My GMU Econ colleague Bryan Caplan writes insightfully about trade. A slice:
Suppose the U.S. Constitution mandated unilateral free trade with no exceptions. Much could go wrong. A pessimist could fairly ask all of the following:
- What if other countries take advantage of our unilateralism to drastically raise their tariffs?
- What if other countries strategically predate on our critical industries, leaving us vulnerable in a major crisis?
- What if hostile countries buy and stockpile strategic resources from us, then get really hostile?
- What if some unforeseen trade issue, an “unknown unknown,” arises, and our leaders are unable to respond because the Constitution ties their hands?
There are many handy responses to these challenges. Like: “If the problem is that bad, we can amend the Constitution to make an exception.” But a pessimist could readily retort, “What if amending the Constitution takes too much time to avert disaster?” When push comes to shove, the defender of unilateral free trade has no response better than, “Tough luck.” Unconvincing, but as I’ve explained before, “Tough luck” is what every conceivable social system tells you in the end:
Name any political system. I can generate endless hypotheticals to aggravate its supporters. The right lesson to draw: Every political perspective eventually has to say “Tough luck” when confronted with well-crafted what-ifs. There’s nothing uniquely hard-hearted or cruel about libertarianism. Defenders of democracy, nationalism, liberalism, conservatism, the American Constitution, and social democracy all eventually sigh, “Life’s not fair,” or “Well, what do you want me to do about it?”
Case in point: Suppose that instead of Constitutionally-mandated unilateral free trade, you leave trade policy to the U.S. federal government. A pessimist could easily ask all of the following:
- What if Congress passes legislation to delegate tariff policy to the President, leaving the whole economy at the mercy of one power-hungry man?
- What if voters elect an economically-illiterate protectionist to the presidency?
- What if the President laughs in the face of stock market collapse and severe economic distress, or tries to shift the blame to the Federal Reserve?
- What if the President treats friendly trading partners like dirt, making up false accusations about their abusive trade practices when the shoe is on the other foot?
- What if the President antagonizes less-friendly trading partners for no reason, sharply raising the risk of world war?
There’s only one major difference between the first set of what-ifs and the second. Namely: Every item in first set is hypothetical, while every item in the second set has actually happened. Except for #1, in fact, they all happened in the last six months!
Sure, you can sigh, “Well, that’s democracy.” But that’s just democratic fundamentalism’s version of “Tough luck.” The reasonable approach, in contrast, is to acknowledge that neither strict free trade nor “pragmatic” protectionism offer anything like perfect safety — and ask “Which set of what-ifs is more fanciful?”
I know my answer.
One of my favorite papers is “The Macroeconomics of Populism,” a 1991 analysis by Rudiger Dornbusch and Sebastian Edwards. Economic populism in Latin America, the economists argue, follows a drearily predictable pattern. Governments blithely ignore fiscal discipline and external constraints while pursuing rapid growth and redistribution. These experiments inevitably flounder as bottlenecks emerge, currency reserves dwindle, and inflation accelerates.
The denouement proves grimly familiar: Capital flight and economic collapse that impoverishes precisely those regular folks the populists promised to help. The authors’ lesson is stark (and all too applicable to current events here in America): Economic policy cannot simply wish away macroeconomic constraints.
“The Mythical ‘Hollowing Out of the Middle Class’.”
Americans own about $35 trillion in foreign assets and foreigners own about $60 trillion in American assets. We both return about $1.5 trillion of profits annually from those assets. Why is that? Because equity earns higher returns than fixed income. Americans largely invest in corporate assets. Foreigners largely invest in fixed income.
Now, let’s say that we both reinvest some of our profits so that next year’s foreign profits are 3% higher. Americans would have to reinvest about $1 trillion of our foreign profits back into our foreign assets. Foreigners would have to reinvest about $2 trillion of their American profits back into American assets. In order to cover that difference, they have to sell us $1 trillion worth of stuff this year.
They have to keep a trade surplus with us just to keep up with us. They are the ones on the financial treadmill running just to stay in place. That’s why we have had a trade deficit for decades while the dollar remains strong. We’re good at investing and risk-taking.
As Scott wrote, the trade deficit is just the other side of that capital surplus. The difference between investment and saving. That’s just an accounting identity. But, some people want to make it a causal story. We are reckless borrowers, and we recklessly borrow a lot through the federal government, and we use that borrowed money to buy imports that we can’t afford.
It’s just not true. It’s not true that we can’t afford them, and it’s not true that the federal debt leads causally to a higher trade deficit (at least not in this way. More on that below). Look at Figure 1. The late 1990s saw the most aggressive rise in the trade deficit that we have seen in the last 50 years. What was happening in the late 1990s? We were running a federal budget surplus! And, the economy was as strong as it’s been in my lifetime.
