Tariff tantrums and contradictions
As in geopolitics, the Trump effect will cause a realignment in trade.
The honest case for a protectionist tariff goes like this: A protectionist tariff will engender better and higher paying domestic jobs, particularly in manufacturing and for young men without a college degree. The societal and national security benefits outweigh the higher costs and reduced choices in consumer goods.
Now, I don’t think a protectionist tariff would have that large of an effect on manufacturing employment and disagree with the weighing of benefits and costs. But the honest case for a protectionist tariff is what lawyers call a colorable argument, one that meets the threshold of potential plausibility. And for most of our history, the United States pursued a protectionist tariff policy. It wasn’t until after World War II that the United States became a practitioner and advocate of free trade.
During the campaign, Donald Trump said that he would impose a universal tariff, on all goods from all countries, of 10% to 20%, with a higher tariff only on China. If he had done that, an argument could be made that it was a good-faith effort to implement the honest case for a protectionist tariff. Supply chains and trade relations would have adjusted, albeit, in my view, less advantageous to the United States. But the global economy would have digested without serious disruption the United States returning to a mild but predictable protectionist policy.
What Trump has done as president bears utterly no resemblance to what he said he would do on the campaign trail, except that they both involve tariffs. Instead of universal tariffs in the 10% to 20% range, he has adopted tariffs ad hoc, for various ostensible purposes, with never ceasing threats of others.
On his self-proclaimed but delusional “independence day”, rather than universal tariffs, Trump announced country-specific tariffs of wildly differing rates. He has called these liberation day tariffs “reciprocal”, but they adhere to no recognizable principle of reciprocity.
Instead, the tariffs are a ratio between a country’s trade deficit with the United States and the volume of its exports to us. The premise of this is that with frictionless trade, the United States would have a trade balance of zero with each and every country in the world. Any trade deficit, therefore, has to result from unfair trade practices of some sort. When it comes to international trade, it’s hard to think of a more ludicrous premise. And, in Trumpworld, it only works one way, which is the opposite of reciprocal. Countries with which we have a trade surplus – indicating, according to the premise, that at a minimum they are not pursuing unfair trade practices against us – are still subject to the 10% minimum tariff.
Trump and his confused and confusing exegetes serially make contradictory claims about his tariffs. For example, sometimes they claim that it will produce the increase in manufacturing employment of the honest case for a protectionist tariff. And other times, and sometimes at the same time, they claim that the tariffs serve as leverage to induce other countries to lower their barriers to U.S. exports.
Manufacturing is a capital intensive endeavor and investment returns require a long view. For a tariff to induce greater investment in manufacturing, investors have to believe that the tariffs will remain in place over the longer return-on-investment horizon. In other words, they need to be steady and predictable over a stretch of time.
However, tariffs that are leverage can be negotiated away at any point in time. Trump has said that he might reduce the tariff on China in exchange for that country agreeing to the sale of the U.S. operation of TikTok to a U.S. owner. Who is going to invest in additional manufacturing capacity based upon a tariff that could be traded away in an eye-blink for a single commercial transaction with political implications?
Similarly, tariffs cannot both stimulate transformational increased domestic manufacturing and raise large sums for the federal treasury. Tariffs only raise significant sums if the transformational increase in domestic manufacturing fails and we continue, despite the tariffs, to import in volumes similar to pre-tariff levels.
The liberation day tariffs are so divorced from reality that other countries are flummoxed over how to respond. There will be various mixes of retaliation and attempts at negotiation. I suspect that there will be a realignment in trade due to the Trump effect similar to what is happening in geopolitics.
Since the Obama administration, the United States has sidelined itself in attempting to lower global trade barriers. But other countries have not. The European Union is, in substantial part, a free-trade zone. And the EU has continued to reach trade deals with other blocs and countries. There are two broad trade pacts in the Indo-Pacific. China is a member of one but not the other, although it has expressed an interest in joining the one from which it is excluded. The United States is a member of neither.
Other countries will want their businesses to have access to the huge U.S. consumer market. But, given how divorced from reality the liberation day tariffs are, there will also be caution about becoming too reliant on access to that market. There has been a global rise in protectionism. However, there are also continued movements toward creating free-trade zones. The United States may find itself increasingly excluded from these zones.
It’s hard to conjure up what a best-case outcome would be as a result of these deracinated liberation day tariffs. But even with a best case, there will be lingering damage to the United States, economically and geopolitically.
Friedrich Hayek defined the rule of law for economic purposes as follows: The rules are known in advance and the rules apply equally to all economic actors. The U.S. economy has outperformed other economies in significant part because we have adhered to that rule of law more closely than other countries.
After the liberation day tariffs, what investor, domestic or foreign, believes that they know what the rules are in the United States? More importantly, what the rules will be tomorrow? What American business can have confidence in the cost and reliability of its supply chain? This uncertainty has a chilling effect on economic activity that radiates well beyond the stock market.
In trade, as in geopolitics, under Trump the United States is forfeiting its role as the leader of the free world. In trade, as in geopolitics, the United States is now an arbitrary and random force. We are too big to be ignored. But no longer a steady hand to be trusted or followed.
Reach Robb at robtrobb@gmail.com.