Here’s a letter to a former undergraduate student of mine.
Curt:
Thanks for your email. It’s good to hear from you.
You counsel that I “maybe should cut Trump some slack cuz he’s using tariffs to get better deals.”
Your argument is a common one. But I believe it to be misguided. Creating leverage in order to bargain for better deals can indeed be a productive move, but only if the cost of the leverage doesn’t exceed the value of the improvement in the deals made possible by the leverage. In the case of Trump’s tariffs, this condition doesn’t hold.
First, Trump & Co. largely ignore the costs of creating this leverage. Yet even without retaliation by other governments, these costs are real. When protective tariffs are in place, Americans suffer economic losses in the form, in some cases, of consumers paying higher prices (and having reduced product selection), in other cases of American importers and retailers suffering lower profits as they eat some of the costs of the tariffs, and in yet other cases of American producers paying higher prices for the inputs that they import.
Second, even if a miracle occurred and the above-mentioned costs disappeared, the successfully concluded deals must be economically productive. Unfortunately, in the case of Trump’s tariffs, the deals themselves are too often destructive. The principal stated purpose of Trump’s “Liberation Day” tariffs is to ensure that America, from here on in, has no “goods trade deficit” with any individual country.
This goal is economic lunacy. Not only is the administration misguided to ignore trade in services – services are nearly 80 percent of U.S. GDP – the notion of a trade balance with an individual country is meaningless.
The “better deals” that Trump is trying to get would, were he actually to get them, forcibly shift a great deal of American economic activity into the production of goods for which we have no comparative advantage and away from the production of services for which we do have a comparative advantage. Trump & Co. might admire the resulting ‘balance’ in goods trade that the U.S. would have with each and every individual country, but that would be akin to quack physicians who, thinking that a person is healthiest when he’s comatose and bleeding, look with pride on a formerly healthy man lying unconscious after they’ve bludgeoned him with a sledgehammer.
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
