Bob Graboyes masterfully exposes many of the fallacies that fuel Trump’s destructive trade ‘policy.’ Three slices:
In 2016, Donald Trump promised, “We’re gonna win so much that you may get tired of winning.” His advisors must have reached that point, as evidenced by the bizarre, incoherent “Liberation Day” tariff policy they helped craft. Trump supporters have enjoyed a heady three months of action on DEI, antisemitism, energy, NGOs, deregulation, border control, Hamas, Houthis, and more, but solidifying those changes will require a strong economy, support from friendly nations, and continued Republican control of Congress. The “April Tariffs,” as I’ll call them, put all that at grave risk, as indicated by roller-coaster markets and Republicans sounding fire alarms.
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Ancient societies believed solar eclipses caused plagues, deaths of kings, crop failures, etc. To stave off the anger of gods or God, they beat drums, flung arrows, slaughtered livestock, and sacrificed children. This madness subsided as science demonstrated that eclipses were predictable and benign.
Antique societies similarly feared trade deficits. Their religion—“mercantilism”—taught that trade deficits impoverish a nation, benefit the wealthy, and result from other countries’ malice. Mercantilists viewed tariffs the way their ancestors viewed drums, arrows, cattle-slaughter, and child-sacrifice. Their beliefs were demolished by David Hume (1752), Adam Smith (1776), David Ricardo (1817), and centuries of theory and data. Unfortunately, economists haven’t been as successful as astronomers at dispelling superstition.
I strive to respect viewpoints contrary to my own. I believe Biden’s stimulus spending was futile and destructive, that the Fed should focus on inflation and not real growth, and that socialism is ruinous. But intelligent people feel otherwise, and I respect that; theory and data are hazy, and different people have different priorities. Tariffs are different. No one who understands trade seriously believes tariffs spur economic growth. A talented economist can postulate theoretical conditions under which that might happen, just as a talented physicist can specify conditions under which spacecraft can travel faster than light. Nice intellectual exercises with limited practical value.
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Superstition #4: More foreign investment can spur lower trade deficits
President Trump speaks of the importance of attracting foreign investment and of reducing America’s trade deficit. This is logically equivalent to someone in Kansas City saying, “I want to relocate my family to some city that is closer to New York and is also closer to San Francisco.” A trade deficit in goods and services is just the mirror image of inward flows of international investment. If America is a superior place to invest in land, business, education, etc., foreigners will buy more American stocks, bonds, land, and factories than Americans buy foreign stocks, bonds, land, and factories. That capital inflow will yield an equal increase in America’s overall trade deficit. This is arithmetic, not theory.
Mr. Trump is also escalating his trade war with China, the world’s second largest economy. He started the latest row with a 34% tariff on top of tariffs already in place, and China responded Tuesday with the same. Mr. Trump then added 50% more, for a total U.S. tariff of 104% on Chinese goods. Beijing hit back again with 50% more, or 84% on all American exports to China, plus multiple regulatory barriers set to hit U.S. companies. Mr. Trump then lifted his China tariffs to 125%.
This is the closest the two economies have come to a full economic decoupling since China began to rejoin the global trading system in the 1980s. Chinese mercantilism poses unique trade challenges, but rapid decoupling isn’t possible without considerable economic harm.
U.S. importers from China will have to raise prices or find other suppliers, if they exist. Beijing has some scope to mitigate the damage to its economy via hefty subsidies to households and producers, but such measures will be costly and can’t last forever. Washington can’t rule out the danger that Beijing will attempt to use a political or military threat—perhaps a blockade of Taiwan or seizure of islands under Taiwan’s control—to force Mr. Trump to the table on trade.
If decoupling from China is Mr. Trump’s goal, one way to mitigate the damage is by expanding trade with allies. But Mr. Trump’s tariffs slam friend and foe alike. Mr. Trump’s pause could give the Administration time to negotiate trade deals with many of his targets. But he’s not pausing his 10% base tariff on most countries.
Who knows what Mr. Trump really intends, and it isn’t clear he even knows. He’s still fixated on erasing the U.S. trade deficit with nearly every individual nation, which makes no sense given the differences in economies. His 90-day pause means the tariffs could come back with a vengeance if he doesn’t like the concessions countries offer.
Eric Boehm explains that “America gained nothing from Trump’s latest tariff stunt.” Three slices:
A few hours after President Donald Trump announced an abrupt and partial reversal of his plans to slap huge tariffs on virtually all imports to the United States, a reporter asked him to explain the process that led to that decision.
Trump’s response was a telling one.
“It came together earlier this morning,” Trump explained. “We didn’t have access to lawyers—we just wrote it up from our hearts, right? It was written from the heart.”
Perhaps that’s true. Certainly, Trump does not seem to be leading with his head.
Another telling scene from Wednesday: U.S. Trade Representative Jamieson Greer, the man who is ostensibly responsible for implementing Trump’s trade policies, was testifying before the House Ways and Means Committee when Trump announced the tariff “pause.” Greer was quite literally in the middle of defending Trump’s higher tariffs when he learned that those tariffs were being postponed.
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Yes, Trump made the right decision in postponing some of his tariffs for 90 days—though it would have been better to cancel all of them permanently—but how are American businesses supposed to plan for the future in a political and economic environment when even the U.S. trade representative is unaware of what could change from one day to the next? Trump claims that he wants the tariffs to encourage more businesses to invest in the United States—thus avoiding the sting of tariffs—but it’s hard to imagine any business executive making an expensive decision like that when the White House is a factory of economic uncertainty.
