Trump’s Tariffs Will Reduce Trade Deficits By Reducing Trade

It’s too bad that good politics rarely makes for good economics.  Donald Trump’s historic election was in no small part due to his brilliant electoral strategy of focusing on the neglected blue-collar “Rust Belt” states that his opponent took for granted — or forgot about, or were simply too dirty for her to visit — and promising to restore their cities to their former glory.  That’s all well and good.  And calling attention to gaping trade deficits, while pledging to use tariffs to protect American workers and industries from (gasp!) competition, sounds great on the campaign trail, and it proved to be successful politically.

But it will not prove to be successful economically.  Reducing trade deficits by reducing trade is self-evidently self-defeating.  And when “protecting American industries” really means “protecting consumers from lower prices,” and “protecting foreign markets from earning the money they need to buy our products,” it should be rejected outright.

Strange.  Republicans used to be the party of unfettered capitalism.  Now we’re the party that, despite all evidence to the contrary, blames free trade for our problems.  Just a thought, but if you find yourself agreeing with Bernie Sanders on an economic issue, it should probably give you pause.

That we can reduce trade deficits by reducing trade in general simply demonstrates why reducing trade deficits for its own sake should not be the ultimate goal.  Rather, the goal should be to maximize economic growth, which cannot be achieved by imposing barriers to economic activity.

Nevertheless, President Trump blithely celebrates reports of new investments being made in industries newly protected by his tariffs, such as steel.  Of course, nobody doubts that targeted tariffs can help specific sectors, at least in the short term.  And in politics, it is always better to give a noticeable and large benefit to a few people, at the cost of an imperceptible problem spread over many people.

But that does not make the problem any less real, and the problem with tariffs is not just that it effectively taxes consumers, nor that other countries tend to retaliate with their own tariffs.  Both of those are certainly true, and bad enough by themselves.  But just as troublesome, if not more so, is that by making it harder for foreign companies to sell their goods here, their economies won’t have the dollars needed to buy things from us.  Since other countries cannot print American currency, other countries need to sell their products to American markets in order to earn the dollars they would use to buy our goods (because none of our goods are sold in any other currency).  This oversight was one of the accelerants of the Great Depression.  When we imposed tariffs on Europe to protect our industries, the Europeans thus lost the American markets, and therefore weren’t making the American dollars they needed to buy our stuff.

So tariffs are not just bad economic policy, they’re bad economic policy cubed: taxing our consumers, inviting taxes on our exports, and destroying the purchasing power of foreign consumers.

Yet, supporters of Trump’s policies argue that it is precisely because tariffs are so dangerous that they make such a strong bargaining tool.

To be clear, it is uncertain the extent to which Trump’s tariff policies are more about protecting certain industries, or creating leverage to liberate markets.  It seems to be some of both.  His tariffs on foreign steel, for example, do not appear to be reciprocal in any way, other than reciprocating the faith that voters in the industrialized states placed in him.  It is protectionism in its most classic form.  But his threats of other tariffs to the G8 and other countries seem more calculated to coerce favorable trade deals.

This is perhaps not the most prudent tactic.  Demanding that trade barriers be removed by threatening to impose our own is like negotiating by strapping dynamite to one’s own chest and demanding a ransom, lest everyone be blown up.  Mutually assured destruction is a necessary deterrent to nuclear conflict, but only because there are no superior alternatives.  And like nuclear war, the best way to win a trade war is not to get into one in the first place.

President Trump needs to understand that the negotiating methods that made him a successful real estate developer do not always translate well to other arenas.  You can back out of a real estate deal and move on and work with someone else.  But to close the doors on a trade partner is to shutter the doors of American businesses.

There are other things that President Trump can leverage.  America’s continued participation in NATO at the present funding levels, for example, seems to be of paramount importance to the European Union, which, despite having an economy roughly the size of our own, and twice the population, still expects the United States to provide military protection.  There is an obvious incentive for them to loosen trade regulations.

Additionally, as the cost of labor in the United States is probably the largest obstacle to America competing with other countries that have lower standards of living, we could begin to subsidize American employment through tax credits.  Under such a plan, the government would cover, or at least share in the cost of raises and new hires.  This would ultimately pay for itself by expanding the tax base while removing people from welfare, at the same time reducing the cost of getting goods to market, thereby making those products more competitive in the global marketplace.

These are just two ideas, and there is certainly room for disagreement on those, but we must all reject the idea that we’re going to improve the economy by creating barriers to trade.  It is not only wrong on its face, it is literally anti-economic.  The economy is trade, and trade is the economy.  To inhibit one is necessarily, and by definition, to inhibit both.  Imagine if we did not have free trade between our states, and, in the name of protecting various states and their workers, we had to pay import tariffs just about every time we purchased online, for example, or bought something in Pennsylvania and drove it to New Jersey.  We would not be able to conduct business.  To replicate that on a global scale makes even less sense.

So for as gratifying and politically expedient as it undoubtedly is to preach protectionism, the message President Trump should be sending, and hopefully learning, is that the best way to protect American businesses, and American workers, and the American economy, is to protect them from tariffs, both foreign and domestic.

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