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What the Devil won't tell you

How Arizonans may foot bill for Trump's suicidal trade war

Exposure to Mexico heightens risk; Threat to local economy could be profound

The owners of Nakoma Sky, a senior center in Oro Valley, have halted plans for an expansion because a labor shortage and an impending trade war meant company leaders can't get handle on the project's cost. Financing proved too risky without a clear sense of construction costs.

If Trump's trade war goes much longer, that won't be the last Tucson casualty. Unlike wars in Iraq and Afghanistan, the casualties won't be limited to Americans who signed up to go over there. The front lines will run right through offices, factories and warehouses, including here in Tucson. Across the country, tariffs on steel and especially lumber imports have already increased the prices of new homes by $9,000. Harley-Davidson is moving some manufacturing overseas, meaning fewer jobs in Pennsylvania and Wisconsin. The largest U.S. manufacturer of nails is on the "brink of extinction" because of the steel tariff, already laying off workers. The president may see it as a bonus, but newspapers across the United States say tariffs imposed on newsprint from Canada may cripple them. And the carnage from this conflict is only beginning.

Either Donald J. Trump is right and all of our Econ professors are wrong, or the Republican president is ignorantly tempting an economic storm — one that he thinks is a hoax.

I asked George Hammond, director of the Eller College Economic Business Research Center at the University of Arizona, what our state has to look forward to should the trade skirmish expand to total war.

The conflict starts in earnest on July 7, when even more of Trump's tariffs on China, Mexico, Canada and the European Union start kicking in. Already there are threats and counter-threats, retaliation and retribution for said retribution.

Hammond said Arizona is no more or less exposed to trade as the rest of country in terms of trade with China and the EU. Mexico is another story. Here, a trade war would mess up more than global trade by increasing production costs, screwing with integrated supply chains and disrupting Arizona's warehousing and transportation of Mexican imports.

As a political writer, allow me to ponder for a second how just how stupid it is that Trump's going all-in with a trade war. His style doesn't play well. His approval ratings have “improved” from abysmal but are only creeping into the “terrible” category. He's under federal investigation for conspiring with a foreign government to get himself elected. He can't maintain a decent news cycle. But – politically at least – he has every right to take credit for a strong economy (even if we've only just begun to see the results repercussions of his policies).

A strong economy can salve all wounds. A kinder, gentler recession like the one in 1990 can ruin a popular president.

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Trump should protect the economy at all costs. Instead he's doing the political equivalent of eating a Tide packet — if the packet were filled with cyanide. The American worker stands to pay the price.

What a trade war is not

Trump has tweeted that it's impossible for a country with a trade deficit to lose a trade war. Only places with surpluses stand to lose, in his calculation. What does that mean to Arizona, which has a trade surplus with the world? State businesses export $20.9 billion and import $20.5 billion.

That assumes the proper way to look at a trade balance is just by way of the deficit.

Most people look at the trade deficit as if the problem is that we export $100 million of X but import $150 million of X and so we're losing at trade to a tune of
$50 million. That's just part of the story. It's like saying “I bought a car and now I'm out 350 bucks a month in payments and I didn't sell them anything, therefor I have less money and it's bad for the economy.”

Not really.

When GM cashes my check, other things happen. Trade is the same thing. The United States buys imports and the people in countries we buy them from return that money into the U.S. through investments Americans aren't making because Americans don't save. If Jeffrey Sachs and the American Enterprise Institute both agree on this, you can take it to the bank.

Fixing the trade deficit means inspiring savings (if that's a big priority), not imposing taxes on imports.

Hammond hasn't done projections about the cost of a trade war but he has looked into his crystal ball and seen good odds at smooth times because economic “recoveries don't die of old age.”

Absent the trade war, the odds are better than 50-50 that the current recovery will last through the early part of the next decade and through Trump's first term, he said. In part Hammond attributed the bright outlook on lower taxes and higher spending stimulating the economy. Nothing shady is on the horizon except Trump himself.

Economists saw the imbalance of debt versus income in the mid-2000s but weren't sure how hard the unwinding of that knot would slap the economy, Hammond said.

Unless the president is that crazy. My caution to Hammond and the markets is if all you are holding onto is the idea that “they can't be that stupid,” then duck!

For evidence I offer the housing bubble, the dotcom bubble, Healthcare.gov website, the Iraq War, Hurricane Katrina, a president making more than eyes at Monica Lewinksy, the “neat idea” of selling arms to Iran then illegally funneling the proceeds to Nicaraguan Contras, Jimmy Carter saying the problem with America is Americans, Tricky Dick Nixon "ratfucking" an election to beat George “One State” McGovern, the Bay of Pigs and the war in Vietnam. That's for starters.

It's how the rigged system is so often undone. Some master of the universe stumbles on the button marked “Do Not Push” and wonders “what's the worst that can happen?” And we have a president who sure ain't going to pushed around by a button.

Disintegrated

Let's start with supply chains, which Hammond said could be broken up in ways business never saw coming.

Free trade has allowed American industry to position parts of our production where it makes the most financial sense. A country like Mexico could use its comparative advantage in low-wage labor is one part of this supply chain.

Companies could then import those parts and products across international lines – as if moving them from Lot A to Lot J on a Chicago factory grounds – and assemble them with skilled U.S. labor.

Arizona's No. 1 export is aeronautics. We sell about $2.5 billion worth. Arizona's leading import is aeronautics. We buy about $763 million. See what I mean? Suddenly our leading export industry is punished by a policy meant to discourage imports.

