President Trump is taking a gamble this week on trade. He is threatening to impose massive tariffs against Chinese goods, which would be bad for American consumers but perhaps much worse for an increasingly wobbly Chinese economy.
As bad as that all sounds in principle, this is a calculated risk that Trump is taking with a worthy goal in mind. He wants to force China’s regime back to the negotiating table, to hash out a trade deal that will end, among other things, China’s policy of expanding its economy using the stolen intellectual property of companies that do business there.
This is a judgment call that Trump is better positioned to make than we are. Moreover, in the long run, everyone will benefit from a favorable trade agreement that binds China’s regime to the basic norms of ethics and fair play that Westerners take for granted.
But even if Trump is right in this, we must object to the misleading message that Trump is sending the nation right now on the issue of trade policy and how it works. On Twitter this week, Trump has been once again talking up the virtues of tariffs and discussing the trade deficit in a highly misleading manner. He is miseducating the public, especially his supporters.
For example, he tweeted Sunday, “The Tariffs paid to the USA have had little impact on product cost, mostly borne by China.” But the idea that the cost of tariffs can simply vanish this way is a fallacy.
Higher taxes (including tariffs) always affect the consumer, either now or later, either directly or indirectly, and Trump should know this after arguing for his tax cuts. Yes, tariffs can result in immediate markups, but they can also lead to higher costs generally in a million subtle ways. For example, many U.S. manufacturers use foreign products and materials, and so tariffs can also cause American-made products to go up in price. For example, Trump’s steel and aluminum tariffs are making everything from American cars to oil pipelines more expensive. There are other, more subtle effects of tariffs, too; for example, they will tend to keep prices higher in the long run for U.S. consumers by delaying cost-saving innovations or by preventing potential new competition from entering the market.
In addition to that, tariffs also invite retaliatory tariffs, harming U.S. exporters and putting Americans out of work. To cite just one example, even Trump understands that American commodity farmers are currently getting killed by his tariff war; that’s why his administration has been forced to subsidize them. Farmers, other exporters, and taxpayers, then — not just the Chinese — are paying the wholly unnecessary costs of Trump’s tariffs.
Trump also discussed the trade deficit this week in a way that doesn’t inspire confidence in what he’s trying to accomplish. “The United States has been losing, for many years, 600 to 800 Billion Dollars a year on Trade,” he tweeted Monday. “With China we lose 500 Billion Dollars. Sorry, we’re not going to be doing that anymore!”
This perpetuates at least two more false notions. The first is that a trade deficit represents a national “loss” of money. But every surplus dollar that a Chinese company receives in exchange for goods represents a dollar that has to be exchanged. As a result, the changing relative value of international currencies ultimately makes up for whatever imbalances exist. The anti-traders’ oft-cited doomsday scenario, in which the U.S. buys everything from China and nothing is made or built domestically, can never occur. Long before things reached that point, the Chinese would voluntarily slow or stop their exports in the face of a weakening dollar, at which point they would benefit more from importing American-made goods and services.
The second false notion embedded in Trump’s tweet is that trade policy can directly cause deficits or surpluses in the first place. This is not so, and one need not look far for an example. Just during Trump’s own tenure, he has imposed multiple tariffs on nations from Europe to Asia to the Americas, and the trade deficit increased by nearly 20% in his first two full years as president. But again, this isn’t a bad thing, it’s a sign of a strong U.S. economy. If Trump really wants to lower trade deficits, he should cripple U.S. economic growth (a terrible idea) or cut government spending (a good idea that he won’t try). It is not an accident that the only meaningful reduction in the U.S. trade deficit this century came about as a result of the economic downturn of 2007-2009.
Trump is taking a gamble, and he has his reasons. Hopefully it all works out, because the nation’s prosperity depends on it. But we would have a lot more confidence in Trump’s leadership if his public statements indicated a better understanding of the fire he’s playing with right now, and how it works.