Trump is fighting the wrong enemy.
His global tariff is said to be a remedy to bilateral trade deficits. But trade deficits are not inherently a problem – ‘deficit’ is just a misleading language choice, and it speaks only to the current account. Pernicious language has misled us.
Those tariffs, though, attack globalisation – our private decisions to act internationally – by making voluntary, mutually beneficial trade more costly.
Eric Boehm wonders if Princess Awesome can defeat Tariff Man. A slice:
It sounds like something out of a comic book: Princess Awesome vs. Tariff Man.
And, as so often seems to be the case in those stories, the would-be hero faces daunting odds against a powerful villain, with the fate of the world—or at least a chunk of the global economy—hanging in the balance.
Princess Awesome LLC, a Maryland-based shop that sells nerdy apparel for kids and adults, is one of several plaintiffs in a new lawsuit challenging the legitimacy of President Donald Trump’s unilateral tariff powers. Other plaintiffs in the suit include five sellers of tabletop games and board games, an art studio, a kitchen supply company, and a toy store. All say they have paid tariffs or expect to have to pay them in the near future, as their businesses depend on imports.
In a blog post on the company’s website earlier this month, Princess Awesome cofounder Rebecca Melsky showed how tariffs were increasing the prices of her products. “It’s bad for the world, for the country, for you, and for all companies, but particularly small ones,” she wrote. “Big businesses will have an easier time absorbing the extra costs and passing them on to the consumer.”
In the complaint filed this week, Princess Awesome says it has already paid over $1,000 in tariffs this year, with more payments expected on upcoming shipments from Bangladesh, India, and Peru.
One of Princess Awesome’s sidekicks in the lawsuit is Stonemaier Games, a board game company founded in 2012. Orders that are ready to ship from China could cost the company “millions [of dollars] in tariffs,” the lawsuit alleges.
Ken Rogoff wisely warns of the dangers posed to the American economy of the U.S. government’s fiscal incontinence. Two slices:
Some point to Japan, whose roughly 250% debt-to-GDP ratio is the highest of any advanced economy and twice that of the U.S., as proof that a country can have extremely high debt without experiencing a debt crisis. Perhaps, but Japan had a two-decade growth crisis and has managed to avoid a financial crisis only by stuffing government debt into every orifice of its financial system.
Financial repression is a tax on savers, and it reduces funds available for innovative private-sector borrowers. Having been the richest country after the U.S. just a few decades ago, Japan’s per capita gross domestic product is now roughly 60% that of the U.S., and below those of Germany, France and the U.K.
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Public-debt problems are never a matter of simple arithmetic. Almost every country default—either through outright default or high inflation—occurs long before debt calculus forces it to. If investors lose faith in the government’s plan for handling its budget, it doesn’t matter if brilliant minds in the government are “right.” The annals of major-country inflations and debt problems are littered with debt trajectories that seemed sustainable until they didn’t.
Mr. Trump has taken over in a difficult fiscal situation where U.S. dollar dominance was already fraying at the edges. Confidence should be injected, not undermined. Given the chaos caused by his tariff war and the concomitant drop in appetite for U.S. bonds, if the coming tax and spending bill doesn’t look beautiful to investors, it doesn’t matter how it looks in the eyes of the president.
… is from page 128 of Thomas Sowell’s 2023 book, Social Justice Fallacies:
But we cannot just keep surrendering more and more of our freedoms to politicians, bureaucrats and judges – who are what elected governments basically consist of – in exchange for plausible-sounding rhetoric that we do not bother to subject to the test of facts.
In a briefing paper published last year, economist Fariha Kamal explained that “half of all U.S. imports are industrial supplies and capital goods . . . used as intermediate inputs by manufacturers.” Put another way, American manufacturers use a lot of foreign components or equipment. That’s so they can produce competitively priced goods for buyers at home and, incidentally, abroad. Manufacturers which import tend to be significant exporters too, but that doesn’t appear to impress the tariff Taliban.
Slap a tariff — or let’s call it what it is, a tax — on American manufacturers’ inputs, and their costs will rise. They may try to pass the increase on to their customers if they can, but they may also try to secure supply lines in the U.S. in order to avoid the tariffs. That’s what the tariff-setters want, they say (at least when they are not boasting about how much money they will make from their tax, something that implies American companies and consumers will not find satisfactory substitutes), because that will mean that sub-suppliers in the U.S. secure more business, employ more workers and so on.
Phil Magness shares evidence that “America hates the Trump-Vance tariff agenda.”
Mark Perry shares evidence that the Trump-Vance tariff agenda is hated also by investors:
N. Gregory Mankiw, professor of economics at Harvard University, tells Reason the most important takeaway from the declaration is that “economists are really united in opposition to the Trump international economic policy, [which] seems to be founded on a variety of very fundamental misconceptions about economics and economic history.”
