Trump's Tariffs Will Hurt The Economy
A few defensible details doesn't change the fact that protectionist economic policy is generally bad.
I voted for Trump twice and I strongly support the Trump administration. But we should be able to call out people on our own side - even our leaders. Overall, Trump’s tariff project is bad.
Tariffs can be a useful tool, but they are useful only as a tool of foreign policy. For example, when the Trump administration tried to deport violent Colombian criminals who were illegally living in the US, the Colombian government initially refused to accept them. (For those who care about such things, according to international law, Colombia had an obligation to accept them, since they were Colombian citizens being deported from another country). Trump immediately put visa restrictions on Colombian elites, slapped a 25% tariff on Colombia, and threatened to increase the tariff to 50% if Colombia did not accept deported Colombian citizens from the US. The Colombian government immediately capitulated.
Some other examples of tariff power as a tool of foreign policy are:
Tariffs and sanctions can also be useful tools to pressure malicious regimes like the regimes of Iran and Cuba.
The threat of tariffs can be used to achieve a lower level of tariffs overall. For example, if Brazil puts a tariff on US goods, the US could threaten to put a tariff on Brazil unless Brazil removed their tariff on the US.
Tariffs can also be used to protect intellectual property (IP). For decades, pharmaceuticals have been much more expensive in America than the rest of the world because the rest of the world has been stealing American IP. Trump has indicated that he will use the tariff power to stop the theft of American IP.
But Trump doesn’t merely promote tariffs as a tool of foreign policy to enforce the rule of law and protect American IP. Trump has, since before the beginning of his political career, endorsed tariffs as a part of protectionist economic policy. Trump believes that tariffs will make the US economy stronger and he is wrong.
The standard econ 101 argument against tariffs is correct. Trade makes both parties better off because they can specialize in their comparative advantage. Tariffs destroy those gains by making trade more costly. Imagine if there was a huge, impassable mountain range in the middle of the Atlantic ocean which made shipping between Europe and America prohibitively costly. That would clearly be bad for the economy because it would dramatically increase shipping costs. It would be great for the economy if someone built a canal through the mountain range so that shipping between Europe and America could become affordable. Tariffs have the same effect as the impassable mountain range in the Atlantic. They make trade more costly. The difference between a tariff and an inconvenient mountain range is that a mountain range is a natural feature that no one can do anything about, while tariffs are self-inflicted injury which most countries stupidly choose to inflict on themselves.
A supporter of protectionism might point out a few other differences between tariffs and an inconvenient mountain range. An impassable mountain range doesn’t only prevent trade, it also prevents people from moving to a country as immigrants, and it’s also a barrier to invading armies. But these points make the mountain range much better than the tariff! There is much to be said for having a country which is protected from invasion by mountains, but no invading navy is going to stop at your customs houses to pay your tariff. A tariff doesn’t do anything to stop hostile immigrants either.
Some people defend the mainstream media on the grounds that it gets specific details right, but they ignore the fact that the big picture narratives which the mainstream media pushes are straightforwardly false. That defense of the mainstream media is dishonest. When one evaluates whether a media outlet is good or bad, one should look at the big picture messages which the media outlet conveys to its readers, not the minor details.
Similarly, many of the specific details of Trump’s tariffs are defensible, but it would be dishonest to defend his tariff project as a whole on that basis. Protectionist economic policy is generally a bad idea, even though tariffs may be good in some limited cases, such as the protection of intellectual property.
Finally, there’s the fact that the rollout of the tariffs has been done erratically and incompetently. Unpredictability is very bad for the economy, and it made the stock market crash even more than it would have from the tariffs alone.
The one good thing to come out of this whole debacle is that democrats are finally coming to sanity on the tariff issue.
Addendum: Trump thinks that tariffs will bring back a strong American manufacturing base, but America lost its manufacturing based because of excessive labor and environmental regulation. Tariffs won’t solve those problems, it will just make everything more expensive.
agreed good post!
Trade is great for countries provided it's reciprocal. It hasn't been for America been since the early nineties. There are complex reasons for this shift, everything from a strong dollar to a savings-investment imbalance to the introduction of global integrated supply chains and an American regularity environment which pushed American companies to offshore.
Trump seems to be using tariffs to push for trade deals which negotiate a marginally better deal than existed before, as well as using the disruptions and fears of companies to push inward investment into America. That's a good thing, although it's painful in the short-term. Critics and opponents of Trump will use the global depression which is coming to argue that Trump's policies were bad, just as they argued that Liz Truss was responsible for the UK economy blowing up under her watch. But just as the British toxic LDI bubble had grown to epic proportions before Truss became PM, the seismic and monumental flaws in China's economy were apparent to more than casual China observers, long before Trump introduced his tariffs.
Chinese people don't spend their earnings. It's that simple. US disposal income saving is below 5%, in the OECD the average is between 5-10%. Chinese households save between 30-45% of their disposal incomes. Consumer spending is 68% of the American economy. China has been trying to boost their economy by pushing extreme export surplus, which was always going to have limits as an economic strategy. The Chinese government needs to find a way to incentivise its citizens to spend more and save less. It really is that simple. Put simply, the Chinese propensity to save excessively is making their domestic, internal economy a third weaker than it needs to be.
Perhaps an increase in some forms of taxes with a generous rebate for consumer spending is the answer. Perhaps the rebate could employ nudge economics to auto-invest the rebate in future healthcare provision/insurance. One of the major reasons why Chinese people save so much is because of limited social safety nets to cover healthcare in later life. Chinese households often bear 30-50% of medical costs directly. Ironically, China needs to find a way for its citizens to both spend and save and at the same time. It is possible, but only in really weird ways. Tax-advantaged healthcare accounts which can only be 'unlocked' through consumer spending tax rebates is probably the answer, although admittedly it's a really contorted method. I'm open to suggestions.