Where Fools Rush In: Trump's Tariff Proposals

A friend asked me this morning what I thought of Donald Trump's new tariff strategy. I used to write about the politics of trade, but I am not an expert, to say the least, on the economics. That said, I'll venture the opinion that Trump's trade policy is the economic equivalent of George W. Bush's invasion of Iraq. It bodes disaster.

I actually favored a tariff strategy. I applaud the writings of Michael Pettis, Michael Lind, and Oren Cass on the subject. Over the last forty-five years, wrong-headed American policies, Japanese and then Chinese mercantilist strategy, and an American business class without loyalty to its country have decimated American manufacturing. It has created a situation where we depend on other nations (some of whose interests run counter to ours) for goods that are vital to our defense and prosperity. It has distorted American economy in favor of speculative finance and away from goods production. And it has contributed to economic instability and inequality.

Tariffs, if coupled with an industrial policy, are one tool in beginning to correct the problem. I look favorably on an overall ten percent tariff (which could encourage domestic production), targeted tariffs at China and at goods that Chinese companies are end-running through third countries, and an end to the de minimis loophole that allows the Chinese to evade tariffs. And I favor some action to boost American domestic auto production. Some of this is in the plan, but it's the rest of it that bothers me.

The imposition of high tariffs (beyond the 10 percent) on a host of countries with which we had formerly enjoyed good relations, and which have not contributed to the international imbalance in trade surpluses could very well precipitate a global downturn; and it could isolate the United States economically and open the door for the Chinese to peel away trade partners. It could land a final blow to our diplomatic and military alliances.

There seems to be a basic misconception that lies at the heart of Trump's trade policies. It was first clearly articulated in a September 2016 "white paper" that Peter Navarro (who became Trump's White House trade advisor in his first administration and has retained that post in his second) and future Secretary of Commerce Wilbur Ross put out to defend Trump's initial tariff proposals during that year's campaign. Navarro and Ross rely on the standard economics 101 formula:

The growth in any nation’s gross domestic product (GDP) – and therefore its ability to create jobs and generate additional income and tax revenues – is driven 8 by four factors: consumption growth, the growth in government spending, investment growth, and net exports. When net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth.

In equation form, that's GDP=C+I+G+(X-M), where C is consumption, I is investment, G is government spending, X is exports and M is imports. Navarro and Ross's assumption, which Trump articulated repeatedly, is that if the United States were to eliminate its trade deficit, it would dramatically boost GDP. But as a host of economists pointed out at the time, C and I are not independent variables. For instance, the trade deficit usually goes down during a severe recession, because a recession depresses consumption, including consumption of imports. Tariffs, if not used judiciously, could reduce the trade deficit by dragging the United States into a recession. And that's exactly what a single-minded attempt to eliminate America's trade deficit could do.

And it gets worse. Trump's goal is not merely to end America's trade deficit, but to end its deficit with each country. That could at best spell endless negotiations that are well beyond the capability of Trump's appointees, but more likely it could fuel trade alliances against the United States. America's goal, as Michael Pettis has argued, should be to end the international imbalance between surplus and deficit countries, of which Chinese mercantilism is the main cause. You don't do that by slapping high tariffs on Indonesia or Lesotho.

What the Trump strategy could do is precipitate a trade war that could cause an international downturn. Instead of promoting new trade agreements with other countries, it could sow distrust of any agreement with the United States. What are countries to think of Trump slapping new tariffs on Mexico and Canada and renegotiating the USMCA that he negotiated during his first term?

Trump's tariffs might not even encourage the kind of manufacturing the country needs. Take the 25 percent auto tariffs that the United Auto Workers have applauded. The United States should encourage auto companies to produce here, and the USMCA began this process. But the 25 percent tariffs take that to a crippling extreme that will damage the Mexican and Canadian economies. An auto tariff and a tariff on other key manufactures also needs to be coupled with an industrial policy that will encourage companies to take advantage of the tariffs by reviving their industries. In the case of autos, that would seem to suggest encouraging the transition from gas to electric cars and trucks, but Trump has coupled the tariffs with killing off the provisions of the Biden administration's attempt to spur an American electric car industry by funding networks of charging stations, battery research and production, and the improvement of the grid. The net effect of Trump's auto tariffs, it seems to me, will be to cede to China domination of the global electric car industry.

You can make similar observations about Trump's tariffs on India (where many of our pharmaceuticals are produced) or on the European Union (whose companies vie for superiority with ours in biotechnology). Trump has coupled his tariffs with measures, led by the unspeakable moron who heads of the Department of Health and Human Services, to gut our bio medical research. In the long run, that could cede leadership in biotechnology to European and Asian firms and universities.

The only silver lining in Trump's proposals is that by stirring discontent within the electorate, they will make it more likely that the Democrats will recapture power. That won't save the country or the Democrats. The seesaw of power between the parties will continue. But it could save us temporarily from the black hole in which Trump, Musk, Navarro, Kennedy et al. are determined to plunge us.