Michael Munger, professor of economics and political science at Duke University, says he signed because “tariffs are bad domestic policy, and bad foreign policy.” Munger explains that the argument for free trade is unilateral: “If another country manipulates its currency, or has trade barriers, that is a harm to THEIR consumers. ‘Wealth’ is the ability to obtain high quality, low cost products.”
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Henderson also acknowledges that the declaration will not have a huge effect right away but, “even if the effect is small, it will be in the right direction.”
Nonetheless, Mankiw believes it’s useful for the world to know when the economic profession has a consensus and for economists to speak with one voice when they can. Benjamin Powell, professor of economics and executive director of the Free Market Institute at Texas Tech University, agrees with Mankiw. He tells Reason that the Trump administration’s haphazardly imposed tariffs are “completely at odds with the standard mainline understanding of virtually all professional economists.”
GMU Econ alum Dominic Pino reports that “Congress can stop the tariff madness next week.” A slice:
Many members of Congress are uncomfortable and concerned about the impacts of tariffs in their districts and states. Trump’s economic-approval ratings have declined over the course of the month, and that decline is bleeding over into other issues such as immigration. The bond market continues to send troubling signals about investors’ confidence in the U.S., which is partly due to the massive uncertainty in the entire country’s trade rules.
Republicans in Congress can complain about all of this. They can continue to field calls from retirees in their districts about the value of their IRAs being depleted and from business owners in their districts about the jobs they’ll have to cut and prices they’ll have to raise because of tariffs. Republican lawmakers will then face the consequences when voters go to the polls next year, with Democrats now leading in the generic congressional ballot.
Or, they can vote for this resolution next week and end this sideshow. Republicans need to focus on cutting spending and extending the 2017 tax cuts, and all the political capital that is burned on this nonsensical tariff policy can’t be used for those vital tasks.
Wonderstate Coffee imports its coffee primarily from Peru and Ethiopia in addition to Mexico, Colombia, Honduras, Kenya, and other countries with a warmer climate. There are very few coffee farms in the U.S., with the exception of those in Hawaii, California, and Puerto Rico, so the coffee industry relies heavily on international trade for its goods.
The Trump administration kept in place the base 10 percent tariff on every country from which Wonderstate Coffee receives imports. Even roasted coffee from Mexico faces a direct hit from tariffs, as it is noncompliant with the U.S.-Mexico-Canada Agreement.
The tariffs threaten the company’s ability to grow, pay its staff, and invest in new equipment, adding to the existing challenges of labor shortages and rising business costs that small businesses often face.
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Domestic manufacturing more broadly has been negatively impacted by the downstream effect of tariffs, with thousands of factory workers having been laid off so far. While Trump claims tariffs are meant to bring jobs back to the U.S., manufacturing workers are more convinced than not that tariffs will hurt their jobs and careers.
Richard Swanson’s letter in today’s Wall Street Journal is spot-on:
Mr. [Gerard] Baker focuses on how President Trump has bungled the execution of his objectives, not his targets. But he had bungled those too. The president targets German, Korean and Japanese cars, even though consumers like them. He targets Google, but consumers like the efficiency of its search engine. He targets Uber, but consumers like its on-time rides over the old taxi monopolies. He targets the Federal Reserve over interest rates, but consumers hate inflation. He targets Chinese, Indian and Vietnamese mercantilism, but consumers like affordable goods.
In short, targeting consumer preferences is akin to shooting one’s own foot, even if firing the gun is executed to perfection.
The Trump Administration wants to promote U.S. tech innovation and competition. Then why is it fighting rearview antitrust battles that would do the opposite?
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The government wants to force Google to divest its Chrome browser to degrade its ability to target ads. This would hurt advertisers while helping other companies that serve up ads such as Amazon and Meta. DOJ also wants to require Google to share search data with competitors like Microsoft and OpenAI.
DOJ says the judge should ban Google from paying for default placement on browsers and devices. Even Mozilla, a browser competitor to Google’s Chrome, said the government’s “misguided plans would be a direct hit to small and independent browsers—the very forces that keep the web open, innovative and free” and primarily benefit Big Tech companies like Microsoft.
Meanwhile, antitrust regulators are investigating Microsoft and OpenAI. Would the real monopolist please stand up?
For consumers today, there is a wide array of social media platforms to connect and communicate with friends, family, and the general public. This includes platforms both owned by Meta and those that are not. The FTC’s market definition does not recognize this reality and instead seeks to define “personal social networks” so narrowly that it excludes popular online products like TikTok. This does not reflect the reality of the consumer experience, especially when considering trends among Gen Z users.
