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Trump, tariffs and the stock market
Today, the US is trying to regain its lost strength through protectionism. By raising tariffs, the US is admitting that it has lost its once superior competitive advantage. But it is questionable whether the recipe will work again in today's different situation.
Trump, tariffs and the stock market
by Lefteris Tsoulfidis
[This article posted on 4/3/2025 is translated from the German on the Internet, https://www.lunapark21.net/trump-zoelle-und-der-aktienmarkt/.]
Political intervention and its limits
The recession that began in 2007 is still ongoing. As during the Great Depression of the interwar period, authoritarianism, isolationism and protectionism are becoming official government policy – albeit not necessarily in all countries.
In the 1920s and 30s, it was particularly Italy, Germany, Spain and Greece. But these policies extended far beyond: in 1930, the US quadrupled its tariffs with the Smoot-Hawley Act, initially on agricultural goods and then on industrial goods as well.
Today, however, protectionism and isolationism are not only state policies. Private companies are voluntarily trying to reduce their dependence on international supply chains and find domestic suppliers. This trend began with the pandemic and intensified with the wars in Ukraine and Gaza. It arises from an unpredictable international situation. The dynamics of globalization have changed. This can be seen from the ratio between the sum of international exports and imports on the one hand and global gross domestic product on the other. Between 1982 and 2007, this ratio rose by an average of 1.88 percent per year – between 2007 and 2023, by contrast, it fell by 0.07 percent annually: since 2007, foreign trade has been growing more slowly than the global economy.
So Trump's policy did not come out of the blue like a bolt of lightning. It has reasons, it corresponds to a trend not only in the USA. But the question is whether it can be successful. As a reminder, in his first term Trump failed on a number of major projects, be it the construction of a border wall with Mexico, which was to be paid for by the Mexican government, the abolition of Obamacare, the introduction of high tariffs on China or the renegotiation of the North American Free Trade Agreement Nafta, which was only renamed Cusma.
“The most beautiful word... tariff”
The effects of the new US protectionism cannot be accurately predicted due to the international interactions in a system of general imbalance. A tariff increase of perhaps 25 percent will certainly lead to price increases. This will increase tax revenues. Part of this increase will be used for interest payments on public debt, which is currently at a problematic 124 percent of GDP. Congress's last increase of the debt ceiling at the end of December 2024 showed how critical the situation of public finances has become.
A glance at the stock market should trigger even greater unease: the S&P 500 index has obviously moved far away from the fundamentals, as measured by the development of corporate profits in the US. Unlike in 1929, this bubble is being fed not only by investors from the US itself, but also by international investors.
The tariffs announced by Trump will increase prices in the US. As a result, interest rates will also rise, making safe investments such as government bonds more attractive to investors, making debt more expensive and reducing the demand for equities. Heavily indebted companies will be hit hardest. If this development occurs primarily in the US, a significant setback on the New York stock market is certain. Then President Trump will have to rethink his policy. The beginning of 2018 was a case in point, when the Fed, the US central bank, gradually raised its interest rates (“tapering”).
Wall Street and the big IT companies, the “magnificent seven” – Apple, Microsoft, Nvidia, Google, Amazon, Meta, and Tesla – supported Trump's election. The US government supports the Stargate project, a new company that is to realize investments of 500 billion dollars in infrastructure for artificial intelligence. Government intervention and investment are essential because, according to Elon Musk, the private sector lacks the capital for such ventures. This has always been the case with fundamental innovations. An increase in stock prices strengthens the companies involved, which, by reinvesting their profits, boost growth. And tariffs? The threat of tariff increases is intended to put competitors under pressure. But implementing tariff increases would threaten the US stock market, which could force a rapid change of course.
Lessons from the past
For their supporters, tariff increases promise a win-win situation: lower imports on the one hand, and higher domestic production and employment on the other. But price increases will lead to interest rate hikes in the US, attracting capital from around the world. This will strengthen the dollar – and weaken the effect of the tariff increases, because imported goods in dollars will become cheaper. The burden of the tariff increases is thus shared in part with trading partners. And the strong dollar could provoke reactions from the Brics states to develop an alternative trading system to reduce their dependence on the dollar.
The current US tariff policy is more a sign of weakness than of strength. In the 19th century, the US used high tariffs to protect its emerging industry under the Monroe Doctrine. When it came to dominate the world market, it adopted a free trade policy, which it propagated worldwide through the GATT from 1948 and the WTO from 1995. Today, the US is trying to regain its lost strength through protectionism. By raising tariffs, the US is admitting that it has lost its once superior competitive advantage. But it is questionable whether the recipe will work again in today's different situation.
The current protectionism is an attempt to shield domestic industry and jobs from international competition. The neoliberal policies pursued so far, such as wage pressure and tax cuts, have not been successful. That is why the US is turning to new technologies, artificial intelligence, quantum computing and perhaps renewable energies. These technologies have the potential to transform entire industries and open up new markets. The US wants to achieve competitive advantages here. However, the competition is fierce and success is anything but certain.
Therefore, it will not take long for the consequences of the new foreign and tariff policies to become visible, and the first effects are already being felt. The historical experience with the Smoot-Hawley Act of 1930 clearly shows that such extensive tariff increases do not stop the recession, but deepen it. In the current situation, they will exacerbate geopolitical tensions and trigger a cycle of retaliation that will further burden the stagnating global economy.
