Trump's Big Bluff

Wow, there were some great college basketball games played over the weekend!

Upsets are always a big part of the NCAA Men’s Basketball tournament. But holy moly — seeded #8 in their regional bracket, Wisconsin took out last year’s champion and the favorite to win this year, #1 overall seed Villanova.

Michigan, #7 seed, won a thriller over Rick Pitino’s #2 seeded Louisville Cardinals. My late grandfather, Luke Corder, was a Southern Baptist preacher in Columbia, South Carolina. I can just hear him declaring, “Great day in the morning,” about his beloved Gamecocks taking down Coach K and the mighty Duke Blue Devils. 

As a Virginia-born transplant to Baltimore, Maryland, I had a sad few days — both Maryland and Virginia Commonwealth University lost in the first round. And it seemed almost impossible to do what the University of Virginia Cavaliers did — score just 39 points in an entire game. And, uh, yeah, they lost. 

The brackets I submitted for the Angel Publishing office pool are in shambles. Even if my pick to win it all, UCLA, actually does win the damn thing, I don’t think I can make it even into the top 10 in the office. That’s how bad it is. And if UCLA loses, well, they know who to blame…

With so much attention-grabbing action, I can’t blame you if you missed the news of another significant meeting over the weekend. Truth be told, G20 meetings usually don’t grab headlines. But this time they should. Because a potentially very dangerous precedent was made — one that could be a big negative for the U.S. economy.

The End of Free Trade?

The G20 is short for the Group of 20, the 20 largest economies in the world that account for about 85% of GDP. Finance ministers, central bankers, and political leaders of the G20 meet every so often to keep the wheels of the global economy greased. Part of that mission usually revolves around reiterating commitments to free trade.

Not anymore…

For the last decade, G20 meetings have ended with a statement validating the shared commitment to free trade. But we also know President Trump won the election largely due to his “America First” promises. Trump believes many of the free trade agreements the U.S. has signed with Mexico, China, and others have been one-sided, encouraging U.S. companies to move production overseas and costing American jobs. 

Anecdotal evidence backs him up — it is very easy to see a new Ford plant in Mexico that hires Mexicans and conclude that it comes at the cost of American workers. It is not as easy for people to see that a new Toyota factory in Texas is hiring American workers. 

In any event, the statement from this weekend’s G20 meeting dropped the standard pledge to remain committed to free global trade. It’s basically the U.S. against the world on this. And the U.S. definitely pulls some weight…

As the biggest economy, biggest military, and home of the world’s reserve currency, we get to throw our weight around. And if the U.S. wants to abandon commitments to free trade, well, no one can stop us. 

But is this the best way to get things done? 

Donald Trump has promised to renegotiate trade deals and add a “border adjustment tax” that amounts to tariffs on goods produced overseas that get imported to the U.S. The problem with that is two-fold.

One, your talking about taxing Fords built in Mexico that come to the U.S. That hurts Ford.

Or think about the iPhone. Made in China and sourcing parts form 50 countries, it’s an example of how intertwined the global economy has become. 

We’re also talking about U.S. retailers that sell clothes made overseas. Any CEO for Macy’s or J.C. Penney will tell you that a border adjustment tax instantly makes every retailer a money-loser. And when companies lose money, they fire employees.

Part two of the problem is if the U.S. starts penalizing foreign countries with import taxes, they will almost certainly retaliate. That will slow the flow of U.S. exports, probably costing more American jobs. 

A Calculated Bluff 

Basically, Trump is pushing a form of protectionism. Protectionism has been tried before, and it has a tendency to lead to recession. Imports and exports slow, which basically means the economy slows, prices rise, people lose jobs — it’s everything we don’t want. 

And plenty of talking heads have come out bemoaning this dramatic shift away from free trade and toward protectionist policies. One of my favorite economists, Stephen Roach, said, “It’s pretty disappointing when you get finance ministers from leading countries in the world who, out of the blue, are unable to validate the commitment to anti-protectionism which is the underpinning globalization.”

The French finance minister said, “There wasn’t a G-20 disagreement, there was disagreement within the G-20 between a country and all the others.”

He means, of course, the U.S. disagreed. 

Now, here’s the thing: Trump could be bluffing. I find it easy to imagine that he is starting with very hardball tactics with the intention of softening his demands as other countries ponder the long-term effects of protectionist policies. After all, if you want to have a trade war, the U.S. is going to fare better than most. 

In fact, the U.S. probably “wins.” But that doesn’t mean we could do so without pain. If Trump’s bluff is called, the U.S. probably does enter a recession. And a lot of U.S. workers probably do lose their jobs. 

So look at the stock market for direction. Is the Dow down 500 points because of the imminent trade-related recession? No. It’s not. Is the S&P 500 tanking as analysts slash earnings estimates for Apple and Ford? Nope. 

It seems to me that the market is sending a pretty clear signal: The biggest investors do not believe Trump will go with the nuclear option and launch a global trade war.

And the market is usually right.

Until next time,

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.