It’s Not Nice to Mess with the Market
By William Reinsch
Ohio Senator Sherrod Brown made an important observation the other day in an interview. He noted the increase in steel imports since the president began threatening to cut them off (up 21.7% YTD from the same period in 2016) and made the point that since the president has not actually done anything, the steel industry, in fact, is worse off than it would have been if he had just kept his mouth shut.
There are several lessons here. The obvious one is the perils of a presidency where “ready, fire, aim” is standard operating procedure, but the more important one, which Senator Brown may not have intended, is that just as it is not nice to fool Mother Nature, it is a mistake to ignore the market. In this case foreign steel producers are doing exactly what any rational person would do and exactly what our government should have expected them to do — cramming as much steel into the country as they can before Trump pulls the trigger. The longer he waits, the worse the situation will get unless and until either the foreign producers decide the whole thing is a head fake and relax or reduced demand causes a market correction.
This is not about whether steel import relief is a good idea or not — that’s been debated for 40 years and will continue to be debated for a long time to come. Rather, it is about the way government policy or public statements affect the market, often in ways that were not expected but were entirely predictable if anybody had taken the time to think the matter through.
Another recent example is the case of Mexican corn imports. After the many hostile things the president said about trade with Mexico and about the wall, both before and after his inauguration, it should have been no surprise that Mexico began looking around for alternative sources of corn. At one level, one could argue this was simply an emotional reaction to Trump’s rhetoric, but it was also a natural market reaction. If there is doubt about a source of supply in the future, it makes eminent good sense to start a search for other ones. They may not be better deals in the short run, but if the current source is either cut off or the price of retaliation in a trade war, prudent planning means having alternatives available.
Those are cases of unintended consequences. There are also cases of collateral damage, particularly when it comes to sanctions. For example, sanctions on Iran theoretically permit exports of humanitarian items like food and medicine, but people attempting to export those items have discovered banks will not provide financing, even though the transactions are authorized. For banks it is easier — and safer — to deny all Iran requests rather than go to the trouble of figuring out which ones are okay and which ones are not. Here again, the market is making decisions contrary to government intention.
This is not to say the market is always right and regulation is a bad idea. You only need to remember back to 2008 and the ensuing recession to see that government plays an important role in regulating markets to keep them functioning efficiently and honestly. There are also externalities and collective goods which markets will not likely address on their own, but where government can get them moving in the right direction through adroit use of incentives and disincentives, as in the case of climate change where both cap and trade and a carbon tax are constructive policies that use market forces to achieve a larger collective goal. Of course, neither of those seem to be going anywhere anytime soon.
So, guiding or leading the market can pay dividends if you are careful, but ignoring it is perilous. I imagine the president thinks the uncertainty he creates gives him more leverage (unless he is not thinking about consequences at all), but in a globally integrated market where there are always workarounds, it just encourages the others to find them more quickly, which compromises the effectiveness of whatever he ultimately decides to do and inevitably produces a bunch of unexpected and often unwelcome side effects.
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.