasted incorrectly that the federal government is collecting “hundreds of billions of dollars” in tariff revenue and said he planned to use $15 billion of that amount to bail out farmers suffering from lost sales to China.
“Our farmers will be very happy. Our manufacturers will be very happy. Our government will be very happy,” Trump said. “It’s working out very well.”
His figures may be off. The amount collected so far has been minimal, but it is growing, and of course it has been collected from consumers, in higher prices for this and that from China, and from manufacturers, paying a whole lot more for parts they buy from China. They either have to eat the now much higher high cost of those parts, and thus book much lower profits, or they can pass those costs on, to consumers. What they make will cost more now. They do have to turn a profit, but higher prices mean fewer sales, and fewer sales mean no money coming in, so they’re stuck. President Trump keeps saying no, the Chinese government pays those tariffs. They write a check to the US Treasury.
That’s nonsense of course, but it’s all nonsense:
The sense of deepening confrontation between the world’s two largest economies represents a sharp contrast to last week’s expectations of an imminent deal. The president said Monday that the two sides had completed “95 percent” of an agreement before talks broke down.
After concluding that the Chinese were reneging on terms they had agreed to during earlier bargaining rounds, Trump last week opted to more than double tariffs on $200 billion in Chinese imports.
That might be seen as clever negotiating but the Washington Post’s Eugene Robinson sees this:
The administration’s trade talks with China had reportedly been going well and were supposed to be nearing an end. Trump accused the Chinese of trying to renege on concessions at the last minute, but the president’s history suggests otherwise. Veterans of the high-stakes world of New York real estate have told me about what they described as Trump’s standard negotiating practice – pitching some kind of fit at the very last minute, when the other party thought things were settled, in hopes of bullying his way to a better deal.
That might work with a subcontractor who doesn’t have the power to say no, or even with a fellow developer who vows on the spot never to do business with Trump again. But would any skilled negotiator think such a stunt would work with China, the world’s second-greatest economic power? Wouldn’t the Chinese government have to react in kind, if only as a matter of sovereign pride? And wouldn’t startled investors conclude that their fear of a serious trade war – the kind with no winners, only losers – had been realized?
That is what the markets concluded. This is that unwinnable trade war, right here and right now, which Robinson sees with this twist:
I assume Trump realizes that China isn’t really “paying” the tariffs and that the cost is in fact borne by U.S. consumers, who will pay higher prices for made-in-China goods. Either the president constantly lies about this on his Twitter feed, hoping to fool the gullible, or he’s even more clueless about trade than I imagined.
No, he has a plan, which Greg Sargent explains here:
Trump’s trade war has put him in a jam. Revamping trade with China was a central campaign promise. But if Trump agrees to a deal that does not win real concessions, one that will reveal his agenda of “toughness” as hollow – particularly if those concessions do not appear worth the pain that the tariff wars have already imposed on farmers, in the very region that’s crucial to his reelection.
So the New York Times reports that Trump is now hoping to flip the political calculus: No deal, followed by still more tariffs, will allow Trump to proclaim he’s still being tough on China. Incredibly, the Times reports that Trump apparently believes this will be a political winner even if increased tariffs impose still more economic pain.
How is this possible? The new, convoluted story he’s telling is basically that the money we “take” from China in tariffs will be given to farmers in exchange for their products, which we will then export to other countries that need them.
Basically, the claim will be that continued tariffs are a good thing: Trump is in effect taking money from China and giving it to his voters.
Cool. But there is this:
That’s why it’s such a big deal that Fox News’s Chris Wallace debunked this falsehood by getting economic adviser Larry Kudlow to admit that China is not paying the tariffs. In fact, they amount to a tax on U.S. consumers.