According to the U.S. Census Bureau, the No. 2 import is in the category “Machines for Manufacturing.” It's in the heading. They are imported to help domestic manufacturing. Trump is threatening to tax them and burden factories here — as well as there.

Is it smart for a restaurant to pay a tax ahead of moving plates from the dishwasher to the kitchen? Conservatives would think that was crazy. If Obama proposed it, it would be an act of treason. Trump does it and his crowd goes wild.

Pass-through economy

The state's biggest import is plane parts but that category is dwarfed by agricultural products which account for more than more than $1.3 billion. They're all listed separately but together add up to nearly twice the value of aeronautics.

The state's gross domestic product is about $250 billion so $1.3 billion isn't a huge number.

Hammond says those imports provide a lot more juice to the economy than the chili we eat in Arizona.

“The transportation and warehousing of those goods provide a lot of jobs in our economy and would be affected,” Hammond says.

Arizona is a hub for Mexican exports passing through. More than 85,000 Arizonans work in the transportation and warehousing industry.

So the more Mexico sells products from there, the better we do here — and the better they do there, thus getting hungry for Arizona products. Not too put too fine a point on it, for the modern day Know-Nothings out there, the more they sell from Mexico, the less likely they are to come here.

Doomsday, Volcker style

What good would an expert be without a doomsday scenario?

Hammond's got one of those, too (honestly, he doesn't sound spectacularly worried about. As a student of the politicos being dumb, I am, and it's my column. So there.)

Wages aren't growing that much in the economy, but with unemployment so low the labor market is as tight as it's been in 20 years. Those wages are going to have to start growing. But they're not.

In other words: It's quiet. Too quiet.

When wages start to grow so will inflationary pressures. That means more piles of money chasing the same amount of goods. So the U.S. Federal Reserve will try to suck money out of the economy by raising interest rates just enough not to quash the recovery. That may be doable.

Increasing wages lead to something called “demand pull” inflation. Higher demand is pulling prices up. That's what the Fed is listening for in all this foreboding silence. Now, at the same time wages go up by pulling prices higher, imagine a beast from below upthrusting inflation with “supply push” (higher prices in the supply chain) and compounding the inflation.

Well, the Fed would have to jump all over inflation with higher-than-anticipated interest rates that scare the bejesus out of the markets, raise the cost of investment and leading to layoffs galore.

An extreme example of this happened in the early 1980s — your grandparents will remember.

Inflation and unemployment were both high, which is not supposed to happen. Federal Reserve Chairman Paul Volcker had a choice. He could lower interest rates to boost employment or he could raise them even higher to kill inflation. He chose the latter (did he ever). Oldtimers remember the days of a prime lending rate of more than 21 percent alongside 10 percent unemployment.

The economy tanked with a short but deep recession that broke the back of inflation and set the table for Reagan to steer the country through a seven-year expansion and sky-high popularity.

This kind of radical attack on inflation probably won't be necessary, Hammond said. He did warn a 1990-sized “cyclical” recession may be in the cards, though. And Tucson is just coming out of the recession that hit 10 years ago.

Bacon good, copper bad

Don't be shocked if the first effects in the looming trade war look and smell pretty damned good. Cheap bacon may be on the horizon. Mexico is threatening to retaliate for steel and aluminum tariffs with their own taxes on U.S. pork. American pork producers will then “liquidate their holdings in the short run,” Hammond said.

That's good news if you consider the water receding rapidly back toward the ocean good news in the face of tsunami warnings. “Stupid elitists say the waters gonna rush in but look, but it's going in the other diretion. Ha! Hashtag MAGA!”

Now imagine it's copper.

Hammond hadn't studied copper specifically and was hesitant to discuss it.

Copper prices are falling ahead of the trade war's start date and when prices of metals fall, they get mined less. Arizona's No. 2 export has fallen by more than 50 percent since 2014 and now accounts for $1 billion in global sales.

Having lived in a copper town, I can tell you no one working in the mining industry thinks it would be good news if domestic copper prices fell. No one in Iowa thinks cheap bacon is such a tasty idea.

Pissing off the Olde World

People I've talked to supporting Trump's idea assume all the other countries will act rationally and work to avoid a trade war. The people of Europe will put pressure on governments to represent the economic self-interest over petty things like nationalism.

That's an odd argument coming from a political party convinced America has lost national face and must reassert it with economic … what's it called? … oh … Nationalism.

Start with Europe: The right was taken by surprise that Canada – vaguely a country – stood up for itself with a “Gosh golly! We're gonna stand up for ourselves, y'know!” What happens when we get into a contest of “whose nationalism is bigger” with the Celts, the Norse, the Prussians, the Romans, the Gauls and the Anglo-Saxons? These are nations of people predating their nation-state countries.

Our idea of a bad decade is slow growth and lousy music. Europe's idea of a bad decade involve million-man armies pulverizing their countrysides.

They are quite particular about their ways being respected. I was in London in the summer of 1984 and was forced to personally apologize for John McEnroe's antics at Wimbledon. Their national hono(u)r was challenged by a single American violating the spirit of tennis. I can only imagine their upper lips stiffening into puckered steel at the idea of Trump demanding they kneel before his new "Tax Americana."

The more America takes the dickish approach, the more pressure European voters will put on their leaders to fly the flags of blood and soil.

It's not like Europe, Japan or China are touchy about that.

So Uncle Don wants you and your job to fight a trade war.

Don't worry. I'm sure he's thought this through.

Blake Morlock is a journalist who spent 17 years covering government in Arizona and also worked in Democratic political communications. Now he’s telling you things that the Devil won’t.


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Donald Trump speaking at the 2018 Conservative Political Action Conference.

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