Economists love to debate what caused the Great Depression. You know a scientific discipline is problematic when it can’t even agree on history…
But it’s hard to debate the facts as stock prices portray them. Investors from the 20s and 30s could tell you exactly when the Great Depression began.
The infamous Smoot-Hawley tariffs triggered the stock market crash of 1929. Some historians mark that as the onset of the Great Depression generally. But who cares about labels? Let’s consider how events unfolded for investors…
The Smoot-Hawley bill imposing the tariffs had been bogged down in the Senate for a long time. But as soon as it became clear the law would pass, and that the President would sign off on it, stocks and commodity prices began to melt down.
What followed was a severe contraction in trade. This undermined US companies’ profits and the general demand for goods. The financial sector and then the economy crashed.
Smoot-Hawley’s role in causing the Great Depression changed the world radically. It gave free market economists the bogey man they used to threaten politicians into a century of lowering trade barriers.
But the Smoot-Hawley tariffs were really just a straw breaking a camel’s back. They merely raised already elevated tariffs even further. And were just one shot fired in a trade war with Europe at the time.
Tit for tat tariffs eventually rose so high on both sides that they made everyone poorer. It takes two to tango in a trade war, after all.
All this begs the question why anyone would want to impose tariffs in the first place. Who would be mad enough to risk starting another trade war with a Great Depression at stake?
Enter Donald Trump, who is looking increasingly likely to win the coming election…
Is Trump about to trigger a trade
war depression?
Sure enough, Donald Trump is busy talking up his tariffs. Some in the thousands of percent. He even declared tariff to be the ‘most beautiful word in the dictionary’.
No single utterance has ever converted so many people to the cause of free trade so quickly. It leaves the lifetime’s work of Adam Smith and David Ricardo in the shade.
Of course, it’s not just Trump who likes tariffs. And this isn’t the beginning of the trade war. It’s a continuation of what began after the 2008 financial crisis. Or China’s ascension to the World Trade Organisation in 2001.
Trump argues he’s merely responding to other countries’ unfair trade practices. And given the response he received from a live audience of businesspeople a few weeks ago, they seem to agree.
But all this is sounding a bit like the 1920s…
On Tuesday I went to bed after reading in the mainstream media about how horrific Trump’s tariffs would be for everyone. And on Wednesday morning I read about how badly Europe needs to raise tariffs on China’s EVs and solar panels in order to keep its economy on life support.
You can’t have it both ways. Unless you’re already in a trade war and have to adhere to propaganda rules. It’s already an ‘us vs them’ mentality.
As I see it, we are already very much into the tit for tat phase of the trade war. The pandemic merely interrupted proceedings. And Trump’s return would mark just the latest salvo from the US in the ongoing conflict.
But, as we learned from the Smoot-Hawley tariffs, the stock market’s reaction to a bubbling trade war can be a sudden crash. Something investors need to be ready for in 2025 if Trump wins.
At least, that’s what investors are being told to think.
But I believe there are reasons to be a lot more optimistic…
The NATO precedent
I suspect Trump’s comments at the G7 in 2018 reveal what the likely next president actually believes about tariffs:
‘You want a tariff-free, you want no barriers, and you want no subsidies, because you have some cases where countries are subsidizing industries, and that’s not fair.
‘So you go tariff-free, you go barrier-free, you go subsidy-free. That’s the way you learned at the Wharton School of Finance.’
Does that sound like a protectionist to you?
Then what on Earth is he up to then? Why is he threatening tariffs in the thousands of percent?
I think there’s a precedent that explains it…
One of Trump’s big bugaboos in 2016 was Europe’s failure to live up to their NATO commitments on defence spending. The American taxpayer was funding and providing Europe’s security, while the Europeans shirked both.
How did Trump successfully get the Europeans to boost defence spending by tens of billions of US dollars to record levels?
Did he ask them nicely, as Biden would?
Did he befuddle them into doing it, as Harris would?
No, he bluffed them. Just like a property tycoon would.
First, he threatened to withdraw US troops from Europe. Then he threatened not to defend the place in a war. And then to leave NATO altogether.
Did Trump really want to do any of this? I doubt it.
He wanted to increase European defence spending, not cut American defence spending. The idea was to funnel more European money to US defence contractors, not less American money.
And I suspect the same shenanigans is at work on tariffs.
I think Trump is a free market guy
The real question is how to achieve more free trade.
As any parent would tell you, the easiest way to achieve something is not to run for election and then impose your policy. Reverse psychology is what works on a bunch of little politicians.
By declaring tariffs to be the most beautiful word in the dictionary, Trump has goaded all his political opponents to take the position he actually wants.
Next his threats of tariffs will be met with European and Chinese willingness to negotiate. Then he’ll get the outcome he really wants: less trade barriers to US goods in other countries. He wants to sell them US cars, not ban their cars.
This would also be a continuation of Trump’s foreign policy. A load of bluster and waving a big stick, before chumming up with just about anyone. Even the Rocket Man in North Korea.
Negotiating in this way raises the stakes of defiance and improves the incentives of compliance. That’s why Trump kept a lid on conflicts during his time in government, compared to the Biden administration.
If I’m right, this implies the pressure cooker that is our geopolitical and global economic situation could ease dramatically if Trump wins the election.
This is precisely the opposite to what most would expect from a Trump presidency.
Just as they told you Trump would trigger a period of geopolitical chaos…before the opposite happened.
Unravelling some of China’s and Europe’s unfair trade practices would trigger more economic growth for all – the whole point of free trade. It could boost profits too. Especially for US companies.
Trump’s campaign to fight trade barriers by threatening to give others a taste of their own medicine could unlock further gains in US stocks instead of undermining the market.
Combine this with some of Trump’s other policies and things begin to look good. Encouraging oil and gas development would ease energy prices too. Corporate tax cuts would incentivise investment, especially on the back of lowering trade barriers.
Perhaps investors should look at Trump’s track record of reverse psychology and prepare for the trade war to ease, not worsen.
Regards,
 |
Nick Hubble,
Editor, Strategic Intelligence Australia
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