Trump may have to fire Kudlow now, or shrug and say that sure, everyone says he’s wrong, and the markets say he’s wrong, and the facts say he’s wrong, but Donald Trump knows that he alone is right – and his base will be with him – and Sargent sees that this is just who Donald Trump is:
Some observers look at Trump’s trade wars and still manage to see hints of his supposed economic populism, in which Trump vowed to defy GOP economic orthodoxy. But, given that Trump has gone all in with GOP plutocracy on taxes and shredding the safety net while punting on infrastructure – three areas where he’d supposedly defy that orthodoxy – the real story is obvious. Trump’s “economic” populism remains operative only in areas that satisfy his xenophobic nationalist impulse to exaggeratedly attack other countries as enemies hell-bent on fleecing us – on immigration and trade.
Indeed, it’s no accident that Trump also vowed to make Mexico “pay” for his border wall, to punish Mexico for “sending” us their outcasts and pitting them against U.S. workers, similar to his claim about China.
Central to this whole tale has always been the idea that Trump will take back for U.S. workers what this alliance of elites and foreign workers is stealing from them – he will take back what is rightfully theirs.
So there you have it:
Given all this, failure on China could be catastrophic for Trump. So he’s just swapping in a new story: He’s making China pay restitution to Americans it has ripped off for so long by forcing it to “pay” us in tariffs.
That makes Trump the hero, and savior, because he is, by force of his will, making China pay millions to millions of wronged Americans… with their own money? What? Don’t ask.
But even if Americans lose their shirts, and farms, and small businesses, it’s just a trade war, as Arkansas Republican Senator Tom Cotton said on national television:
That sacrifice is pretty minimal compared to the sacrifices that our soldiers make overseas that are fallen heroes who are laid to rest in Arlington make.
That’s it. This isn’t war. No one is going to die. There may be a deep recession. The economy may collapse. But no one is going to die.
That’s one way of looking at this. This isn’t the same as the coming war:
At a meeting of President Trump’s top national security aides last Thursday, Acting Defense Secretary Patrick Shanahan presented an updated military plan that envisions sending as many as 120,000 troops to the Middle East should Iran attack American forces or accelerate work on nuclear weapons, administration officials said.
The revisions were ordered by hard-liners led by John R. Bolton, Mr. Trump’s national security adviser. They do not call for a land invasion of Iran, which would require vastly more troops, officials said.
We don’t have those troops, but Bolton is doing what he can, without Trump, so far:
The development reflects the influence of Mr. Bolton, one of the administration’s most virulent Iran hawks, whose push for confrontation with Tehran was ignored more than a decade ago by President George W. Bush.
It is highly uncertain whether Mr. Trump, who has sought to disentangle the United States from Afghanistan and Syria, ultimately would send so many American forces back to the Middle East.
It is also unclear whether the president has been briefed on the number of troops or other details in the plans. On Monday, asked about if he was seeking regime change in Iran, Mr. Trump said: “We’ll see what happens with Iran. If they do anything, it would be a very bad mistake.”
He punted there. He may have been out of the loop on this one, and Bolton is only one guy:
There are sharp divisions in the administration over how to respond to Iran at a time when tensions are rising about Iran’s nuclear policy and its intentions in the Middle East.
Some senior American officials said the plans, even at a very preliminary stage, show how dangerous the threat from Iran has become. Others, who are urging a diplomatic resolution to the current tensions, said it amounts to a scare tactic to warn Iran against new aggressions.
European allies who met with Secretary of State Mike Pompeo on Monday said that they worry that tensions between Washington and Tehran could boil over, possibly inadvertently.
But this is serious:
The size of the force involved has shocked some who have been briefed on them. The 120,000 troops would approach the size of the American force that invaded Iraq in 2003.
Deploying such a robust air, land and naval force would give Tehran more targets to strike, and potentially more reason to do so, risking entangling the United States in a drawn out conflict. It also would reverse years of retrenching by the American military in the Middle East that began with President Barack Obama’s withdrawal of troops from Iraq in 2011.
But two of the American national security officials said Mr. Trump’s announced drawdown in December of American forces in Syria, and the diminished naval presence in the region, appear to have emboldened some leaders in Tehran and convinced the Islamic Revolutionary Guards Corps that the United States has no appetite for a fight with Iran.
