Trump and His Tariffs

August 2018 – There is little question the overwhelming consensus of economists is that tariffs impede economic growth. So, of course, most economists would say President Trump’s imposition of tariffs is a bad idea.

Of course, economists say these things “ceteris paribus” — or “all other things being equal” — and, alas, they rarely are. Here are three other ways of thinking about the issue:

1) Tariffs can be a tool to get other countries to accede to freer trade.

The President has alleged unfair treatment of the United States by enemies and allies alike. Countries such as China distort trade by requiring foreign-owned entities to transfer technology to Chinese joint-venture partners, by failing to protect intellectual property, by placing restrictions on U.S. companies, etc. The publisher of this magazine, as a U.S.-owned entity, cannot publish a magazine in China. A U.S. law firm, though employing Chinese lawyers who are members of the Chinese equivalent of the Bar, can’t appear in a Chinese court.

If imposing tariffs causes China to change its behavior in these and other areas, the tariffs might be withdrawn again and, overall, there might be more free trade. The economists, smart as they are, simply can’t tell us what efforts might, long term, produce the most open trading environment.

2) Tariffs can be a tool to equalize other imbalances in global trade.

In Europe, one of the things the President has brought to the table is an unwillingness to compartmentalize issues. When Donald Trump sits down with German Chancellor Angela Merkel, he is thinking about Germany’s unwillingness to raise defense spending. Though NATO countries are formally committed to raise spending to 2 percent of GDP, Germany only spends 1.2 percent of its GDP on defense. The United States, by contrast, spends 3.5 percent of GDP on defense. From President Trump’s perspective, this represents freeloading on the U.S. defense guarantee and thus imposes a cost on U.S. producers similar to a tariff.

In other words, if through the use of tariffs, President Trump persuades the Germans and other Europeans to pay their share of defense expenditures, trade might flow to where things can actually be produced most efficiently. It would end a trade distortion, which any economist would favor, but, of course, economists don’t have special knowledge as to whether, or to what degree, the President’s tariffs will motivate Germany or Europe as a whole to change their ways in regard to defense expenses.

3) The value of economic growth turns on how the expanded resources are spent.

Of course, everyone would like to see the economy grow, but if trade with China makes both China and the United States more prosperous, and China chooses to use this growing prosperity to invest in better weapons, say nuclear missiles better able to hit the United States or islands in the South China Sea suitable for blocking the sea lanes — well, what do we gain if we have to live under these threats or spend money or lives to counter them? Again, economists can’t make this kind of value judgment.

Of course, none of this means President Trump’s tariffs are wise or well executed.

It seems a reasonable argument to say that if, for example, one wants to put pressure on China to change its policies, one might not want to also simultaneously fight with Canada, Europe and Australia, etc. Indeed, even multilateral trade agreements — such as the Trans-Pacific Partnership, which both Hillary Clinton and Donald Trump pledged to reject as candidates, and which President Trump did reject — might be useful tools to build alliances to press China to change its behavior.

Many economists have focused on the risks of trade wars and on U.S. farmers, who are big Trump supporters. They note that many countries, and especially China, have focused on placing retaliatory tariffs on American farmers. Yet these plans are “too clever by half.” Men are not meat; the more you pound them the tougher they get, and this is certainly true of American farmers who will not appreciate being targeted with the thought they will lobby the president to change his policies.

Besides, the impact of these types of retaliatory tariffs is typically very small when dealing with commodities.

The issue with commodities is that the only thing that really matters is the landed cost.

So, if China was buying soybeans from America and Japan and Korea were buying from Brazil, and if China puts a sufficient tariff on American soybeans, trade will shift and the Japanese and Koreans will buy U.S. soybeans and China will buy the Brazilian product. If the tariff is 5 percent or 5,000 percent, the impact is the same.

President Trump is sui generis. Neither America nor the world has seen anything like him before. So old guidelines and impressive expertise just don’t guide us in the way they once did.

Will he succeed? Will he fail? This is not something an economist can really predict.

Paul Krugman, winner of the Nobel Prize in economics, for many years professor at MIT and Princeton, author of 27 books and a columnist for the New York Times, wrote on election day:

“It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover?… A first-pass answer is never.”

Yet, a year after the election the S&P 500 was up 21.1 percent. For better or worse, President Trump doesn’t seem to worry much about conventional expertise.