Wall Street should take Trump more literally.
Many people are in the habit of not taking Donald Trump literally, and that appears to include investors on Wall Street who have responded to Trump's election with the sort of stock price boom you would have expected from the election of a completely orthodox free marketer like Jeb Bush or Marco Rubio.
Trump has said, many times, that he favors a drastic revision of American trade policy aimed at making it much more difficult for companies to manufacture products in foreign markets (especially China) and then sell them to American consumers. This would, if he pulled it off, be a huge deal for the American economy — dramatically boosting the fortunes of some companies, but potentially crippling others, raising prices of many goods and inviting retaliatory measures that would harm American exports.
As much as Wall Street appears to believe this is just talk, Trump is putting his words quietly into action. Appointments to a range of lower-profile executive branch positions strongly suggest that he is likely to pursue a fairly aggressive policy of trade protectionism.
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He even appears to be thinking seriously about how to structure the policymaking process. In the context of a Republican Party that remains mostly invested in a pro-business approach to trade policy, this is exactly what Trump would need to do to unleash a protectionist agenda. Trade wars, in short, are almost certainly coming soon — though the actual consequences are difficult to project.
Donald Trump's team of protectionists
The Trump transition team returned from its winter holidays to announce that Robert Lighthizer would serve as his United States trade representative. Lighthizer is a true pillar of the DC Republican establishment, having served in the Reagan administration and then as treasurer of Bob Dole's failed 1996 presidential campaign before settling in as an attorney at the DC office of the white shoe law firm Skadden, Arps, Slate, Meagher & Flom.
He's an experienced and well-qualified USTR. He was a deputy in the USTR office under Reagan, and his legal specialty is specifically in international trade cases. Lighthizer's generally a low-profile public figure. To the extent that he's a thinker at all, it's specifically as a kind of early harbinger of Trump's infusion of protectionism into the conservative ideological firmament.
Back in 2008, for example, he penned an op-ed for the New York Times making the case that John McCain should abandon his commitment to free trade. Lighthizer argued that "conservative statesmen from Alexander Hamilton to Ronald Reagan sometimes supported protectionism" and "always understood that trade policy was merely a tool for building a strong and independent country with a prosperous middle class."
Meanwhile, Trump has also installed his longtime friend and business associate Wilbur Ross at the Commerce Department. Ross is a much more Trumpian figure than Lighthizer, with strong personal ties to the president-elect (he worked on some of Trump's bankruptcies) and no government experience, but a shared commitment to a GOP brand of protectionism — in Ross's case deriving from the small fortune he made investing in distressed American steel producers who were temporarily rescued from ruin by Bush-era protective tariffs.
Last but by no means least, Trump has tapped Peter Navarro for a new job running something called the National Trade and Industrial Council. Navarro is basically an anti-trade ideologue, who, despite being a well-qualified economist, holds a view on trade policy that essentially no one in economics agrees with.
Trump is creating a structure to act
Perhaps more important than the picks themselves is the fact that Trump has set up a policymaking structure that should facilitate protectionism.
Under the Tariff Act of 1930 (this is the Depression-era Smoot-Hawley Tariff you may recall from history books), the Commerce Department retains fairly broad discretionary authority to slap foreign exporters with tariffs if they believe foreign "dumping" is harming American businesses. At the time, Herbert Hoover was president, a job to which he had ascended to after serving seven years as commerce secretary under Presidents Harding and Coolidge. That meant the then-new Commerce Department was a high-prestige agency. In subsequent decades, however, it's become a bureaucratic backwater with little real policymaking clout.
The true significance of Trump's setup is he appears to be altering that.
Normally the USTR's office is bureaucratically powerful despite its small size (this is symbolized by its physical location right by the White House) and institutionally biased in favor of making trade deals. Tapping an experienced trade lawyer animated by a profound ideological and historical conviction that the GOP's 20th century embrace of free trade is a mistake constitutes a huge shift.
Meanwhile, the new Navarro-run NTIC means that protectionist measures emanating from Commerce will be able to bypass the interagency process at the White House that's normally run through the National Economic Council. The result is that even though the traditional economic policy power jobs are in the hands of a hedge fund manager who used to work at Goldman Sachs and a top executive from Goldman Sachs, the structure is in place for Trump's team of protectionists to implement tough measures aimed at blocking foreign imports whether or not they, or congressional Republicans, like it.
Wall Street isn't taking this seriously
During the fall campaign, good news for Donald Trump — like James Comey's infamous letter to Congress — was bad news for American stocks. At the time, investors feared that a Trump administration would lead to chaotic economic policymaking, unpredictable trade wars, and other bad-for-business measures. And when it first became apparent on election night that Trump was, unexpectedly, going to win, stocks crashed.
But the market then swiftly rallied the next day and closed out 2016 with a boom.
Investors anticipated that Trump would slash corporate income tax rates, which has the near-automatic effect of boosting dividends and therefore share prices. They also foresaw a policy regime friendlier to fossil fuel extraction and likely to sharply reduce regulation of major financial institutions, meaning those sectors in particular boomed.
Concern about trade wars, meanwhile, rather suddenly vanished. We haven't seen, for example, investor concern that Boeing's ability to sell planes abroad will be profoundly compromised by foreign governments retaliating against American companies. But even though the United States runs, on net, a trade deficit, we do export a great deal around the world — especially airplanes, agricultural products, financial services, high-tech products, entertainment, and pharmaceuticals.
Investors' complacency in this regard may be warranted. Despite Trump's rhetoric, small-scale trade wars have been a fairly common fact of life in recent administrations. Bush was embroiled in a years-long dispute with the Canadian government over imports of softwood lumber, and his administration slapped massive tariffs on imported French cheese to retaliate against European objects to exports of American hormone-treated beef. The Obama administration slapped tariffs on Chinese tires years ago, and hit Chinese steel earlier this year. A dispute between the United States and the European Union about bananas managed to drag through the Clinton and Bush administrations only to be resolved shortly after Obama took office despite the fact that neither the US nor the EU grow bananas.
These various trade controversies have all been big deals to the workers and companies directly affected, but none of them has been significant on a macroeconomic level because the basic tit-for-tat structure of tariff and retaliatory tariff has prevented any of them from impacting really major industries. It's certainly possible that the Trump era will bring more of the same — big talk about protecting American jobs followed by climb downs when it turns out that American jobs can also be put at risk by retaliatory measures.
Maybe the same will be true under Trump. But Wall Street certitude about this is a little difficult to understand. Trump certainly seems to be laying the groundwork for a serious effort to curtail foreign imports into the United States, and nothing about his personality suggests that he's likely to back down quickly in the face of countermeasures. The exact consequences of this are difficult to predict, precisely because nobody's really tried anything like it in the modern era. But based on his picks and his clear belief that trade controversies are good politics, it seems much more likely than not that we are about to find out.