My intrepid Mercatus Center colleague, Veronique de Rugy, is appalled by the reckless misinterpretations of David Ricardo’s work offered by apologists for Trump’s protectionism. Here’s her conclusion:
For years now, the nationalist wing of the GOP has tried to argue for protectionist policies by resting much of their case on a fundamental misunderstanding of comparative advantage — the idea that what matters is not the absolute quantity of some particular output that a country can produce compared with other countries but, instead, the cost to that country of producing that output, in terms of the forgone production of other outputs.
Protectionists, however, push a zero-sum vision of trade, treating it as a competition to “win” rather than an opportunity for mutual gain. It doesn’t matter how many times you correct them and explain that Ricardo’s logic remains sound regardless of whether a country has higher overall wages, a trade deficit, or a different industrial base relative to its trading partners. The misunderstanding persists, infecting debates about tariffs, industrial policy, and so-called economic nationalism.
If we are going to debate economic policy, let’s at least start with a shared understanding of these theories. Until then, poor Ricardo will continue doing somersaults in his grave. And we Americans are in deep trouble.
Commerce Secretary Howard Lutnick said over the weekend that the President’s tariffs would make some foreign products more expensive but “American products will get cheaper.” Huh? Companies that use foreign components will have to raise prices or swallow narrower profit margins. Does Mr. Lutnick understand, well, commerce?
Domestic manufacturers that compete with foreign goods will raise their prices to take advantage of the protectionism to increase their margins. A study in the American Economic Review found that consumers paid $817,000 for each new manufacturing job created by Mr. Trump’s washing machine tariffs in his first term.
And Mr. Trump is only getting started as he prepares to take his trade war global. He promised Tuesday to “substantially increase” tariffs on cars on April 2, which he said would “essentially, permanently shut down the automobile manufacturing business in Canada.” So first he whacks U.S. auto makers with tariffs that raise their production costs, then he tries to shield them from foreign competition by whacking American consumers.
Greg Jensen isn’t surprised that Trump’s lunatic trade ‘policy’ is feeding the bears on Wall Street. A slice:
Asset prices require a large U.S. capital surplus, the mirror image of a trade deficit. The U.S. push to reduce trade deficits and escalate tensions with key allies puts at risk the ability of U.S. assets to draw in capital from the rest of the world.
Foreign countries hold far more U.S. assets than the U.S. holds in foreign assets. Europe and Japan have for years stashed their surpluses in the U.S. Major institutional investors are reassessing the wisdom of having such a disproportionate amount of their assets in the increasingly unreliable U.S.
Foreigners don’t need to sell those assets to create a rout; if they stopped buying them it would be devastating for U.S. asset prices.
Eric Boehm is clear-eyed about why some U.S.-based producers welcome Trump’s ridiculous tariffs.
House Republicans have quietly blocked a Democratic proposal that would have forced Congress to vote on whether there is, in fact, a national emergency that justifies President Trump’s imposing crushing tariffs on our neighbors in Canada and Mexico with nearly unprecedented reliance on the International Emergency Economic Powers Act (IEEPA). Politico has the report, here.
There is no national security emergency. As Charlie compellingly wrote last week, the authorities to tax and to impose tariffs are constitutional powers of Congress. The tariff power is being abused because of Congress’s consignment of it to the executive — effectively allowing the president unilaterally to impose taxes (that’s what tariffs are: taxes on imported goods). Such executive excesses cannot be effectively checked, even though the IEEPA as written intended there to be a congressional check, because — as I chimed in last week — the Supreme Court invalidated the legislative veto.
This letter in today’s Wall Street Journal by Tony Lima is spot-on correct:
In his otherwise excellent piece, Karl Rove is too generous in one instance (“Trump’s Deft Victory Dance,” op-ed, March 6). He writes: “If tariffs drive up prices . . .” The proper word, I’m afraid, is “when.”
Helpfully providing solid evidence of the silliness – of the sheer, destructive madness – of Trump’s trade ‘policy’ is Commerce secretary Howard Lutnick, who, as reports the Wall Street Journal, “defended the administration’s rollout of its trade policy, saying: ‘It is not chaotic, and the only one who thinks it’s chaotic is someone who’s being silly.'” [DBx: For decades, each U.S. presidential administration has outdone its predecessor at insulting Americans’ intelligence. This trend continues.]
Arnold Kling decries “the age of theatrical politics.” Here’s his conclusion:
I myself am more pro-DOGE than anti-DOGE, but overall the DOGE play is much ado about nothing. It will not stop us from getting to where the government can no longer borrow enough to fund its spending, including the ever-rising share of interest payments. At that point, we will be staring in the face the threat of Weimar-era hyperinflation, confronting our political leaders with the need to suddenly do something serious and substantive. The curtain will come down on the political theater.
Tad DeHaven insightfully ponders “a US sovereign wealth fund and tariffs.” A slice:
As the economic damage from the president’s tariff fanaticism continues, the Trump administration is reportedly considering using tariff revenue to finance a planned US Sovereign Wealth Fund (SWF). The federal government having an investment fund is a bad idea, and financing it with tax increases on American businesses and consumers would add insult to injury. Moreover, tariff revenue can’t remotely pay for everything the administration claims it can.
A US SWF makes no fiscal or economic sense (see here and here for more).
My Mercatus Center colleague Alden Abbott counsels the FTC to focus more on fraudsters.
Forthcoming in July from Phil Magness: The 1619 Project Myth.
