Equity markets continued to sell of Monday morning as Trump economic advisor Peter Navarro told CNBC that even a 0% tariff offer from Vietnam would not be enough for the Trump administration to change its tariff policy toward that country.

“Let's take Vietnam. When they come to us and say, 'we'll go to zero tariffs,' that means nothing to us because it's the nontariff cheating that matters," said Navarro.

Non-tariff cheating refers to subsidizing domestic manufacturers, currency manipulation, and other measures designed to give a country’s domestic producers an advantage over potential exporters to that country.

Navarro’s comments seem to indicate the administration is committed to maintaining tariffs not only until trading partners lower or eliminate their own, but rather until no trade deficit at all exists between the U.S. and that country. This means that even countries with a natural comparative advantage in some export – or no need for many potential U.S. imports – may see U.S. importers of their products taxed indefinitely.

Stock market selloffs don’t always mean a recession is imminent, but they usually precede one. And to the extent that the input costs may be artificially higher for not only importers of finished goods but also of components for products manufactured in the U.S., a recession would be natural result.

While recessions are always painful for those who go out of business or lose their jobs, they can be healthy for the economy as a whole in terms of liquidating malinvestment. According to the Austrian theory of the business cycle, recessions are the market’s way of redirecting unproductive deployments of capital to product ends. The mistakes are made during the artificial boom caused by monetary inflation by the central bank.

Artificially low interest rates and an overabundance of currency mislead entrepreneurs into expanding production more than real savings will support or investing in ventures that would not be profitable at all under natural market circumstances. The market eventually forces these mistakes to be acknowledged, and entrepreneurs must make the necessary adjustments - cutting production or filing for bankruptcy – so that the misallocated capital can flow to profitable projects.

Since all this takes time, recessions are painful. But at the end, capital is redirected towards better use instead of continuing to be wasted on unprofitable endeavors.

The problem with the tariff recession, if there is one, is that it is not being driven by natural market forces. As with Covid lockdowns, it is being imposed by government edict and therefore, also like Covid lockdowns, it has the potential to do the opposite of what a market-driven recession would do.

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Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness? 

 Tom