Trump's Tariff Gambit: Lots Of Problems

While I have spent the past couple of weeks writing about conspiracy theories and the Kennedy assassination, the rest of the world has been consumed by the news of President Trump and his big tariff gambit. After talking at length during the campaign about imposing a new and expansive tariff regime, Trump announced the details of his big move on April 2 — tariffs on everything, from all countries, of at least 10%, ranging up to 50% or more on some countries (e.g., China) and certain products. All of this is to be done by Executive Order, said to be based on a declaration of “emergency” under a collection of pre-existing statutes (the International Emergency Economic Powers Act of 1977; the National Emergencies Act; and the Trade Act of 1974).

The stock markets have reacted with turmoil. Various indices were down 10% or more over the past week, and, after initially gaining, have fallen further today. Liberal media outlets, including the New York Times gleefully foresee impending economic damage. (From today: “Investors overwhelmingly believe that Mr. Trump’s tariffs, and retaliation from U.S. trading partners, will lead to higher prices, slower growth and possibly a global recession.”).

Regular readers here will not be surprised to learn that I am not a fan of what Trump is doing on the tariff front. Judging from Trump’s stated rationale for his actions, they do not make sense. The actions also carry substantial potential for harming the economy.

I am aware that there is another theory about what is going on. That theory is that Trump is really a free trader at heart, that his stated goals and rationale are just a cover story, and that this whole tariff game is really about getting rapidly to a free trade regime that would never be achievable through the establishment’s playbook of endless multi-decade negotiations on the GATT model. A version of this hypothesis appears in an op-ed in today’s Wall Street Journal by Arthur Laffer and Stephen Moore (headline: “A Win-Win Exit Strategy for Trump on Tariffs”). The hypothesis gains at least some additional support from news that since the announcement of the new tariff regime upwards of fifty countries have approached the White House seeking to negotiate trade deals.

But we can’t know how that will turn out. Meanwhile, let me compile a litany of problems with Trump’s tariff gambit.

First, there is no bona fide international trade “emergency.” Calling the international trade situation an “emergency” is an abuse of the term. This is significant because without the supposed “emergency” there is no basis for the President to set tariff levels on his own authority; that would be a matter reserved to Congress.

The declaration of “emergencies” by a President to gain additional powers is a very dangerous game. Note that the international trade emergency is just one of several that Trump has declared. Other big ones include a border emergency and an energy emergency. Perhaps the border one could be justified; but I don’t think that trade and energy are even close calls. Even if you agree with the goals that Trump is trying to accomplish with these declarations of emergency, they are setting a terrible precedent sure to be used and abused by future presidents in very bad ways.

Second, the stated rationale about the “trade deficit” is just wrong. On the campaign trail, Trump constantly talked about the trade deficit as representing other countries somehow stealing something from us. I don’t find the word “stealing” in the tariff Executive Order, but it’s close. Here are some excerpts from the EO’s stated rationale:

Large and persistent annual U.S. goods trade deficits have led to the hollowing out of our manufacturing base; inhibited our ability to scale advanced domestic manufacturing capacity; undermined critical supply chains; and rendered our defense-industrial base dependent on foreign adversaries.  Large and persistent annual U.S. goods trade deficits are caused in substantial part by a lack of reciprocity in our bilateral trade relationships. . . . Over time, the persistent decline in U.S. manufacturing output has reduced U.S. manufacturing capacity.  The need to maintain robust and resilient domestic manufacturing capacity is particularly acute in certain advanced industrial sectors like automobiles, shipbuilding, pharmaceuticals, technology products, machine tools, and basic and fabricated metals. . . .

Trump is engaging in a clear fallacy in failing to recognize that the trade deficit is just the inevitable reciprocal of an investment surplus. The trade deficit represents foreign entities choosing to hold U.S. assets, U.S. bonds, and to a substantial extent U.S. currency. All of these things are huge advantages for the U.S. Here’s a quote that I included in a post back in 2018, looking at the U.S. “trade deficit” from the perspective of someone in China:

We Chinese send our resources, our capital, and the output of our most productive workers overseas to be enjoyed by American consumers, and what do we get in return?  A trillion dollars or so of foreign exchange surpluses that our government invests for 2% returns in US government bonds.  Yes, that's right -- not only are we subsidizing American consumers, but we are subsidizing their taxpayers by financing their government's debt at low interest rates.

Today, the U.S. treasury interest rates are a little higher, but the principle is the same. Meanwhile, the data do not support the proposition that U.S. manufacturing output has been declining or that our manufacturing base has been “hollowed out.” In fact, manufacturing output in the U.S. is on a long-term continuous upward trend, and not a small one, despite a couple of blips for the 2008-09 “Great Recession” and the 2020-21 Covid panic. Here is a chart from Macrotrends where the top line represents U.S. manufacturing output from 1997 to 2021. It shows a quite steady increase in that metric over the entire period, from $1.380 trillion in 1997 to $2.497 trillion in 2021.

