Tariffs and Monetary Policy: Moral Hazard and Rent Seeking

President Trump’s threat to impose tariffs on Mexico over immigration has pushed Federal Reserve Chair Jay Powell to say that if the tariffs lead to economic growth slowing, the Fed will cut interest rates.  While the bump may be about to end, this announcement was followed by a  solid global surge of stock markets on June 4 followed by smaller increases the next day.  This sets up a moral hazard situation for Trump where if he behaves irresponsibly on trade policy (with even GOP senators basically freaking out), the Fed might bail him out with interest rate cuts.

How is rent seeking entering into this?  I note a point just made by Dean Baker, that all these tariffs Trump is imposing on his own without any Congressional approval offer him the option of allowing specific exemptions from them.  So Trump can grant exemptions to specific sectors or even firms that favor him.  So Trump’s trade wars are opening up a whole new vista for rent seeking.

Finally, and unsurprisingly, many of his trade policies look to fail to achieve their supposed goals.  This is pretty obvious for the case of the tariffs on Mexico, which by potentially weakening the Mexican economy weaken Mexico’s ability to reduce Central Americans from to the US.  Another case involves the Chinese firm Huawei, supposedly both to enhance US national security and support the US high tech sector.  But according to a story in the Washington Post, 6/5/19 reports that 61 percent of experts say that Trump’s ban on US firms supplying parts to Huawei will both weaken US national security by reducing US influence over Huawei and the whole 5G sector, with the relevant US firms being hurt.  I do not think even the Fed can bail the US economy out from this mess.

Barkley Rosser