“Trade wars are good, and easy to win.” At this point in the tug-of-war between the U.S. and China, President Donald Trump’s declaration is now looking about as plausible as President Herbert Hoover’s promise that “prosperity [was] right around the corner” while the country was sinking deep into the Great Depression.
The U.S. and China have recently escalated their ongoing trade war by each implementing tariffs on an additional $16 billion worth of imports, bringing the total amount levied to $100 billion since July. Trump’s justification for the bevy of tariffs on China, Mexico and the European Union?
He claims that the U.S. is a piggy bank that is continuously raided by other countries when Americans buy more goods from abroad than they buy domestically, from milk to steel to inflatable kayaks (all of which, coincidentally, have been tariffed).
“Our country was built on tariffs, and tariffs are now leading us to great new trade deals — as opposed to the horrible and unfair trade deals that I inherited as your President,” Trump tweeted on Aug. 15. “Other countries should not be allowed to come in and steal the wealth of our great U.S.A. No longer!”
Unfortunately, the justification of his administration’s trade “policy” is centrally based on several faulty premises. One of the most significant is that running a large trade deficit to the tune of about $566 billion per year means that the U.S. is a victim of unfair trade.
By Trump’s reasoning, any country with a trade deficit is a “loser” in a global competition and suffers from job destruction, loss of capital to abroad, and a general abdication of economic dominance. However, let’s think for a second about what a trade deficit actually means.
By the definition that the Trump administration prefers to use, a country runs a deficit when it imports more goods than it exports — in other words, when we in the U.S. consume more goods than we produce.
When a country runs a deficit, in the Trump administration’s way of thinking, the country is losing out on the number of jobs that could be supported if those goods were produced at home. The White House has responded by imposing tariffs on allies and adversaries alike. There are multiple problems that have arisen so far.
First, the administration insists on focusing on the more-negative part of the picture, the one that only takes account of goods. But as a modern and growing service-based economy, the U.S. has a robust services trade surplus that offsets some of the deficit we incur by purchasing goods that aren’t as efficiently produced domestically. The service economy generates jobs and income just as surely as the goods economy does. Just ask any computer programmer, doctor or teacher.
Second, by applying tariffs on friends and adversaries alike, the administration badly damages its ability to make progress on other problems. U.S. companies have a legitimate point when they complain about China stealing their intellectual property.
We’ll have a much better chance of addressing that problem if we can build a broad international coalition of like-minded countries. But how willing will our typical allies be to work with us if we’ve just smacked them in the face with tariffs on their aluminum and steel? Not so much.
Third, Trump’s trade policy suggests a much more simplistic trade network than the complicated reality of globalization. Tariffs won’t just punish the target country.
They will ripple throughout global supply chains and, in many cases, eventually come back to hurt us. As Jared Bernstein, Vice President Joe Biden’s chief economist, recently wrote in the Washington Post, “Globalization is an omelet that can’t be unscrambled.”
Thus, when the Trump administration levies duties on foreign intermediate goods, such as steel and aluminum, which show up in everything from food cans to airplanes, American manufacturers who use those intermediate goods will try to pass on the tariff to consumers. This means that the prices of the goods we buy domestically rise. Our manufacturers also become less competitive internationally when they try to sell their products to overseas customers.
Lately, the U.S. has been exporting vast quantities of raw soybeans to China and importing vast quantities of soybean-based food products. In the wake of the 25 percent retaliatory tariffs that China has imposed on American soybeans, Chinese firms will likely transition to slightly more expensive Brazilian soybeans, which would increase our food prices if we continue to purchase soybean-based foods from China.
Losing market share to Brazil would also hurt American farmers, many of which are in Trump country. All in all, the marginal price increases and market distortions the U.S. causes domestically by its own tariffs (and retaliations thereof) could do much to dampen growth in our currently-thriving macroeconomy, which would have commensurate implications for jobs.
Trump may paint the U.S. as a casualty of unfair trade deals negotiated by scheming foreigners, but the reality is that at the present moment, it is his policies that are distorting the market and making life more difficult and expensive for American families.
It is also troubling that he believes he can negotiate trade deals favorable to the U.S. while continuing to instigate half-baked attacks against some of our most important trading partners.