Colin Grabow reports that “Trump’s Vietnam agreement bodes poorly for future trade deals.” A slice:
Earlier this year, President Donald Trump stated that US tariff policy would be based on reciprocity. “Whatever countries charge the United States of America,” he wrote in a social media post, “we will charge them—No more, no less!”
Well, so much for that.
Announcing a new trade agreement with Vietnam last week, Trump indicated that tariffs between the two countries would be anything but reciprocal. Although details of the deal are scant, Trump crowed that US exports to Vietnam will enjoy tariff-free access while exports from Vietnam will face 20 percent tariffs. Exports transshipped through Vietnam to the US, meanwhile, will face 40 percent tariffs.
With the average US tariff on most favored nation countries (including Vietnam) when Trump took office at 3.3 percent on a simple average basis, the new rates constitute a substantial increase.
Nonetheless, Trump characterized this lopsided arrangement as a “great deal” for the United States. What it really signifies, however, is the president’s deeply confused understanding of trade policy.
Economists have long understood that to fully reap the gains from trade, the United States should pursue the mutual elimination of tariffs with its trade partners. This means expanded access for US exports to foreign markets (a win) and expanded access by American consumers and businesses to products from other countries (another win).
But President Trump doesn’t appear to see things that way. Instead, his Vietnam deal seeks to clear the path for US exports while raising tariffs on imports. The former are seemingly viewed as contributing to economic vitality, while the latter are a privilege extended to foreigners in exchange for payment in the form of a tariff (in reality, paid by American importers, not the foreign exporter).
Such mercantilism has been discredited since the days of Adam Smith. It’s now widely recognized that imports bolster a country’s economic efficiency and material standard of living through lowered costs and expanded choice and variety.
The Editorial Board of the Wall Street Journal justly criticizes Trump’s latest hike in tariffs taxes on Americans’ purchases of imports and import-competing products. Two slices:
President Trump sure knows how to spoil an economic mood. Three days after he signed the GOP’s big budget bill, saving the economy from a scheduled $4.5 trillion tax increase, Mr. Trump was back playing the role of Tariff Man. On Monday he announced 25% tariffs on Japan and South Korea, while adding to renewed will-he-or-won’t-he uncertainty for the U.S. economy and trading partners.
In letters to Japan’s Prime Minister and South Korea’s President, Mr. Trump huffs and puffs again about bilateral trade deficits, which he mistakenly thinks are a sign of foreign exploitation. “We must move away from these longterm, and very persistent, Trade Deficits,” he says. Hence the new 25% tariffs, starting Aug. 1. This nearly matches Mr. Trump’s paused “Liberation Day” duties on the two countries, except Japan was supposed to get only 24%. Later in the day he sent tariff letters to a dozen other, less economically significant, countries.
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The economic damage will be broad as well, given the volume of trade. The U.S. last year imported $148.4 billion in goods from Japan and $131.6 billion from South Korea. Together that was about 8.6% of total U.S. imports.
Looking through the trade data, is it easy to see how Mr. Trump’s tariffs will hurt American businesses and consumers. Imports from Japan last year included $9.9 billion in assorted industrial machines, $7.5 billion in pharmaceutical preparations, and $3.1 billion in medicinal equipment. South Korea sent over $8.5 billion in semiconductors, $7.4 billion in computer accessories, and $3.2 billion in household appliances.
If Mr. Trump slaps on 25% tariffs, some of this trade might grind to a halt. Having less competition in the market for washing machines, say, isn’t to the American homeowner’s benefit. Businesses in the U.S. that rely on highly specialized industrial machines might not have easy alternatives to Japanese and South Korean imports. Meantime, the trade ructions and uncertainty make it harder to plan and invest.
One illusion that’s bursting is that Mr. Trump is imposing tariffs in the cause of free trade. He’s imposing tariffs because he likes them as an economic policy. The U.S. average effective tariff rate when Mr. Trump took office was 2.4%, according to the Yale Budget Lab. As of last month Mr. Trump had cranked that up to 15.6%. (See the nearby chart.) How much higher does he want to go? Mr. Trump’s deadline for a deal with the European Union is supposed to be Wednesday, and he has threatened 50% tariffs.
Eric Boehm reports on Trump’s art of destroying his own trade deals. A slice:
If you still believe there is some overarching goal—new trade deals, negotiating for lower trade barriers, or whatever—to the Trump administration’s trade policy agenda, Monday’s announcement of new tariffs targeting imports from South Korea ought to put an end to all that.
South Korea was not the only country whose goods were hit with higher tariffs on Monday, nor does it seem likely to be the last. President Donald Trump also announced higher tariffs targeting imports from Japan, Myanmar, Laos, South Africa, Kazakhstan, and Malaysia. The White House indicated that Trump will be sending letters to other countries in the coming days announcing various tariff rates. This is, in effect, a slow-motion repeat of the “Liberation Day” tariff announcements that were put on hold for 90 days in early April after the markets reacted negatively to those announcements.
Still, tariffing imports from South Korea, America’s sixth-largest trading partner, is particularly galling. If Trump’s goal here is to strike deals that will lower foreign barriers to American exports and deliver better trading conditions for American manufacturers (who rely on imports), then hiking tariffs on South Korea makes startlingly little sense.
For starters, that’s because the new tariffs seem to violate an existing trade deal between the U.S. and South Korea. That deal, the U.S.-Korea Free Trade Agreement, was signed in 2007 by President George W. Bush and implemented in 2012. Under the terms of the deal, about 95 percent of the goods traded between the two countries are imported tariff-free. Among other things, that deal put an end to high South Korean tariffs on American cars and light trucks, which has boosted American exports and U.S. auto manufacturing jobs.
Yaron Brook talks with Scott Lincicome about trade and protectionism.
Wall Street Journal columnist Sadanand Dhume decries the destructive ideology of Zohran Mamdani. A slice:
Start with rent control, which Swedish economist Assar Lindbeck called “the most efficient technique presently known to destroy a city—except for bombing.” India’s first rent-control laws were introduced during colonial rule. After independence, they became more draconian. In Bombay and Calcutta, landlords were forbidden to raise rents. Tenants could squat on property and pass it on to their heirs. Indian cities, once among the most advanced in the East, became known worldwide for squalor.
Mr. Mamdani opposes the rich. “I don’t think we should have billionaires,” he told Kristen Welker on NBC’s “Meet the Press.” Margaret Thatcher famously remarked that socialist governments “always run out of other people’s money.” India learned this the hard way. Under Prime Minister Indira Gandhi, who held office for most of the mid-1960s through the mid-1980s, the highest marginal rate of income tax reached 97.5%. High taxes coupled with reckless government spending spawned a vast underground economy and pushed talented Indians to emigrate. Facing an economic crisis in 1991, India had to turn to the International Monetary Fund for a bailout.
The parallels with socialist-era India don’t end there. Government-run grocery stores? Been there, done that. Government-built housing units? Their boxy contours mar urban India.
Mike Munger and Russ Roberts talk about capitalism.
And Kevin Gentry talks with Jim Piereson about how philanthropy helped build support for capitalism.
Kevin Corcoran tells why he’s “sure DOGE will have a long history as the textbook definition of overpromising and underdelivering.”