I’m worried a Trade War May Cause Our Next Recession
I’m skeptical that our current economic recovery — the second longest behind the 90s — can survive a reckless, unnecessary trade war.
This article originally appeared in the New York Daily News.
The last time the U.S. economy was in recession, in June of 2009, there was no Snapchat and no Instagram. A $100 investment in Bitcoin made at the time would be worth billions today. I was nearing the end of my time as a young Wall Street investment banker in my first job after college, where I spent 12-hour days helping clients structure some of the complex financial instruments at the center of the crisis that spurred the recession.
Since officially turning the corner, the U.S. economy has grown at just over 2% per year, slow growth for a country crawling its way out of a deep hole. Last week’s GDP numbers revealed 4.1% growth in the second quarter of 2018, a stark contrast to the tepid growth of the recovery thus far. Most post-war American expansions have averaged at least 3% annual growth. Our current expansion hasn’t reached 3% in any single year.
But the second quarter was more likely a blip than a trend. It was due, in part, to buyers accelerating the purchase of goods to front-run tariffs that are yet to take effect. Also, this recovery has had unsustainable spikes before. Growth jumped to nearly 5% in the third quarter of 2014 only to decelerate the following quarter to less than 2%.
Economic expansions don’t last forever. So, as I’ve watched this current economic recovery move into its seventh, eighth and now ninth years, I’ve been asking myself, when is this ride going to end?
It turns out that economic recoveries become more vulnerable with age but they don’t die of natural causes. Instead, they get killed. Our current expansion is old. At 109 months and counting, it’s the second longest in U.S. history; only the boom of the 1990s lasted longer.
The good news is that none of the typical dangers look especially menacing. The price of oil, at around $70 a barrel, is well below where it was just a few years ago. There are no obvious over-inflated asset price bubbles. Inflation, nearing 3%, was higher as recently as 2012.
The bad news is that the biggest danger is self-inflicted: quickly escalating global trade conflicts. From trade conflicts with our chief economic rival, China, to our European allies and our closest neighbors, Canada and Mexico, each new tariff has prompted a swift retaliation, with the possibility of further escalations looming. (This week’s trade ceasefire between the U.S. and the European Union, while still light on details, may have stalled further escalation between the two parties for now.)
Trade wars are bad, but this trade war is particularly dangerous because nine years into a weak economic recovery, it’s the thing most likely to trigger our next recession.
Of all the tools one might use to fight perceived trade unfairness — making a claim with the WTO or greater participation in multilateral trade agreements such the Trans-Pacific Partnership, from which the U.S. withdrew in January — tariffs, because they prompt retaliation, are the most likely to spiral out of control.
Also, because these tariffs aren’t aimed at a particular economic problem like addressing a surge in imports, they’re likely to be applied with little regard for the economic consequences. And because many of them cite national security as their rationale, they’re subject neither to congressional nor World Trade Organization oversight.
Perhaps worse, this all coincides with the decline of America’s reputation and influence abroad. While tariffs will hurt many American businesses and consumers — last week’s announcement of a $12 billion aid package for farmers hurt by rising tariffs is an admission of such — the bigger risk is that trade wars will accelerate existing geopolitical turmoil. An escalating, multi-front trade war combined with the already noxious mix of declining NATO relations, rising populism and an emboldened Russia blatantly asserting its influence worldwide is an uneasy foundation on which to base economic growth.
Most dangerously, a trade war could prompt a chilling effect on business investment and cutbacks in corporate spending in the face of an uncertain trade climate. A corporate spending pullback in a monetary policy environment in which the Fed has little room to take action would all but guarantee a recession. A recent report from the International Monetary Fund, citing “adverse effects on confidence, asset prices, and investments,” says that trade tensions and the threat of escalation are now the single biggest threat to global growth. The same applies to the U.S.
Despite the President’s assertion that “trade wars are good, and easy to win,” history has shown that trade wars are notoriously complex and bad for their participants. More importantly, this trade war is adding unnecessary strain and uncertainty to an aging economic expansion exactly when we can least afford it.