But why should consumers care if Meta has to split off from Instagram and WhatsApp? Well, it might make their experiences on those platforms worse. A court-ordered breakup would also likely create requirements that prevent things like cross-posting or messaging interoperability. This could also eliminate certain products consumers like. For example, what if Meta were faced with the choice of keeping only Messenger or WhatsApp?
Trump did get this call on tax policy right:
President Trump disappointed Democrats this week when he wisely rejected the idea floated by some on the right to raise tax rates on high earners. He’s saving Republicans from a blunder that would divide his coalition and hurt the economy.
Our Kimberley Strassel reported last week that leaks in support of raising taxes are coming from political allies of Vice President JD Vance. Steve Bannon, the Goldman Sachs-Hollywood populist, has pitched letting the top rate revert to 39.6%—the level before the 2017 tax reform—from 37%. That rate now begins at $626,350 in income for individuals. He and others also want new tax brackets for those earnings more than $1 million, and perhaps $3 million or $5 million.
Liberals [DBx: ‘progressives’] cheered the idea, but Mr. Trump knocked it down Wednesday. “You’ll lose a lot of money if you do that,” the President told reporters. “And other countries that have done it have lost a lot of people. They lose their wealthy people. That would be bad, because the wealthy people pay the tax.” He’s right on all counts.
Juliette Sellgren talks with my former GMU Econ colleague Bart Wilson about humanomics.
… is from page 58 of Anne Krueger’s 2020 book, International Trade: What Everyone Needs to Know:
Protection against some sectors of the economy inevitably entails discrimination against other sectors.
DBx: Indeed. It cannot be otherwise.
Industries X and Y cannot expand without industries A and B being made smaller and less efficient than they would otherwise be. Protectionists point only to expanded industries X and Y and, boasting of being more clever than free traders, insist that the tariff-induced expansion of industries X and Y is sufficient to prove that protection works and that free trade fails. Protectionists nearly always ignore industries A and B (as they also ignores the fellow-citizen consumers whose costs of living are artificially raised by protectionist measures).
But on those rare occasions when protectionists do acknowledge the shrinkage of industries A and B, they – protectionists – simply assert that the value of what is gained by the expansion of industries X and Y is greater than is the value of what his lost by the shrinkage of industries A and B. Yet never do protectionists explain how they come to this conclusion. They never reveal to us what source of knowledge they tap to determine that what is lost from the shrinkage of A and B is more than made up for by what is gained from the expansion of X and Y. We are simply to trust the protectionists’ instincts, hunches, superstitions, and divinations.
Maddeningly, these same protectionists are quick to allege, with contempt, that the case for free trade is based on “faith,” despite the fact that we free traders do point to a source of knowledge and information – the competitive price system – that allows us to say, with great confidence, that value of that which is produced by industries that expand under a regime of free trade is greater than is the value of that which would have been, but is not, produced by industries that shrink under a regime of free trade.
The dogmatists in this debate aren’t the free traders; the dogmatists are the protectionists.
Copies of Phil Gramm’s and my new book, The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism, were just delivered. Its official release date is May 13th. I’m truly honored to have worked with Sen. Gramm on this project. In writing this book, I learned quite a lot.
Here’s a letter to a long-time “proud Trump man” correspondent.
Mr. McKinney:
You ask my “opinion of Spencer Morrison’s critique of comparative advantage” (“Debunking Comparative Advantage,” April 21). Here’s my opinion: His critique is tired and tendentious.
Protectionists have for years seized upon David Ricardo’s assumption that capital is internationally immobile as reason to assert that, because in today’s real world capital is very mobile, comparative advantage no longer applies. Journal articles written decades ago exposed the fallacies that infect this alleged ‘proof’ that comparative advantage doesn’t apply in today’s world.
Were Ricardo alive today, he would recognize – in his example of England and Portugal trading cloth and wine – that if Portugal’s legal and economic institutions treated owners of capital with respect, enough English (or global) capital might flow into Portugal to give that country a comparative advantage at producing both wine and cloth, thus eliminating England’s comparative advantage as a cloth producer. But the great economist would also recognize that, because the amount of capital in the world isn’t fixed, as long as England remained hospitable toward investors, new capital would be created and invested in England to launch other industries at which she would have not only a comparative advantage, but a comparative advantage better for her than the one she lost in cloth-making. Ricardo’s (and Adam Smith’s, and Frédéric Bastiat’s, and Alfred Marshall’s, and Leland Yeager’s, and Vernon Smith’s, and Jagdish Bhagwati’s, and Arvind Panagariya’s, and Douglas Irwin’s, and every other competent economist’s) case for free trade based upon comparative advantage would continue to hold without qualification.
