It’s Time for a Course Correction in the Trade War

President Donald Trump and his supporters often tell us that he is fundamentally a free trader. The current trade war with China, they say, is simply the small price we must pay now for a world of much freer trade tomorrow, when all governments lower their trade barriers in fear of Trump’s hard-bargaining techniques.

Let’s see what markets have to say about that. After the president tweeted a couple weeks ago that tariffs against China would go up within five days if Beijing didn’t agree to his demands, markets dived. Stocks plunged once again on Friday morning, after the 25 percent tariff on $200 billion in Chinese exports to the United States became reality. Stock prices rose later that day after presidential tweets suggested that trade talks were going well. But the market took another hit on Monday after China announced retaliatory moves, including tariffs increased to as much as 25 percent on $60 billion of U.S. imports to China.

Markets aren’t immune to being pulled and pushed by emotions, yet overall, they’re smarter than any one politician or administration. Markets reflect expectations of the future health of the economy. And what they’re telling us now, strongly and clearly, is that they’re uncertain about the economy’s ability to sustain a long trade war with China. That’s true even if, by some measures, China is getting hit harder than we are. The great interconnectedness of our economies means that if China “loses,” we do, too—and vice versa.

If the markets really believed that the Trump trade war would eventually make global trade freer, then with each U.S. move, the markets should go up. The fact that they go down upon news of a U.S. escalation in the trade war means that markets expect trade to, for a significant time, become and remain less free.

It’s understandable. Investors don’t know how long this belligerence will last. They don’t know which goods will be targeted for retaliation or how high the new duties will go on either side. And markets don’t know if or how this fight will spread to other countries.

Also, let’s not forget that our

You can read the rest of this article at: https://reason.com/2019/05/16/its-time-for-a-course-correction-in-the-trade-war/