#WTH The Tariff Tsunami
You keep using that word. I do not think it means what you think it means.
Better economists than I (not an economist at all) will explain the corrosive and destabilizing effects of Donald Trump’s strange new tariff regime. No one should be surprised by the aggressive nature of the Trump tariff wars — 34 percent on China! — he advertised that clearly from the get go. The question is, what is in Donald Trump’s mind? He’s upending the global trading system, slamming the US economy, killing our 401(k)s, and trashing the dollar. So what does he think he’s getting?
Leverage: Trump may not have been a serious or successful businessman (though he was a very serious and successful marketer), but he has a theory of the game. He who has the most leverage, wins. One might believe that being the world’s largest and most prosperous economy is leverage in and of itself, but in Trump’s worldview, more is always better. How does one amass additional leverage? By threatening to punish everyone, and then selectively negotiating away “cards” for concessions from the other side. Think of it like a kidnapping or ransomware: Trump takes your exports hostage, and releases them slowly in exchange for what he perceives are necessary payouts to even the playing field.
America first! Making it in America is always better in the Trump weltanschauung. And if you are economically illiterate, it sounds about right. Why buy those stinkin’ Chinese TVs when you can buy them made by honest patriotic Americans? This means jobs and manufacturing at home — reshoring if you’re fancy — and it means rebuilding an American factory machine that restores the older glory days when we did make TVs and such.
Fairness: Damn those foreigners. They have Value Added Taxes (VATs) which Trump officials have described as a tariff. They are selling more to us than they’re buying. They are doing business with each other and excluding the United States. In a fair world, we would buy and sell the same amount and never have trade deficits; or better still, everyone would have a trade deficit with us, because deficits are bad and unfair.
There are other Trump-perceived benefits to the new tariff wars, but most fall under the three categories above. The problem, unfortunately, is that Trump is wrong about how global trade works. This is not a lefty-hater shot at Donald Trump, Republican. Sadly, this is just fact. Take the “leverage” argument: First, no one likes a kidnapper, or the moral equivalent who embraces the same tactics. Second, it doesn’t really work. Trump may be able to scrape some concessions from America’s trading partners, but at the end of the day, they will make less expensive arrangements with countries that see a terrific opportunity to exclude the United States from global trading markets. Who might that be? China, duh.
There should be no doubt that free trading arrangements have consequences, and that there are people who are left behind by them. This was Trump’s anti-NAFTA argument, and in American political terms, he has won that fight. The Democrats don’t support free trade anymore either. However, the numbers behind tariff (or tax or whatever) free trading arrangements are hard to dismiss; fewer barriers to entry mean ease of doing business, which means sales, which means jobs. Some do lose their jobs when the cheaper labor and manufacturing is overseas, but adaptation is the unfortunate and little-liked answer. We can deny that all we like, but the bottom line is that other nations don’t agree, and they will ink such agreements with each other to our exclusion. That is not called winning.
The America First argument is another feature that sounds better than it is in execution when it comes to economics. Sure, I’d rather buy an iPhone made in America. I’d also rather pay 10x less. That’s the dilemma we face, and unfortunately, while we will be able to muscle some iPhones and BMWs and Mercedes and chip manufacturing into the United States, companies can’t afford to ignore labor costs, and we are at the pricey end of the scale.
Nor is there much evidence to suggest that more expensively made things here actually return jobs to Uncle Sam. Rather, the evidence is that the suddenly exorbitant cost of imports — because precursors in the supply chain will still be made overseas — will drive up inflation, which demands higher salaries, which lowers initial hiring. And um, even though happy Trump-voting Joe Sixpack is now making your TV (or car or stove or air conditioner), everything he buys at the supermarket will still be astronomically more pricey, because… tariffs. Voters hate inflation. Ask Joe Biden.
The fairness argument is just — let’s not sugarcoat this — dumb. We buy more because we’re rich. And we like cheaper stuff. Other countries sell more than they buy from us because we don’t sell what they’re buying, and when we do, it’s more expensive. Indeed, let’s go further and say the entire notion of measuring trade deficits is dumb. We maximize what we can sell, and we buy the cheapest stuff that we want. Ideally, we do so in a free trade environment in which goods cost the same to us that they do to the guy in that foreign country. When they don’t, that’s when we have a legitimate argument. Otherwise, no.
And a small note on VATs: I spend a lot of time overseas. I hate the VAT, and in a lot of countries, it drives the economy underground. Why not pay in cash if you can avoid a 20 percent surcharge? But a VAT is fundamentally a sales tax. Pringles made in America come with the same VAT as chips made in Italy. Everyone pays the VAT, period. If it were only imposed on US goods, it could be called a tariff, but that’s not true anywhere.
A final point: Donald Trump likes to be unpredictable. He wants friend and adversary alike to be on tenterhooks about what he might do at any moment. On the economic side, this unpredictability suppresses investment, incentivizes alternative arrangements that are more predictable, and drives up costs. Why hire if you think the policy may change next week? Or next year? Increasingly, businesses are simply going to wait out Donald Trump.
In foreign policy, which I know better, there is a thing called a “declaratory policy.” I love declaratory policies, because they lay out both costs and benefits to our friends and our enemies. Think of it this way: “NATO allies, if you spend more on your defense, we will remain committed to our alliance. If you don’t, we won’t.” Or better still, “Iran, if you develop a nuclear weapon, we will attack you and depose you from power.” Based on statements of policy like this, countries can make assumptions about whether or not to move forward, to adjust their own policies, and to sync with Washington or bear the risks.
You may counter-argue that all Trump is doing is declaring his policy and allowing countries to adjust; unfortunately, what he is actually doing is bombing Iran, and then asking Iran to come to the negotiating table. It might work, but odds are it won’t. Because you don’t start by bombing.
I don’t believe Donald Trump is persuadable on the economic front, because his cockamamie view of how world trade works is akin to a religious belief, and the acolytes who surround him are more interested in their own influence than they are in correcting his many misconceptions. That’s a shame, because a) I like my 401(k), and b) every American is going to pay the very steep price of the Trump team’s economic fecklessness.
Using tariffs temporarily, as Ronald Reagan famously did against unfair semiconductor trade with Japan in his second term, to address unfair trade is one thing. However, using them to reindustrialize and protect American manufacturers has a poor record. Ask Herbert Hoover, Senator Reed Smoot, and Representative Willis Hawley.
Ms. Pletka, I thought you said you don't know economics. Economic tariffs have been demonstrated to be detrimental to our economic well being. But tariffs for national security are a moral choice to defend ourselves. But statesmen must have a good understanding of moral and economic principles. I'm not sure Trump does. Great stuff. Take care.