Recently, the stock market has been on a wild ride after trade war escalations including the U.S. labeling China a currency manipulator, the announcement of $550 billion in new tariffs, and a confusing tweet ordering U.S. manufacturers to make contingency plans to relocate from China. As Steve Forbes noted on Fox Business, the stock market is sending a clear warning signal that the trade war must be resolved, and the longer President Trump waits, the greater political risk he is taking.
To see such major trade war escalations as the 2020 election cycle heats up is perplexing, especially since the President has linked his legacy to the performance of the U.S. economy. The recent spike in gold prices and inversion of the yield curve have given economic bears plenty of ammo without adding greater trade uncertainty to the mix. If President Trump thinks he can lay blame for any economic slowdown at the feet of the Federal Reserve, he underestimates the extent to which the public have seen markets react to his tweets.
Adding to economic worries, the Chinese yuan recently fell to an 11-year low, leaving some concerned a ‘War for the Dollar’ is taking place within a Trump administration that has reportedly considered retaliatory devaluation in the past.
Supply-side economist Arthur Laffer warned of the impact of competitive devaluation in an early (pre-Laffer Curve) study he co-authored with Dr. Robert Mundell. Fellow supply-side icon and Wall Street Journal editor Jude Wanniski summarized Mundell and Laffer’s conclusion:
[Laffer and Mundell’s] empirical study of 15 devaluations between 1961 and 1967 shows no relationship between devaluation and improved trade balances. In most cases, trade deficits in fact worsened in the years following a country’s devaluation.
No country can devalue its currency into prosperity — if economic growth were that simple, Venezuela would be among the richest countries on earth.
There is little question that trade and currency uncertainty is holding back the U.S. economy from experiencing optimal economic growth. With the 2020 election getting closer, it is increasingly important that President Trump solves this trade dispute in order to most effectively run on his economic record.
Senator Elizabeth Warren (D-Mass.) has already issued a bold challenge to “Trumponomics” by predicting an imminent recession, and if President Trump wishes to dispel the public of Warren’s alarmism, the most important thing he can do for the health of the global economy is reach a deal with China. The clock is ticking — the administration must double down on its efforts to wind down this trade dispute before it becomes a political drag.
Author’s Note: Nathan Williamson also contributed to this report.