But just to show how utterly confused Morrison is, consider this passage:
Remember, in Ricardo’s example, Portugal had an absolute advantage in making cloth and wine. Therefore, the most efficient allocation of capital would be to make everything in Portugal and nothing in England—assuming that England could pay. If so, English industry should be offshored to Portugal, and England should run a trade deficit.
The unintentional hilarity of this passage goes beyond Morrison’s non sequitur of supposing that if Portugal gains a comparative advantage also in making cloth then England will make “nothing.” The real howler is Morrison’s supposition that the movement he describes of capital being shifted from England to Portugal would result in a trade deficit for England. Morrison apparently doesn’t grasp the elementary point that if a country experiences a net loss of capital it runs a capital-account deficit – and such a deficit is necessarily matched in that country by a current-account – or “trade” – surplus. It’s difficult to discern what goes on in a mind as confused as his, but Morrison seems to think that the English ship their factories physically to Portugal and that such a transaction would be recorded in the accounts as a sale by the English of assets to the Portuguese – and thus create an English trade deficit.
But if such sales and physical shipments were to occur, they would be recorded as English exports, thus causing England to run, not a trade deficit, but a trade surplus. (And, by the way, Morrison also fails to ask what the English might do with the funds they earn from these sales. He presumes, wrongly, that the English necessarily use these funds exclusively to pay for current consumption.)
One way textile-factory investments in Portugal would happen in reality is that the English would use some of the reals they earned by exporting to build textile factories in Portugal. This activity would be accounted as a net inflow of capital to Portugal and would give that country a capital-account surplus and a trade deficit, while the net outflow of capital from England would give that country a capital-account deficit and a trade surplus rather than, as Morrison asserts, a trade deficit.
There are several other possible ways that a Portuguese textile industry might arise alongside the Portuguese wine industry, including the Portuguese themselves increasing their domestic savings to get the funds to build the textile factories, but without having any impact on the either Portugal’s or England’s balance of trade.
Whatever the particular case, as long as individuals have different talents and tastes, mutually advantageous trade will be possible, both domestically and internationally. And this trade, if it is free, will be according to comparative advantage. As Gottfried Haberler observed in 1936, “somebody or other is always trying to show that the Law of Comparative Cost is valid only under the simple assumptions upon which it was originally formulated. But we shall demonstrate that this is not so and that the simplifications merely help the exposition without affecting the essentials of the matter.”
Contrary to Morrison’s claim, the principle of comparative advantage, although discovered long ago by David Ricardo, is no less operative in today’s world than is the law of gravity, although discovered long ago by Isaac Newton.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
History may not perfectly repeat itself, but it often rhymes. Two protectionist episodes — the infamous Smoot-Hawley Tariff Act of 1930 and the Trump-era tariffs of today — offer a striking example. Both emerged from economic nostalgia and fear of change. Both were politically attractive. And both were costly, backward-looking mistakes that undermined the economies they were meant to protect.
Smoot-Hawley was conceived in an America uneasy about economic transformation. In the 1920s, while the economy was otherwise booming, farmers were in crisis. After a postwar boom, crop prices had collapsed and rural debt soared. About one-quarter of the labor force still worked in agriculture, down from one-half a few decades before. Many Americans longed for an earlier era when agriculture was dominant and prosperous.
Foreign competition was the scapegoat. Politicians seized on this frustration. Promising protection from cheap imports was an easy way to win votes. The result was a tariff that raised duties on more than 20,000 goods by an average of about 20%.
Smoot-Hawley’s intent was to reduce imports and raise domestic prices, especially for farmers. But the plan backfired quickly.
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The two blunders have one more thing in common: cronyism. According to economic historian Douglas A. Irwin, Smoot-Hawley was not primarily about ideology. It was about interest-group politics: an ad hoc scramble driven by constituent demands, sectoral lobbying and legislative bargaining.
In the same way, Trump’s tariffs have revived the lobbying for tariff exemptions we saw in his first term. Apple got an exemption for the iPhone and now, understandably, everyone else wants one. As the Cato Institute’s Scott Lincicome on X, “The cronyism buffet line is now open.” National Review’s Dominic Pino calculated that tariff lobbying spending is up by 277%.
The lesson is clear: Economic nostalgia is a poor guide to sound policy. Smoot-Hawley and Trump’s tariffs represent attempts to re-create a romanticized past — one of small farms or bustling factories — rather than to embrace the reality of a changing world. But economies are dynamic. Trying to freeze them in place with trade barriers doesn’t stop change; it just makes the transition harder, costlier and more painful.