So it was time to compensate for Trump being a flake? Maybe it was just time for Bolton to take over:
The Iranian government has not threatened violence recently, but last week, President Hassan Rouhani said Iran would walk away from parts of the 2015 nuclear deal it reached with world powers. Mr. Trump withdrew the United States from the agreement a year ago, but European nations have urged Iran to stick with the deal and ignore Mr. Trump’s provocations.
The high-level review of the Pentagon’s plans was presented during a meeting about broader Iran policy. It was held days after what the Trump administration described, without evidence, as new intelligence indicating that Iran was mobilizing proxy groups in Iraq and Syria to attack American forces.
As a precaution, the Pentagon has moved an aircraft carrier, B-52 bombers, a Patriot missile interceptor battery and more naval firepower to the gulf region.
This sounds kind of “Gulf of Tonkin” familiar, but Nancy LeTourneau notes how this is different:
One of Donald Trump’s first actions as president was to pull the U.S. out of the Trans-Pacific Partnership trade agreement. He followed that up by ending this country’s participation in the Paris Climate accord and the Iran nuclear agreement. In the midst of all of that, Trump railed against our NATO allies while cozying up to Russia… He berated Mexico and Canada while attempting to re-negotiate NAFTA and has been both hot and cold in his dealings with China on trade. Is it any wonder that our traditional allies are reacting with a mixture of distrust and distance?
The president now faces what could develop into national security crises with Iran, Venezuela, and North Korea. Having alienated our allies, all he has left is to go it alone. Nevertheless, the administration is referring to their strategy as the application of “maximum pressure.”
It’s simple. Shut them down. Cut them off. Sanction them all. But the Atlantic’s Ali Vaez says that’s not simple:
There can be little doubt that the administration’s “maximum pressure” policy is inflicting considerable economic harm on Iran.
To date, however, there is no sign that either Iran’s regional policies are shifting or its leaders are willing to come back to the negotiating table and submit to the Trump administration’s demands. Nor is there any hint that economic hardship has triggered popular unrest of a magnitude that would threaten the regime’s survival. In the absence of any visible shift in Tehran’s political calculus, Washington is presenting the sanctions’ impact by no metric other than their quantity and severity.
There appears to be a belief among U.S. policy makers – almost congealed into doctrine – that Iran will cave to nothing less than massive pressure, a point it clearly has not reached. With U.S. elections at the end of next year, the administration is therefore responding to Iran’s refusal to concede defeat by doubling down, and it’s going about it in a hurry. It has resorted to the unprecedented steps of designating a state entity, Iran’s Islamic Revolutionary Guard Corps, a “foreign terrorist organization,” and of trying to push Iran’s oil exports to zero almost overnight.
LeTourneau explains that:
This is a perfect example of how, rather than breaking with Republican foreign policy failures of the past, Donald Trump merely represents their escalation. His modus operandi has always been to reject partnerships, preferring to go it alone and rely on transactional relationships. Those are most often focused on assuming that adversaries will be subservient in response to his bullying threats.
The one thing Tehran would find more intolerable than the crushing impact of sanctions is raising the white flag because of them. Convinced that Trump’s national-security team is bent on toppling the Islamic Republic, the Iranian leadership views economic sanctions as just one in a range of measures designed to destabilize it. Its counterstrategy can be summed up in two words: Resist and survive. The mere act of survival would constitute victory, however pyrrhic.
Donald Trump assumes, just like his Republican predecessors, that applying maximum pressure on a foreign adversary will cause them to retreat and submit. Any fool that knew a bit of history should understand that an approach like that will fail.
The term “blowback” was first used by U.S. intelligence services as a way to describe the fact that the 1953 coup in Iran, which was backed by the CIA, eventually led to the Iranian Revolution in 1979 and the establishment of the Islamic Republic of Iran. Contrary to resulting in submission, that approach to foreign policy leads to disastrous results.
The term “blowback” has become useful again. The suddenly escalating trade war with China may ruin the economy, and the world. And a new hot war in the Middle East might do the same. No one is going to be bullied into submission. No one ever has been bullied into submission, only into deep resentment – and more disastrous results. This won’t get better.