Yes, manufacturing in the U.S. has declined as a percent of GDP, and as a percent of employment, and as a percent of worldwide manufacturing. None of those is the same as saying that it has “declined,” or been “hollowed out.” The fact that manufacturing has declined as a percent of GDP just means that other things (e.g., tech and services) have grown faster. The fact that manufacturing has declined as a percentage of employment just means that productivity has grown. The fact that U.S. manufacturing has declined as a percentage of world manufacturing just means that the developing world is developing. Despite all these things, it remains the case that U.S. manufacturing has been growing continuously, and not by small amounts.

Third, the “national security” rationale for tariffs does not stand up to scrutiny.

I understand that national security is very important, and I could be persuaded to support specific tariffs that could be shown to make a meaningful contribution to national security. As an example, tariffs, or for that matter sanctions, directed at certain adversarial countries (e.g., China or Iran or Russia) could make sense on this basis. But the broad-based, all-countries and all-of-trade tariffs being imposed by Trump cannot be justified on this basis.

Consider, for example, the subject of steel. At first blush it may seem plausible that steel is critical for military purposes (ships, tanks, etc.), and therefore protecting the steel industry with tariffs would enhance national security. But the data undermine that argument. The U.S. steel industry currently produces around 80 million tons of steel per year. The military uses only about 3% of that output. While there may be a lack of some special steel for some specific military purpose, there is no general shortage of domestic steel for the military. Even if tariffs resulted in increased domestic steel production, how much of a difference to national security would that make?

In a related area, the U.S. has essentially no ship-building capacity outside of the defense industry. But the navy needs a lot of ships. Are tariffs any part of the solution to that problem? Not at all. All the military ships are made in shipyards dedicated to defense contracting and supported by defense spending. Even very high tariffs on foreign-made ships would be basically irrelevant to that situation. Similarly, if the U.S. steel industry were actually disappearing, which it is not, the Defense Department could buy from dedicated steel mills. But we are nowhere near that situation.

And meanwhile, putting high tariffs on steel means that the big consumers of steel need to pay higher prices. Who are those? Probably the biggest are the automobile producers. Tariffs on steel (and hundreds of other inputs) are seriously disrupting their business.

Fourth, disruption of existing trade patterns is not a small problem. The trade patterns and supply chains that support existing production and consumption are far too complex for any collection of government bureaucrats to understand. Blanket tariffs like those currently being imposed can have all kinds of unintended consequences. For example, random companies with niche spots in production processes can find their cost structures undermined and their businesses destroyed. This is undoubtedly a big reason for the recent stock market turmoil. Other businesses can get sudden windfalls that nobody anticipated.

Trade is the way that markets continuously discover slightly better and cheaper ways to make things. Tariffs disrupt that discovery process. They also create vested interests to lobby for the continuation of tariff regimes long after the reason for the tariff has become obsolete.

So what is the argument in favor of this blizzard of tariffs? The only positive rationale I can think of is that this is a grand strategy to leverage the buying power of the American consumer to force our trading partners to eliminate their own tariffs and come to a world-wide free trade regime, or at least to something much closer to that than we have had. As discussed earlier in this post, some intelligent supporters of Trump’s actions think that this is what he is up to. And if that is the ultimate goal, I support it. But that is not the stated rationale of the endeavor, and indeed it contradicts the stated rationale. If somehow Trump and his people were able to negotiate a world-wide free trade regime tomorrow, the U.S. would still have just as big a trade deficit as it has today. Maybe there would be an even a bigger trade deficit — after all, the desire of foreigners to hold U.S. assets and debt would have no reason to have declined. Also, achievement of a free trade regime would leave American manufacturing as much or more vulnerable to incursions from foreign competition as it has been over recent decades. Such a regime would certainly not “bring back the jobs” that have been lost to foreign manufacturing competition — although probably, nothing will bring those jobs back. The fact is that the main comparative advantages of the U.S. are not in manufacturing. They are in things like tech and services, and other things people never think about or mention like our (relatively) stable currency, our education system (I know that’s crazy), and the English language.

Finally, if free trade is the end game, it needs to be accomplished quickly. If the recent blizzard of tariffs remains in place for months and then years and gets entrenched, that can cause lots of damage. Trump has only a short window to turn this gambit into a free trade bonanza. As of now, he hasn’t even said that that is the goal; and even if it is the goal, I am doubtful that it can be accomplished completely enough and quickly enough to compensate for the risks that have been taken. If Trump can accomplish that, I will be the first to congratulate him, but I think it is not likely.