In short: There is no plan. There never was one. That fact has become painfully obvious in the past week.
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This is an insane way to run the world’s biggest economy. After all, even with the higher tariffs temporarily paused, the average tariff rate on American imports has still skyrocketed to over 25 percent and a trade war with China will be economically damaging, particularly for lower-income Americans.
The goal of all these tariffs for avowed protectionists is to make Americans less able to purchase things.
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President Trump’s sudden reversal this week is unlikely to mark the beginning of the end of his adventures in tariff-land, alas. Two details about this month’s trade fiasco argue for pessimism: Mr. Trump insists on maintaining a 10% base tariff globally despite the “pause” he announced Wednesday. And the administration seems unconcerned about the costs these policies will impose on American households. Both are clues to the true magnitude of Mr. Trump’s trade ambitions.
It’s time to dig into the intellectual version of Trumpism—and yes, there is such a thing. Mr. Trump’s justifications and objectives for his trade policies keep shifting. But it’s becoming clearer that tariffs for him aren’t simply a matter of negotiating leverage, or revenue raising, or protecting a few strategic industries. The policy that’s coming into effect manifests the views of a circle of economists whose understanding of U.S. trading relationships is systematic but unconventional and whose policy prescriptions will come as an unpleasant surprise to many Americans.
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This explains the recent startling admission from Trump trade adviser Peter Navarro that tariffs could cost the U.S. economy $6 trillion over 10 years, and the more startling fact that he wasn’t apologetic about this. The Trump bet is that trimming American consumption via higher prices is a more politically palatable way to rebalance U.S. trade than paring back entitlements would be. Hundreds of millions of American voter-consumers will decide in coming months whether they agree.
[DBx: Although I agree with most of what Sternberg writes, I believe him to be mistaken to argue that a significant cause of U.S. trade deficits are American government-supplied consumption subsidies.]
GMU Econ alum Dominic Pino reports that the bond-market’s reaction to Trump’s tariffs is especially troubling – especially for U.S. government finances. Here’s Dominic’s conclusion:
With no appetite or plan for real deficit reduction, the government needs to be able to count on people still being willing to buy Treasury bonds at favorable rates. If that goes away over these tariffs, things will get much uglier much more quickly than they are already expected to be for the federal budget.
The American left liked to blame mortgage defaults on “predatory lending.”1 Miran is accusing China of that evil. It is a ridiculous charge.
Treasury Secretary Scott Bessent says the U.S. trade goal all along has been to isolate China as a main offender. There’s good reason to treat China differently given its often predatory trade practices. These include cyber attacks on U.S. companies and government; intellectual property theft; unequal treatment of U.S. firms in China; and Covid lies.
But it isn’t clear what Messrs. Trump and Bessent want from China, and what their strategy is to achieve it. Do they want a complete decoupling of the two economies? That’s what tariff levels of 145% suggest. But that also means large economic disruption in the near and medium term, as some $600 billion in two-way trade goes away or finds new sources and destinations. Strategic decoupling on key goods makes more sense.
Yet that’s not what Mr. Trump says he wants, and on Wednesday he said he still hopes for a trade deal with China. The tariffs in that case are merely his lever for getting President Xi Jinping to the table. The problem is that tariffs are a blunderbuss weapon that hurts Americans as much as it does Chinese exporters. Markets are saying the U.S. economy will suffer too.
George Will takes accurate measure of the Tariff Man. Two slices:
Trump might be the most progressive president since, early in the 20th century, progressivism defined itself with three core tenets:
First, only an energetic executive can make modern government “wieldy” — Woodrow Wilson’s word. (“The president,” said Wilson, “is at liberty, both in law and conscience, to be as big a man as he can.”) Second, the separation of powers is a premodern mistake that permits Congress to meddle in government and allows the judiciary to inhibit the executive.
Third, conservatives see modern society’s complexities as reasons to avoid attempting dramatic social engineering, lest unintended consequences overwhelm intended ones. Progressives think conservatives are worrywarts too timid about wielding government.
In June, Scott Bessent gave a speech decrying the Biden administration’s “discredited economic philosophy of central planning” — its attempted “social and political engineering” with an economy “managed” by “subsidizing supply in favored industries and restricting it in disfavored ones.” Such government intervention in the economy, Bessent warned, “breeds favoritism for market incumbents,” reduces economic dynamism and raises prices.
Today, Treasury Secretary Bessent serves a Trump administration agenda of progressive audacity. It aims to discombobulate global commerce and supply chains to transform the U.S. economy with a government-planned revival of manufacturing, which the administration mistakenly thinks is anemic.
Trump’s protectionism might yet be the largest peacetime government intervention in the economy — more comprehensive, ambitious and futile than Richard M. Nixon’s wage and price controls.
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After the just-begun 90-day pause in his tariff chaos, Trump will still be himself, the splenetic and frantic protector of American greatness from diminishment by Canada, Mexico, Denmark, Vietnam and every other country. Readers of Charles Dickens’s “Our Mutual Friend” might recognize a resemblance to John Podsnap:
“Mr. Podsnap’s world was not a very large world, morally; no, nor even geographically: seeing that although his business was sustained upon commerce with other countries, he considered other countries, with that important reservation, a mistake.”
