The Trump Tariffs: Dumb and Dumber versus the Dismal Science

Donald Trump has described himself as “The Tariff Man.” An unusual and unexpected moniker for a colourful egomaniac. He has also stated that “Tariffs” are this favourite word in the English language. This confirms his lifetime avoidance of serious English literature. I submit the American body politic and the international community should take his rhetoric seriously. Trump, similar to most politicians can shift policy positions radically when the winds of popular opinion change. Issue flexibility and agility is an important skill for political survivors. He does not project a commitment to core intellectual principles. However, a careful review of his public statements the past forty years reveals that he does have two bedrock positions. First, he hates immigrants, illegal or legal. He has always believed that emigres, particularly those from poor countries. make us less safe, undermine our culture, damage our economy and “poison our blood.” Second, he has loudly proclaimed that the United States has been a “sucker” on global trade. Trade deficits are benchmark of national weakness and the conventional embrace of free trade principles by the American intellectual, political and business elite is completely wrongheaded. He has always been aggressively protectionist. He believes the hollowing out of our midwestern industrial manufacturing base was political malpractice by our leadership. You certainly can't accuse him of hiding the ball on this issue. Tariffs have always been a focus in his speeches.

Tariffs are important on their own, but they also give us a window into his entire world view. They put “meat on the bones” when you ponder what he means by “Make America Great Again.” It is all about POWER. America must be hegemonic, dominant and supreme in all things. Protecting our interests demands strength and action and an America in charge will not hesitate to inflict pain on its allies if necessary. The neo- liberal mindset in place since WW2 does not work for him. America, as first among equals in a global network of alliances and multi-lateral institutions denies America its rightful place as the world’s sole and indispensable superpower. Therefore, MAGA means a total reset of the global order and he has openly pledged to use all tools available, including bullying, abrogating existing treaties breaking rules and ignoring customs and traditions. Tariffs are an attractive blunt tools in this package of weapons available to him. I do not anticipate he will abandon his views at 78, particularly since he is operating under the delusion he received a breathtaking mandate from the American people. Fasten your seatbelts.

90% of Americans have no idea what he is taking about when he rants about trade deficits and the blessings of tariffs. Some basic definitions may be in order. First, and all Republicans should cover their eyes, tariffs are a TAX. A big TAX. The tariff tax is applied to goods imported into the United States from a foreign country. The President has authority to establish the scope of the tariffs, the products at issue, the target countries and the size of the tariff. Congress can reverse the decision, but don’t hold your breath with the current bunch hiding in the Capital. The American importer pays the tariff. For example, if an an American importer buys $1,000,000 of electronics from Canada and there is a 25% tariff in place, the importer will pay Customs 250,000. A substantial cost. What happens next is the importer will sell the product to a retailer, distributor or wholesaler and attempt to recover all or part of the increased cost associated with the tariffs by raising his price from historical levels. The rest of the supply chain will do exactly the same thing. Ultimately, the consumer will pay a much higher price for the item than he did before imposition of the tariff. The original importer will also go back to the manufacturer and seek to convince them that they need to bear some of the pain caused by the tariff, eg lower your price and cut your profit margins. Tariffs will increase the price on all goods subject to the tariff. If you impose tariffs on all products and the tariff levels are high, prices will increase on everything and the general economy will experience material inflation. When inflation increases, the Fed will raise interest rates. With increased rates, the economy will slow in growth- perhaps to a recession level. Stagflation is a genuine risk. This predictable scenario explains why 100% of all economists, liberal to conservative, left to right, believe that tariffs are a singularly awful idea from an economic policy perspective. Really, it is almost unanimous.

In the face of this expertise and the ugly history of tariffs (Smoot-Hawley) and worldwide depression in the early 30’s what is Trump’s rationale in support of his developing stringent tariff regime? To be clear, the policy instigator here is Trump. It is very unclear whether any of his economic advisors have actually recommended to him that a tariff regime is appropriate. Ok, maybe Peter Navarro but he just got out of prison. Instead, they are bobbing and weaving, changing their arguments daily, always deferring to Trump’s arguments, against their better judgement. Not many of these fellows will be featured in a future edition of Profiles in Courage. He has many arguments and they change daily and several are internally inconsistent with one another. First, he insists that America will get “rich” from the revenue collected from the tariffs. The Treasury will be flush with new found cash and we can pass another pass cut for the wealthy. Tariffs will fund a new “Golden Age” for the USA. Second, the tariffs will totally eliminate that pesky trade deficit that gets on his nerves. Third, American companies competing with the foreign manufacturers will benefit because they will increase market share because the foreign manufacturer wont be able to compete price-wise. With increased market share and healthy profits, the American company will hire more workers which will help the long persecuted working class. He also proffers that tariffs are an effective negotiating tool in renegotiating existing trade agreements. Tariffs will generate trade concessions from our partners. Tariffs can also be tool to punish non trade related bad behaviour. Impose tariffs on Mexico because they are ineffective in stopping fentanyl and illegal immigration. Basically, use the tariff as a stick on your allies- analogous to sanctions placed on an adversary eg Russia for invading Ukraine. Finally, they can be used for national security purposes. Ultimately, Trump’s big bang vision of a successful tariff policy is that companies with plants outside the United States will become exhausted by the tariffs and return to the United States to reopen or rebuild manufacturing facilities here. His goal is for everything to be made here! All the people sitting behind him at his rallies will have lifetime jobs and Youngstown, Ohio will again be a garden spot. Very ambitious, although I believe this is going to turn out poorly.

