President Donald Trump often cites the stock market as proof of his economic-policy success, so let’s hope he was watching the Dow Jones Industrial Average on Monday. The Dow fell 2.38%, and the Nasdaq and Russell 2000 fell even more, on the escalating tariff dispute between the U.S. and China.
Stocks are volatile, but there’s no denying that markets are rising or falling these days in substantial part on the prospects of a U.S.-China trade deal. They fell after Trump raised tariffs to 25% on $200 billion in Chinese exports to the United States, then rose later that day on word that bilateral talks had been “constructive.” Equities fell again Monday when China retaliated with tariffs up to 25% on $60 billion of U.S. goods.
The Dow is now nearly 1300 points lower than it was in January 2018 when Trump began his tariff offensive — despite the best 12 months for economic growth since 2005 and healthy corporate profits. The stock market isn’t the only measure of economic health, and it can send false signals, but in this case the clear market message is that tariffs will subtract from economic growth.
Regarding China, Americans have been giving Trump the benefit of the doubt that his tariff strategy is intended as leverage to negotiate a better, fairer trading regime. But Trump seems to sincerely believe that tariffs are a free lunch. “The unexpectedly good first quarter 3.2% GDP was greatly helped by Tariffs from China. Some people just don’t get it!” Trump tweeted Monday.
But tariffs are taxes that raise the price of Chinese goods for U.S. consumers and producers. They also raise the price of domestic goods that compete with Chinese imports because U.S. producers tend to raise their prices