David Henderson eloquently clears the air on trade deficits and tariffs. Two slices:
First, is a trade deficit with a particular country bad? No. One of the easiest ways to see that is to look at your own spending on other producers’ goods. Consider mine. Our household spends over $5,000 a year on groceries from Safeway. But those scoundrels at Safeway spend nothing on my output. If you’re employed, your employer has a trade surplus with you. He or she spends much more on your services than you spend on his products. But that’s not a problem.
The same reasoning applies to a specific country. Our trade deficit with Canada in 2024 was about $36 billion, not the $100 billion that President Trump seems to have pulled out of thin air. And contrary to Trump’s belief, the fact that we spend more on imports from Canada than Canadians spend on our exports does not mean that we’re subsidizing Canadians, any more than I’m subsidizing Safeway. There’s no reason that we should have a zero trade deficit with a particular country. In 2024, the United States had trade surpluses with the Netherlands ($56 billion), Hong Kong ($22 billion), Australia ($18 billion), and the United Kingdom ($12 billion). Was that a problem for those countries? The heads of those countries and, apparently, many of their citizens, don’t seem to think so. It’s very much like you having a trade surplus with your employer.
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Imagine, contrary to the data, that every country’s government in the world imposes higher tariffs on our exports than the US government imposes on our imports. What would be the best strategy for our government?
The answer may shock you, but I assure you that my answer is based on decades, nay centuries, of economic reasoning and evidence. The answer is: cut our tariffs to zero.
Why? It’s true that when a foreign government imposes tariffs on our exports, it hurts our producers. It also hurts the foreign government’s consumers. If our government responds by imposing tariffs on imports from that country, it helps our producers who compete with those products but hurts our buyers of those items. Those buyers include not just ultimate consumers, but also producers who use the tariffed items as inputs. It’s relatively easy to show, although you need a graph of supply and demand, that the losses to our consumers exceed the gains to our producers.
The bottom line, therefore, is that whatever the other country’s government does, our government’s best option, if it puts the same weight on losses to consumers as it puts on gains to producers, is to have zero tariffs.
Two major figures in the last century used metaphors to make the point. One was President Reagan. In the early 1980s, he argued that if you’re in a lifeboat and someone shoots a hole in the boat, it’s not a good idea to shoot another hole in the boat. Yes, you’ll hurt the first shooter; but you’ll also hurt yourself.
The other was famous British economist Joan Robinson. If someone in another country to which you ship goods puts rocks in the harbor to make shipping more difficult, she asked, does it make sense for you to put rocks in your harbor?
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Fear of trade deficits comes from atavism and tunnel vision.
The atavism is the lingering faith in mercantilism, whose medieval proponents loved the export of tangible goods and despised imports. Their economic ideal was to sell exports and accumulate idle hoards of gold. (Think of Scrooge McDuck diving into his swimming pool full of coins.) David Hume, Adam Smith, David Ricardo, and others revealed the fatal flaws in this philosophy by showing how trade is mutually beneficial for both importing and exporting countries. Imported goods bring both satisfaction to consumers and inputs with which investors can generate future wealth. Because of this latter factor, there’s no limit to how long a nation can run a trade deficit.
The tunnel vision is the tendency to focus on narrow segments of the economy and ignore the rest. In the deficit/surplus example above, mercantilist nostalgia might—pun intended—pine for the loss of some furniture-making factories in America and long for them to come back. But mercantilism (currently traveling under the moniker of “anti-globalism”) ignores the other parts of the story. In the example above, mercantilists remember bygone American furniture factories but fail to notice the willingness of foreigners to invest in America, the rise of new American industries like biotech, the high-paying jobs these new industries bring, the wealth those new industries create as their newly wealthy employees buy furniture and cars and healthcare, and the capacity of Americans to consume and invest in magnitudes unimaginable to their parents or grandparents.
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“Globalism” (a.k.a., free trade) is to those on the political right what “trickle-down economics” (a.k.a., free markets) is to those on the political left. Both are vacuous pejoratives that translate loosely into English as, “Somewhere on Earth, buyers and sellers are engaging in voluntary trade and minding their own business AND WE HAVE TO STOP THEM.”
GMU Econ alum Dominic Pino elaborates on “Trump’s impossible trade policy.” Two slices (ellipses original to Dominic):
When other countries subsidize production or “dump” goods into the U.S. market, they are taking money from their people to make things cheaper for our people. From a purely nationalistic point of view, that seems like a good deal. Even if you think this is a problem, broad tariffs won’t solve it. There are a bunch of international trade rules about subsidies and dumping and U.S. laws that allow antidumping duties on specific goods after an investigation. The U.S. could bring a bunch of cases before the WTO and use the antidumping law it already has if Trump really wants to stop this “cheating” of . . . receiving more affordable goods from abroad.