Well, how does this vision measure up with the facts? The United States trade deficit is currently 900 billion dollars. The main exporter countries contributing to this deficit are China (400 billion), Mexico (140 billion), Vietnam (120 billion), Japan (90 billion), Germany (75 billion), Ireland (70 billion), Taiwan (60 billion), South Korea (50 billion), Malaysia (40 billion), Italy (35 billion) and Canada (20 billion). The goods generating the deficit are finished consumer goods, electronics, automotive and pharmaceuticals. This sounds bad. Is it? NO!! First, it ignores that the current system has resulted in a 1 billion dollar “services” surplus for the United States. Did we engage in unfair trade practices to generate those numbers? The current global system developed naturally, consistent with rational laws of commerce. Products are manufactured where it is most efficient to do so. More broadly, trade deficits are not a sign of national weakness. Strong economies attract foreign capital. Trade deficits result from higher demand and investment. There is no evidence to support the claim that America is more prosperous when trade deficits are low. The Reagan recovery in the 80s and the Clinton boom in the 90s were accompanied by rapidly growing trade deficits. There is no credible evidence that broad based tariffs benefit the country as whole. Tariffs actually distort the issuing nation’s economy. Protective tariffs incentivise domestic producers to produce goods that could have been acquired more cheaply thru international trade. Capital is diverted from producing goods and services in areas where we have a comparative advantage. Finally, tariffs will slow economic growth and prices and wages will rise. The combination of inflation and slow growth will produce stagflation- not a good thing.

We should learn from history. Many empires and great powers had mercantilist or protectionist trade policies. Great Britain had an imperial preference system for 200 years and used protective tariffs to dominate global trade and preserve local industry. The USA used heavy tariffs to protect emerging industries and politically potent regional and local interests. Smoot-Hawley was a failed tariff experiment in the lates 20s and exacerbated our great depression and contributed to a collapse in international trade. The negative economic consequences led to Fascist, Nazi and militarist regimes which led to millions of deaths in WWII. The Germans, Japanese and Soviets were big believers in tariffs. After WWII, the world, led by the United States, chose another path. Bretton Woods, the IMF, the World Bank, GATT, The WTO- all designed to promote global growth and economic integration and interdependence. An economic structure based on rules and biased against protectionism. Rejection of aggressive tariffs is a cornerstone of the neo- liberal model. Trump rejects it all and would prefer a return to the 20s and 30s. The modern system has worked. More people have been pulled out of poverty in the last 40 years than in the 3000 years that proceeded it. Poor countries got rich. The economic integration generally kept the peace. Global trade as a percentage of GDP increased from 20% in 1960 to 60% in 2020. The playing field is not totally level, but the progress has been breathtaking. Trump’s fundamental argument that the United States has been cheated by this system is total NONSENSE! We definitely made concessions to enhance trade flows but international stability, alliances and an American led multi-lateral structure is in OUR interest. Trump complains about free riders, but fails to note that we are driving the bus, own the bus and built the roads! Under the current system, the US has a capital surplus which finances the trade deficit and provides safety, liquidity and good returns. Big consumption drives imports and reflects our high standard of living. US companies design products here, make them abroad in a cost effective manner and ultimately capture significant value here. Trade agreements like USMCA create highly integrated supply chains, integrate border economies, support trade in services and create political stability. To buy into Trump’s argument, you need to believe that every American President, Secretary of the Treasury and all Nobel Prize winning economists alive since WWII are IDIOTS. I don't believe so although my antenna for idiot spotting is flashing red right now- every time I turn on the TV. Europeans and Asians I have met thru the years laugh out loud when they hear the argument that American has been screwed by their cunning and wiles. They communicate a life experience where America is dominant in all facets of society- economic, political, military and cultural. The dollar is the reserve currency. Our share of the global economy has grown the past 25 years. We have recovered from COVID faster than everyone else. We lead the world in tech and artificial intelligence. Frankly, America should sue Trump for libel and slander.

The Wall Street Journal, hardy a leftist sheet, has said repeatedly that Trump’s current and planned tariffs guarantee retaliation from other countries, disrupt mature supply chains, undermine our alliances and will dramatically increase consumer prices and in totality- “is the DUMBEST economic decision and policy” ever promulgated by an American President. Why promulgate a regime that will cause agriculture to suffer, increase international tension and create opportunities for our adversaries to take advantage of the mess these policies will create? There is no good answer except the President has no clue and his cluelessness will prevail in an intellectually vacuous administration. Hopefully, when the damage becomes clear, cooler heads will prevail. Tariffs are bad for Wall Street, Main Street and also create huge opportunities for corruption since companies and countries seeking relief, exceptions or exemptions will create a “favors” based system- a recipe for grifters in ascent.

Finally, there are international economic issues that do require engagement and negotiation. The system should become more open and more free. Tariffs do the opposite. There are opportunities to knockdown barriers that still exist to absolute free and fair trade. We must negotiate with and pressure if necessary on obstacles created by European and Asian countries to our companies and products entering their markets. I refer to bogus public health standards on food imports, idiosyncratic technical and safety requirements for products, rigid government procurement rules, joint venture requirements, currency manipulation, export controls, subsidies to national companies and protection of state owned enterprises. The agenda is rather long, but the goal is to further open up the system. The more open it is, the better for America. Frankly, the ideal international tariff regime wold be zero tariffs by everyone. God bless the United States and I commit to never write another word about tariffs again- EVER!