Stocks tanked last week amid signs of a worsening slowdown in Germany and China, and bond investors flashed the clearest signal yet that the U.S. is courting a self-inflicted recession. Hopefully these cries of alarm from financial markets will cause President Donald Trump and his advisers to stop and think. If not, steel yourself for worse to come.
Slowing growth in Europe and China has various causes, but high on the list is trade, because Trump has made disrupting commerce his main instrument of economic policy. Right now, damage to the flow of goods and services is the least of it. Far more dangerous is the blow to confidence and investment. Firms and investors are starting to ask where the president’s willingness to wreck the global economic architecture might actually lead.
Until now, the tendency has been to see the administration’s protectionist initiatives as a combination of tactical (hence temporary) disruptions and threats that will come to nothing. This is presumably why stock markets have mostly been betting on further expansion. But Trump, erratic in so many other respects, has been consistent on one thing: his disdain for international cooperation in general, and for the liberal order of global trade in particular. An idea seems to be dawning at last: Perhaps he really is willing to see both destroyed.
It would be hard to exaggerate what’s at stake. For decades, the international economy was built on the assumption that liberal trade would prevail. Countless billions have been invested on the assumption of no backsliding. Now this fundamental premise is being called into question. The risk is that the evolving structures of economic integration will simply be smashed by people who appear to have no clue what they’re doing.
If this happens, the costs would be staggering. The mere risk that it might happen, once the possibility begins to be taken seriously, could easily be enough to push the U.S. and the world into another recession.
Perhaps the president is beginning to sense the prospect of a crash that would rightly be blamed on him. He delayed some of his new tariffs against China until after the Christmas shopping season starts. If nothing else, this suggests he grasps, finally, that taxes on imports hurt U.S. consumers. His fervent criticism of the Federal Reserve could be another tell. Alarm over last week’s sudden drop in long-term bond yields, often an indicator of impending recession, was all the Fed’s fault, he said. But nobody is buying it; the Fed is helpless to dispel fears about a deliberate policy of smashing world trade.
Sadly, even if he wanted to, Trump couldn’t entirely undo the damage he’s caused. The world now knows what it’s dealing with. With trust gone, the president can’t repair the partnerships he has so blithely fractured, and restoring confidence in the stability of the global trading order will take years of wiser leadership. Yet the president and his officials can at least end their policy of reckless aggression on trade. And Congress should claim back the trade powers it has delegated to the White House.
With luck, this glimpse of a Trump slump will do some good. But if the president just plows on, and Congress lets him, the economic consequences could be dire.