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“Free Trade” – Really?


Recent market volatility has been blamed on worries about President Trump’s proposed trade and tariff policies. That does appear to be an unsettling factor, but should that be happening? Truth is one thing, but logic and reason don’t always comprise the whole and complete truth. In my opinion, the market is overlooking common sense realities.

The first reality is the economy in general, which by virtually all metrics is in a period of stellar performance. To paraphrase “noted economist” Al Gore in the 2000 election cycle, “Everything that should be up is up, and everything that should be down is down.” GDP is up, unemployment is down, corporate earnings are up, wages are up, taxes are down, optimism is high, and investment is strong. That is a formula for an excellent stock market.

Why is the tariff discussion overriding all the economic data? There are a couple reasons, including historical legacy. Tariffs have been found to be mostly ineffective, and even destructive, in past generations. One classic example is the Smoot-Hawley Tariff Act from the 1930’s. It was a general and comprehensive protectionist tariff on everything we imported, and the results quickly proved to be negative, so the Act was repealed.

Did the death of the broad tariff bill result in free trade? Not by a long shot! In the intervening years, dozens of trade acts have been passed, resulting in about 12,000 tariffs that we currently impose on imports. This means that Americans pay more for all these imported goods. Who reaps the rewards? The Federal Government, which collects the tariff revenue. Who loses? American consumers, who lose by having to pay these taxes in the form of higher prices.

Interested to know what imported goods are taxed by the US Government? Here are just a small handful: brooms, cotton shirt fabric, chocolate, milk and cream, sugar of all types, avocados, peanuts, tobacco, T-shirts, ice cream, hotel/restaurant/kitchenware items, beef, tomato sauces, etc.

Similarly, our exports are frequently taxed by the receiving countries, and largely the tariffs (taxes) are higher on our exports than those on similar imported goods entering our country. A classic example is the 275% tax levied on dairy products we send to Canada. This hurts our dairy farmers by making their products unaffordable to Canadians.

I will be the first to defend free trade advocates who have a problem with Trump’s policies and actions, insofar as they desire a system of truly free and fair trade. The only acceptable tariffs, with the exception of countries whose governments are subsidizing their industries, are no tariffs in either direction. That is not the situation we are in today.

We elected a President on his policy positions, not the least of which was to correct bad trade agreements. Why not give him a chance? In Trump’s own words, “What the hell do you have to lose?” The stock market is acting like a petulant child. Try to ignore it in favor of the economics. The art of this deal is in its infancy.

Van Wie Financial is fee-only. For a reason.