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. Raging Twenties: Great... Escobar, Pepe Best Price: $22.73 Buy New $15.00 (as of 03:06 UTC - Details)

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 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. Instead of targeting companies which have invested capital unwisely, it will target companies with perfectly sound investments of capital that just happen to be dependent upon imports for some part of their production process.

And if the administration’s policy were successful in the long term – a tenuous proposition at best – it would reward companies that operate inefficiently, unable to compete in international markets without government protection. What the Nurses Saw: A... McCarthy, Ken Best Price: $11.75 Buy New $18.53 (as of 04:12 UTC - Details)

The Covid lockdowns did similar damage to the economy. They didn’t punish companies that had invested capital unwisely. They merely punished companies that served the public in person. That punishment was also very selective. Small, family-owned businesses were disproportionately punished while large, multinational corporations were not only exempt but received trillions in newly created money dollars via Federal Reserve monetary inflation.

The effect was to put perfectly good, profitable small companies out of business or severely damage their earnings while rewarding many large corporations dependent upon cheap money and credit for their survival.

There are good cases to be made that the U.S. economy was due for a recession in 2020 after a decade of near-zero interest rates and quantitative easing. There is an equally good case the U.S. economy is similarly positioned right now after an even larger expansion of the Federal Reserve’s balance sheet following the Covid lockdowns. But Trump’s tariffs, like the lockdowns, have the potential to bring all the pain of a deep recession with none of the gain – the liquidation of malinvestment.

Reprinted with the author’s permission.