Over the weekend, President Trump tweeted the following:
This echoed a point he made exactly three months ago:
These are hardly the only tweets Trump banged out during this week of trade turmoil. Most of them contain flaws in logic and evidence, however. So this seems like a good moment to bring up the myriad ways that Trump could be smarter on trade.
1) Trade deficits are not a sign of weakness. It is a common conception, which Trump shares, that trade deficits are primarily about trade policy. The thing is, this is not really true. A country’s trade deficit is primarily a function of its budget deficit and how much more the country spends rather than saves. Let’s face it, the United States has a huge budget deficit and rapidly declining savings rate. This is a recipe for a whopping trade deficit — one that Trump has played a big role in fostering.
A country is far more likely to run a trade deficit when its economy is booming and personal consumption is high. That is why the U.S. trade deficit has ballooned even further during the Trump administration. If Trump really wanted to shrink the trade deficit, he would push to revoke his own tax bill. But he really does not want to do this.
Countries can engage in shady trade policies (see: China, intellectual property rights), but they play much less of a role in affecting trade deficits than simple macroeconomics. Trump’s macroeconomics virtually guarantee high trade deficits
2) If this is mercantilism, it’s really bad mercantilism. I’ll outsource this point to my Washington Post colleague Catherine Rampell:
Like an 18th-century mercantilist, Trump perceives no mutual gains from trade. In any transaction, he sees only a winner and a loser. And the winner is determined by who has the trade surplus ….
Even 18th-century mercantilists knew that if you were trying to use tariffs to boost your trade surplus, you wanted to tax imports of finished goods, not the inputs that your domestic industry needs to make those high-value, finished-good exports.
Trump still hasn’t figured this out. In protecting U.S. steel and aluminum, he is threatening the much larger manufacturing industries that purchase these materials to make, and then sell, high-value exports such as cars and appliances.
See also my essay in Reason on this point.
3) Tariffs are a regressive tax. Trump has tried to claim that tariffs are a way in which the U.S. government can “charge a country” for imported their goods. But tariffs do not do that. They are a tax on U.S. consumers who buy imported goods. As Jason Furman, Katheryn Russ and Jay Shambaugh wrote in VoxEU last year, tariffs punish the poor:
Tariffs — taxes on imported goods — likely impose a heavier burden on lower-income households, as these households generally spend more on traded goods as a share of expenditure/income and because of the higher level of tariffs placed on some key consumer goods. [We estimate] the tariff burden by income group and by family structure using a new data set constructed by matching of granular data on trade and consumer spending. The findings suggest that tariffs function as a regressive tax that weighs most heavily on women and single parents.
Trump has bragged about “many Billions of Dollars” that the tariffs would bring into U.S. coffers. Those taxes disproportionately hurt poor consumers, however. The next time Trump trade adviser Peter Navarro claims that tariffs help low-income Americans, understand that he is lying.
4) The United States, in violating the rules of the game, guarantees retaliation. The Trump administration is relying on national security provisions of the 1962 Trade Act to impose its tariffs on aluminum and steel. The national security logic is risible in the extreme, especially since these tariffs are disproportionately focused on U.S. allies.
The fact that this administration is targeting allies probably gives them hope that crude issue linkage will yield trade concessions. But as I noted back in March:
Coercing allies only works if those expectations of future conflict remain low. If a targeted state starts to view the threatening actor as something other than an ally, then conflict expectations rise and the likelihood of concessions falls. This is why sanctioning Cuba in the 1960s did not work. Despite the severe economic costs, Castro decided to ally with the U.S.S.R. instead.
If Trump could convince U.S. allies that the current pressure represents an extraordinary exception to traditionally strong alliances, it is possible that he might get some concessions. Clearly, however, Trump has no love for either the liberal international order or the U.S. alliance system. He cannot even feign commitment to animating ideas of the open global economy or America’s security community. And our allies have noticed. So they are going to be expecting a lot more conflict down the road. This reduces their incentive to acquiesce in the present.
5) This makes zero sense for enhancing U.S. national security. As I understand it, a key part of Trump’s foreign policy is getting our allies and partners to agree to reinstate sanctions against Iran. The likelihood of that occurring in the wake of these tariffs seems … small. The Group of Seven allies were not amused by these tariffs:
The United States faced unified opposition from the world’s top economies to President Donald Trump’s escalating, multi-front trade offensive at the end of high-level meetings Saturday soured by the imposition of tariffs.
G-7 ministers urged U.S. Treasury Secretary Steven Mnuchin, who was at the event, to express their “unanimous concern and disappointments” to the White House over new U.S. tariffs, Canadian Finance Minister Bill Morneau told reporters ….
No joint final statement emerged from the G-7 ministerial meeting, a sign of the strong discord as the world’s major economies verged on open trade conflict.
The Chair’s summary of the G-7 finance ministers meeting contained these sections:
G7 Finance Ministers and Central Bank Governors agreed that, when they work together, the G7 can build on strong interpersonal and economic relationships to advance our common goals.
Concerns were expressed that the tariffs imposed by the United States on its friends and allies, on the grounds of national security, undermine open trade and confidence in the global economy.
Finance Ministers and Central Bank Governors requested that the United States Secretary of the Treasury communicate their unanimous concern and disappointment ….
While G7 Finance Ministers and Central Bank Governors are pleased with the progress made on important issues that affect the daily lives of people around the world, most regret the uncertainty caused by trade actions which run counter to the goal of economic growth. The international community is faced with significant economic and security issues, which are best addressed through a united front from G7 countries. Members continue to make progress on behalf of our citizens, but recognize that this collaboration and cooperation has been put at risk by trade actions against other members.
I have read a lot of G7 statements in my day. Heck, I even helped craft a few. I have never seen an individual G7 country called out in this manner.
I’ll just outsource the last word to Canadian Foreign Minister Chrystia Freeland:
Maybe, just maybe, trade wars are neither good nor easy to win.