The Navarro Recession II---WSJ

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The Navarro Recession, II
Evidence of a tariff-inspired slowdown spooks the markets.

By The Editorial Board
Aug. 14, 2019 7:23 pm ET


After we warned last week that U.S. trade policy was courting recession, White House aide Peter Navarro took to Fox Business to denounce us for sounding like The People’s Daily, the Chinese Communist propaganda arm. That was novel as criticisms of these columns go, but perhaps Mr. Navarro would care to comment again after Wednesday’s recession warning from the bond and equity markets? Are they Commies too?

Stocks fell about 3% on the day on bad economic news out of Germany, China and the bond markets. Europe’s largest economy shrank by 0.1% in the second quarter as exports fell amid trade and Brexit uncertainty. Chinese readings on factory production, consumption and employment also revealed an economy that is slowing sharply. China’s industrial production increase of 4.8% was a 17-year low.

Investors saw all that and headed for the tall grass of U.S. Treasurys. The yield on the 10-year note hit 1.58%, dipping for a time below the two-year bond yield. The 30-year Treasury hit a record low of 2.018% and closed at 2.02%. Yields this low show investors are moving out of risk assets and they signal slower growth ahead—perhaps even a recession unless events and better policies spur more optimism.

Some Trumpians are cheering the Chinese economy’s pain, but they should be careful what they wish for. They could drive China, the world’s second largest economy, into its first recession since Deng Xiaoping began the era of pro-market economic reform.


A Chinese recession would mean a European recession, which would send U.S. growth down too. The impact would be worse if slower growth triggers capital flight from China and there’s a disorderly fall in the yuan.


Mr. Navarro and President Trump spent Wednesday blaming the Federal Reserve for the market meltdown, and we suppose any scapegoat will do in a storm. The Fed isn’t blameless, and we argued it shouldn’t have raised rates last December. But it has since countered that rate increase with a 25-basis-point cut in July, and even another 50 basis points won’t be enough to counter a downward spiral of trade and currency mayhem.

We’ve been warning for two years that trade wars have economic consequences, but the wizards of protectionism told Mr. Trump not to worry. The economy was fine and the trade worrywarts were wrong.

But we never said tariffs would produce immediate recession. We said they—and the climate of uncertainty they were creating for business—would chill global trade and undermine the surge in capital investment spurred by tax reform and deregulation. The growth momentum from tax cuts and a strong labor market were able to mask the impact of helter-skelter trade policy for a time. But that old economic disciplinarian, Adam Smith, sooner or later exacts a price for policy blunders.

Wednesday’s market moves are an omen of the future, not destiny. The key to avoiding the worst is to restore a sense of policy calm and confidence. Stop the trade threats by tweet. Call a tariff truce with China, Europe and the rest of the world while negotiations resume with a goal of reaching a deal by the meeting of Pacific nations in November. Someone should tell Mr. Trump that incumbent Presidents who preside over recessions within two years of an election rarely get a second term.

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