Since November’s election, the U.S. market has put on a historic rally.
Last fall, virtually every poll showed we were likely to see four more years of partisan gridlock in Washington, with Hillary refusing to give Republicans in Congress what they wanted and Republicans refusing to give Hillary what she wanted.
The election upended that notion.[ad#Google Adsense 336×280-IA]With the House, Senate and presidency in Republican hands, we are now likely to see tax reform, deregulation and a raft of other pro-business policies signed into law.
Investors cheered this prospect – as did I – and rapidly moved billions into equities.
There is a downside to this optimism, however.
President-elect Trump is right that lower taxes, lighter regulation, tort reform and other business-friendly policies will benefit the economy, hiring, wages, corporate profits and the stock market.
Unfortunately, Trump is also an ardent protectionist. And that is not good for the economy or the market.
Unless he changes his tune – as he did on other matters (like the prosecution of Hillary Clinton and the wholesale deportation of illegal immigrants) – the Trump Rally could quickly turn into the Trump Correction.
Why? Because, while protectionism may sound like “a good idea” to some, it actually undermines American economic growth.
For starters, we are the world’s third-largest exporter, selling more than $2.35 trillion of American goods and services overseas each year.
We are also the world’s single biggest importer. Americans love Japanese electronics, European cars, French wines, Italian shoes, Swiss watches, Dutch chocolates and inexpensive fashions made in Bangladesh.
Our morning coffee comes from Colombia or Brazil. Our smartphones are assembled in Vietnam or China. Much of our fresh produce in the grocery store – especially this time of year – comes from the Southern Hemisphere.
International trade is an enormous net plus for the economy – and for investors.
Trump’s proposed tariffs of 35% are no panacea. Who wants to pay more for their Toyota truck, Samsung TV or Grey Goose vodka?
More importantly, over 11.7 million people in the U.S. work in export-related industries. And these are higher-paying jobs.
What will happen if Trump signs his protectionist policies into law? We need only look at history.
The U.S. government enacted the infamous Smoot-Hawley Tariff Act on June 17, 1930. That raised U.S. tariffs to record levels on more than 20,000 imported goods.
This populist legislation sounded appealing at the time… but it helped create and worsen the Great Depression.
Foreign governments retaliated by shutting out U.S. exports. International trade ground to a halt. The world economy contracted 25%. And a quarter of Americans were thrown out of work – and into bread lines.
Too few recognize the enormous benefits of globalization and international trade.
Why does a flat-panel HDTV that cost more than $10,000 in 2003 cost less than $400 today? Globalization.
How can you walk into a Marshalls store and buy a fine cashmere sweater for 35 bucks? Globalization.
Why does an $8 million supercomputer from 20 years ago sit in your pocket and cost less than $200? Globalization.
Free trade and globalization give us a huge selection of high-quality products and services at a lower cost. The problem is it helps all of us at the expense of some of us.
The benefits are diffuse and hard to discern, while the drawbacks are concentrated among a few and right there on the evening news.
Some Americans say they will happily pay more for products made here at home. It’s a patriotic sentiment.
But not much more. Manufacturers and retailers confirm that despite the laudable, socially conscious talk, most consumers will not pay more for products of similar or equal quality just because they’re made in the USA.
Others have cheered that Trump browbeat companies like Boeing (NYSE: BA), Carrier and Ford (NYSE: F) into bringing jobs back to our shores.
But in a country that values free markets and the rule of law, is this how things are done, with the president haranguing companies about their allocation of scarce resources?
Donald Trump knows better. Many of his branded products – including his signature red neckties – are made in overseas markets. Why? Because he can’t make them at competitive prices here at home.
Austrian economist Friedrich Hayek warned against the “fatal conceit,” the belief that “experts” wielding political power are smarter and more efficient than markets.
It doesn’t work.
What’s more, tariffs – which are simply taxes imposed at the border – are the worst kind of corporate welfare. They benefit one group – specific companies or workers – at the expense of others, including American consumers and investors.
Traditional conservatism is about limited government, free trade, the rule of law and a constrained chief executive.
So Trump’s protectionist impulses are guaranteed to run into opposition from House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell and other Republicans and Democrats in Congress.
Let’s hope they’re successful in dissuading (or blocking) his worst instincts.
If not, the Trump Rally could easily turn into the Trump Correction.
Source: Investment U