Lefteris Tsoulfidis is a professor at the Department of Economics at the University of Macedonia in Thessaloniki, Greece.
by Lefteris Tsoulfidis
[This article posted on 4/3/2025 is translated from the German on the Internet, https://www.lunapark21.net/trump-zoelle-und-der-aktienmarkt/.]
Political intervention and its limits
The recession that began in 2007 is still ongoing. As during the Great Depression of the interwar period, authoritarianism, isolationism and protectionism are becoming official government policy – albeit not necessarily in all countries.
In the 1920s and 30s, it was particularly Italy, Germany, Spain and Greece. But these policies extended far beyond: in 1930, the US quadrupled its tariffs with the Smoot-Hawley Act, initially on agricultural goods and then on industrial goods as well.
Today, however, protectionism and isolationism are not only state policies. Private companies are voluntarily trying to reduce their dependence on international supply chains and find domestic suppliers. This trend began with the pandemic and intensified with the wars in Ukraine and Gaza. It arises from an unpredictable international situation. The dynamics of globalization have changed. This can be seen from the ratio between the sum of international exports and imports on the one hand and global gross domestic product on the other. Between 1982 and 2007, this ratio rose by an average of 1.88 percent per year – between 2007 and 2023, by contrast, it fell by 0.07 percent annually: since 2007, foreign trade has been growing more slowly than the global economy.
So Trump's policy did not come out of the blue like a bolt of lightning. It has reasons, it corresponds to a trend not only in the USA. But the question is whether it can be successful. As a reminder, in his first term Trump failed on a number of major projects, be it the construction of a border wall with Mexico, which was to be paid for by the Mexican government, the abolition of Obamacare, the introduction of high tariffs on China or the renegotiation of the North American Free Trade Agreement Nafta, which was only renamed Cusma.
“The most beautiful word... tariff”
The effects of the new US protectionism cannot be accurately predicted due to the international interactions in a system of general imbalance. A tariff increase of perhaps 25 percent will certainly lead to price increases. This will increase tax revenues. Part of this increase will be used for interest payments on public debt, which is currently at a problematic 124 percent of GDP. Congress's last increase of the debt ceiling at the end of December 2024 showed how critical the situation of public finances has become.
A glance at the stock market should trigger even greater unease: the S&P 500 index has obviously moved far away from the fundamentals, as measured by the development of corporate profits in the US. Unlike in 1929, this bubble is being fed not only by investors from the US itself, but also by international investors.
The tariffs announced by Trump will increase prices in the US. As a result, interest rates will also rise, making safe investments such as government bonds more attractive to investors, making debt more expensive and reducing the demand for equities. Heavily indebted companies will be hit hardest. If this development occurs primarily in the US, a significant setback on the New York stock market is certain. Then President Trump will have to rethink his policy. The beginning of 2018 was a case in point, when the Fed, the US central bank, gradually raised its interest rates (“tapering”).
Wall Street and the big IT companies, the “magnificent seven” – Apple, Microsoft, Nvidia, Google, Amazon, Meta, and Tesla – supported Trump's election. The US government supports the Stargate project, a new company that is to realize investments of 500 billion dollars in infrastructure for artificial intelligence. Government intervention and investment are essential because, according to Elon Musk, the private sector lacks the capital for such ventures. This has always been the case with fundamental innovations. An increase in stock prices strengthens the companies involved, which, by reinvesting their profits, boost growth. And tariffs? The threat of tariff increases is intended to put competitors under pressure. But implementing tariff increases would threaten the US stock market, which could force a rapid change of course.
Lessons from the past
For their supporters, tariff increases promise a win-win situation: lower imports on the one hand, and higher domestic production and employment on the other. But price increases will lead to interest rate hikes in the US, attracting capital from around the world. This will strengthen the dollar – and weaken the effect of the tariff increases, because imported goods in dollars will become cheaper. The burden of the tariff increases is thus shared in part with trading partners. And the strong dollar could provoke reactions from the Brics states to develop an alternative trading system to reduce their dependence on the dollar.
The current US tariff policy is more a sign of weakness than of strength. In the 19th century, the US used high tariffs to protect its emerging industry under the Monroe Doctrine. When it came to dominate the world market, it adopted a free trade policy, which it propagated worldwide through the GATT from 1948 and the WTO from 1995. Today, the US is trying to regain its lost strength through protectionism. By raising tariffs, the US is admitting that it has lost its once superior competitive advantage. But it is questionable whether the recipe will work again in today's different situation.
The current protectionism is an attempt to shield domestic industry and jobs from international competition. The neoliberal policies pursued so far, such as wage pressure and tax cuts, have not been successful. That is why the US is turning to new technologies, artificial intelligence, quantum computing and perhaps renewable energies. These technologies have the potential to transform entire industries and open up new markets. The US wants to achieve competitive advantages here. However, the competition is fierce and success is anything but certain.
Therefore, it will not take long for the consequences of the new foreign and tariff policies to become visible, and the first effects are already being felt. The historical experience with the Smoot-Hawley Act of 1930 clearly shows that such extensive tariff increases do not stop the recession, but deepen it. In the current situation, they will exacerbate geopolitical tensions and trigger a cycle of retaliation that will further burden the stagnating global economy.
Lefteris Tsoulfidis is a professor at the Department of Economics at the University of Macedonia in Thessaloniki, Greece.
For more information:
http://www.freetranslations.foundation
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