Trump's tariff threats could prove to be 'smart politics,' Barclays analysts say

  • At the start of the month, Trump denounced the U.S. trade deficit with other countries and proposed plans to levy tariffs of 25 percent on steel imports and 10 percent on aluminum imports.
  • The contentious decision prompted a global backlash and heightened fears of a tit-for-tat trade war.
  • "Although raising tariffs on steel imports will be economically costly, it might be smart politics," Barclays' analysts said in a research note published Wednesday.
President Donald Trump waves upon his arrival in West Palm Beach, Florida, March 2, 2018.
Kevin Lamarque | Reuters
President Donald Trump waves upon his arrival in West Palm Beach, Florida, March 2, 2018.

President Donald Trump's threats to impose global duties might be a shrewd political move ahead of November's mid-term elections, analysts at Barclays said Wednesday.

After more than a year of stirring support from skeptical conservatives with an economic agenda of tax cuts and deregulation, Trump announced plans to slap hefty tariffs on steel and aluminum imports last week. The contentious decision prompted a global backlash and heightened fears of a tit-for-tat trade war.

"Although raising tariffs on steel imports will be economically costly, it might be smart politics, since free trade has become particularly unpopular with Republican voters," Barclays' analysts said in a research note.

In acknowledging investors were likely concerned about the broader consequences of Trump's proposals, Barclays said the U.S. president's protectionist rhetoric could be a "useful political strategy."

"Since the benefits of free trade are widely dispersed among many, the beneficiaries are likely to protest only mildly to protectionist measures. Meanwhile, the costs of free trade tend to be acutely borne by a few, with whom protectionism resounds strongly," the analysts said.

What happened?

At the start of the month, Trump denounced the U.S. trade deficit with other countries and proposed plans to levy tariffs of 25 percent on steel imports and 10 percent on aluminum imports. He complained "very stupid" trade deals had allowed trading partners to take advantage of the world's largest economy.

Several trade chiefs from around the world decried Trump's proposals, with the International Monetary Fund (IMF) and World Trade Organization (WTO) also quick to criticize the move.

The IMF's Christine Lagarde said she hoped Trump would decide not to implement the tariffs and warned "nobody wins" from a trade war.

European Commission President Jean-Claude Juncker vowed to react firmly to Trump's threat to impose tariffs on metal imports and the European Union (EU) has reportedly drawn up a $3.5 billion hit list of retaliatory tariffs.

In response, Trump reaffirmed his position and said the U.S. could also impose a 25 percent tax on European cars.

Speaking alongside the Swedish prime minister at a press conference on Tuesday, Trump said: "The European Union has been particularly tough on the United States… They make it almost impossible for us to do business with them."

Trump is 'likely' to favor further protectionist trade measures

Barclays' analysts said Trump probably favored further protectionist trade measures for two reasons.

First, the Trump administration is likely to tap into the "unpopularity of free trade among his political base," which could subsequently help the Republican Party in November's mid-term elections.

And second, analysts at the bank said fiscal stimulus from the Trump administration's tax cut and higher budget stimulus were likely to "worsen" the U.S. trade balance.

White House chief economic adviser Gary Cohn.
Jabin Botsford | The Washington Post | Getty Images
White House chief economic adviser Gary Cohn.

Trump's top economic advisor, Gary Cohn, announced Tuesday that he would resign following a disagreement with the administration over the plans to slap tariffs on steel and aluminum imports.

The former Goldman Sachs president and free trade advocate was thought to be a voice of reason in the White House and is well-liked on Wall Street.