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There is no sophisticated plan to negotiate great trade deals or reduce other countries’ trade barriers behind the Trump administration’s chaotic implementation of its signature economic policy. The task it has set for itself is impossible, which is likely why it hasn’t really attempted to do it, instead settling for a simple formula based solely on the volume of imports and the size of the trade deficit. These facts will not be any different in early July when the tariff pause is set to expire.
The Editorial Board of the Wall Street Journal wonders if this is “Trump’s Mitterand moment.” A slice:
President Trump continues to walk back his original tariff assault, and markets are pleased. They rose again Wednesday after Mr. Trump said he won’t fire the Federal Reserve Chairman and is likely to retreat from his highest China tariffs. Is this Mr. Trump’s François Mitterrand moment?
Readers of a certain age will recall how the French Socialist President swept into power in 1981 promising a far left agenda of government control over the private economy. The market reaction was brutal. Within a year he had put socialism on pause and by 1983 he had abandoned most of it. He went on to serve two terms.
That historic U-turn comes to mind as we watch Mr. Trump execute a reversal by stages in his tariff agenda. First he carved out space for Mexico and Canada from his reciprocal tariffs. Then he put his reciprocal tariffs on everyone except China on a 90-day pause. Then the Customs bureau gave exceptions to Apple, Nvidia and big electronics companies. Now comes word that Mr. Trump may substantially cut his 145% tariff rate on China.
That’s a long way in three weeks from the declarations by White House aide Peter Navarro and Commerce Secretary Howard Lutnick that there would be no tariff-rate changes. It’s hard to see this as anything other than a retreat amid the harsh reaction of financial markets, worries about recession and price increases, and a sharply negative reaction from the rest of the world—friend and foe.
… is from page 150 of Art Carden’s and GMU Econ alum Caleb Fuller’s superb new book, Mere Economics (footnote deleted):
Price gouging laws are “knowledge embargoes” that stop resources from flowing to their highest-value uses and prevent far-flung people from helping. In fact, price gouging laws force prices to “bear false witness” with mischief never lagging far behind. Specifically, the prices are being forced to lie about what, exactly, is available.
GMU Econ alum Dominic Pino reports that “tariff lobbyist spending is up 277 percent over last year.” Two slices:
Some manufacturing firms have been cutting jobs in response to tariffs’ raising their input costs, and the overall economy has been hammered by uncertainty, with a plummeting stock market coinciding with a declining dollar and higher Treasury bond yields. But you can always count on protectionism to be a full-employment program for lobbyists in Washington, D.C., and the Trump administration’s tariff plan is no exception.
An analysis, by Advancing American Freedom, of lobbying disclosures filed with the clerk of the House of Representatives found that lobbying expenditures on trade issues were $4.9 million in the first quarter of 2025. That’s 277 percent higher than the $1.3 million spent in the first quarter of 2024.
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Tariffs are great for Washington insiders. They’re not so great for the American people, who will pay higher prices and, in some cases, lose their jobs because politicians and bureaucrats decided they knew best how to arrange trade.
Fortunately, there’s a more effective, expansive, and less disruptive way of securing lowered tariffs and trade barriers. Rather than hurling tariff thunderbolts to get the attention of US trade partners, President Trump should invite them to negotiate free trade agreements (FTAs).
FTAs aren’t new. Indeed, since signing its first such agreement (with Israel) in 1985, the United States has concluded FTAs covering 20 countries. Under such agreements, signatories agree to reduce their tariffs and other trade barriers (see chart) covering substantially all trade with certain limited exceptions. The reductions are reciprocal, and all sides agree on a common set of rules.
Scott Lincicome’s voice continues to be among the clearest and wisest on trade and trade policy. A slice:
Furthermore, many alleged nontariff barriers Trump is targeting aren’t actually trade barriers at all or, in the case of domestic tax and regulatory policy, are considered sovereign domestic (not trade) policies or cultural priorities not up for negotiation—at least not quickly. Other “cheating” is, like “dumping” and intellectual property theft, overblown (at best) and already disciplined by U.S. law. And, of course, the U.S. government does a lot of this stuff too (see, e.g., our trillions in subsidies)—often more so than other governments. Throw in the simple fact that basic politics makes it hard for democratically elected foreign leaders to be seen as caving to a guy like Donald Trump, and it’s not gonna be an easy slog.
Next, there’s the small matter of what the United States actually wants in these deals. Foreign diplomats tell [Wendy] Cutler, for example, that they lack clarity about the White House’s priorities—a necessity for focusing negotiators’ efforts during highly accelerated talks. Others report similar concerns from both the European and Japanese teams as to the U.S. demands and objectives. Is it tariff cuts, nixing nontariff barriers, reducing trade deficits, guaranteeing purchases of U.S. goods, countering China, or something else? And is the U.S. side willing to give on anything, including its own trade barriers, reducing “reciprocal” tariffs below the 10 percent universal rate, or new exclusions like the one Trump quietly announced for consumer electronics?
