Our editorial: Tariffs could turn boom into bust
The U.S. economy posted its first breakout quarter since the slow recovery from the Great Recession began nearly a decade ago. The second-quarter surge, which boosted the gross domestic product growth rate to 4.1 percent, is welcome evidence that friendlier tax and regulatory policies are paying off.
But there are warning signs in the quarterly numbers that may warrant putting the champagne back on ice.
Chief among them are the impact of President Donald Trump's tariffs.
Some economists believe as much as a full percentage point or more of the GDP growth was tied to increased trade activity, as businesses sought to get their goods to foreign markets and stock up on imported materials ahead of the tariffs.
If that turns out to be the case when the numbers are fully parsed, then it bodes ill for sustaining the hot performance for the rest of the year.
The Trump tariffs affect a variety of goods from steel to soybeans to solar panels.
They will inevitably lead to higher consumer prices, which is bound to slow spending, a key factor in the strong second-quarter posting.
Tariffs also could put the brakes on the solid employment gains since the first of the year, as employers look to cut labor costs to offset the increased cost of raw materials and the lower demand for their products.
Fortunately for Detroit, the president last week backed away from a proposal to impose a 20 percent levy on imports of European automobiles and parts in exchange for a promise by the European Union to buy more American soybeans.
But Trump continues to weigh additional tariffs on automotive imports from Mexico and Canada, and the auto industry will take a major hit from the levies on imported steel and aluminum.
Last week, the president proposed a $12 billion relief fund to aid farmers hurt by his tariffs, suggesting he knows full well the levies will damage segments of the economy, particularly agriculture.
Government bailouts are no substitute for a vigorous free market and sound trade policy, and can't be kept up for the long term. Adding more farmers to the public dole and more dollars to the federal deficit is a curious position for a Republican president who claims to be a conservative.
As evidenced by the EU deal, our trading partners are eager to end this trade war, and the president should be just as willing a negotiator.
While Trump may score a few victories, such as the cars-for-soybeans agreement, 90 years of economic history confirm that playing tit-for-tat with tariffs will ultimately be bad for Americans.
Trump believes he has found a potent weapon to expand U.S. power in the world and punish those who he perceives are taking advantage of America's liberal trade policies. He recently expressed his glee with a tweet declaring, "TARIFFS ARE THE GREATEST!"
They are not, as his own top economic adviser, Larry Kudlow, warned the president before taking the position.
Trump may have well as tweeted, "TAX HIKES ARE THE GREATEST!" because that's what tariffs are in the end. They force Americans to pay more money for the things they buy, without receiving additional value.
Crowing about the strong second-quarter growth will soon give way to cries of pain as a reckless president derails these long-awaited boom times with a needless trade war.