Sierra Dawn McClain describes Trump’s tariffs as “a kick in the can.” Two slices:
President Trump’s trade policies harm American businesses and consumers. Take one industry—can making—as an example. The president’s game of red light, green light with tariffs creates uncertainty for U.S. can-making businesses and will result in higher prices for canned food and drinks.
Although Mr. Trump on April 9 issued a 90-day pause on reciprocal tariffs and slapped a 10% tariff rate on most goods from most countries, the 25% tariff on steel and aluminum that went into effect on March 12 remains in place. That means higher input costs for U.S. can makers.
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Tariffs will generally increase prices by 2 to 5 cents a can, although some specialty cans will increase in price by more than 12 cents. The difference between a can of soup for $3.95 and one for $4 may not sound like much, but small price hikes add up when you’re on a budget.
Not all price increases will be immediate. Corn and peas will be packed after harvest and in some cases may be warehoused for a year, meaning higher prices would show up in 2026. Just-in-time products such as soups are more likely to face immediate price increases.
In addition to the downstream effects for consumers, the trade war creates an environment that makes it harder for American businesses to plan and invest. Mr. Huether of Independent Can Co. had expected to invest $6 million this spring in equipment to build a new canning line, but he halted the project after Mr. Trump on “Liberation Day” announced a 20% tariff on the European Union. The EU produces specialty supplies—welders, seamers and other can-making equipment—that Mr. Huether needs for the project and can’t get from the U.S. The 20% tariff raised the project cost to $7.2 million. Even though there’s now a 90-day pause and a 10% tariff rate on most goods from the EU, Mr. Huether said he’s “holding off . . . until we have much more clarification.”
Whatever he thought was going to happen with his tariff announcement, it didn’t, and President Trump is in planless improvisation mode now. But the episode is also of a piece with every other move in his early administration, aimed at exciting conflict, sticking a thumb in the eye of an establishment whose policies he has long criticized (without really understanding them) and, more importantly, that he believes wants his destruction or impoverishment.
The world now faces a known unknown. It may be months or years before a comfortably intelligible trade-policy equilibrium is re-established.
In vain, we search for precedents. By August 1941, Roosevelt inaugurated a trade war with Japan, embargoing its supply of important metals and oil. It took until MacArthur in 1947 to negotiate new terms for our interdependence. A lot of things happened in between.
One day Mr. Trump talks up free-trade deals, the next tariffs as the solution for America’s every problem. But these are really lower-pay-grade issues for the president. His focus is elsewhere—on the death match with his enemies that began with his 2016 election.
Steve Davis talks with Chad Bown and Doug Irwin about Trump 2.0 trade ‘policy.’
The federal lawsuit, filed Wednesday in the U.S. Court of International Trade, challenges President Donald Trump’s use of the International Emergency Economic Powers Act to impose sweeping tariffs. The White House invoked the law earlier this month to address the nation’s large trade deficit created by unfair foreign trading practices, which the presidency considers a national emergency.
The twelve states argue that the president can only invoke the International Emergency Economic Powers Act when a national emergency presents an “unusual and extraordinary threat” from abroad.
One of Mr. Trump’s greatest strengths is the other party’s weakness. The Democrats have collapsed, as has their socialist-led opposition to all things Trump. The Biden presidency looks even worse in retrospect. But a collapsed Democratic Party won’t matter much if the midterm elections are a referendum on Mr. Trump’s power—if the primary goal of the electorate in 2026 is to express anger at high prices.
George Will rightly is highly critical of the so-called U.S. Department of “Education.” Two slices:
Today, there are widespread laments about the diminishment, perhaps to extinction, of the Education Department, although the lamenters cannot connect it with educational improvements since its founding nearly 46 years ago; there having been few, if any. Although the department has been often slathered with high-minded devotion, it was born from a banal political transaction between a notably pious politician and one of the principal causes of the subsequent decline in K-12 education quality.
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Today’s K-12 calamity is chronic absenteeism, defined as students missing at least 10 percent of the school year. This is partly an echo of teachers unions’ conniving at the unnecessary and wickedly prolonged school closures during the pandemic. The 2023 Trends in Mathematics and Science Study showed that students’ scores in those subjects have continued to decline since the pandemic.
Education problems abound. But if the Education Department is the answer, what is the question?
My intrepid Mercatus Center colleague, Veronique de Rugy, counsels attention to tax policy. A slice:
Over at the Cato Institute, Adam Michel and I make the case that tax reform is just as critical to abundance as regulatory reform. A truly abundant economy requires not only freedom to build but also incentives to invest productively. And that means getting taxes right.
