The phony economics of Trump's trade policy

 Gordon L. Weil

“You can’t put lipstick on a pig.”   But you can try.

Trump’s petulant trade policy lacks any underlying economic theory.  He wants to eliminate the U.S. trade deficit no matter the cost or effects.  If imports cost more or new domestic production is more expensive, the price will be paid by American customers unless foreign suppliers swallow them. 

But a loyal member of the Trump administration is trying hard to make that brutal trade policy appear to have a rational economic basis.   U.S. Trade Representative Jamieson Greer asserts that Trump wants to almost instantly replace the entire world trade system that has grown up since the end of the Second World War.

International commerce is based on a division of labor under which each country exports the products and services resulting from its economic strengths and buys the output of foreign production that best serves the needs of its people.  Competition sometimes exists, improving choice and increasing value.

Under the system that came to be managed by the World Trade Organization, tariffs were set at low levels and nations freed their trade with one another, treating each as its most favored partner.  Some nations benefit more than others from the low, reciprocal tariffs.  But most prosper from it.

The system has worked reasonably well and, more importantly, nations have become accustomed to it.  It has major problems, the result of historic change and attempts at manipulation by countries.  It needs reform, but Trump is throwing it out, because it has not given the U.S., the world’s largest economy, enough advantages.

One problem is that the manufacturing potential of developing countries has been hindered, limiting them to the sale of their raw materials.  The vestiges of colonialism have survived.

The other problem results from countries with state-run economies rather than open markets. The biggest mistake the U.S. made was to allow China to become a member of the WTO, enabling it to prey on free market countries by manipulating the value of its currency and exports.

Clearly, it’s time for the world’s trading partners to reform outmoded rules to deal with these and other issues.  The U.S. might have taken the lead in such reform, but it has refrained, because it has enjoyed the low cost of imports from China.

Greer says that, more than simply trying to enrich American industry at the expense of others, Trump intends to replace the relatively free flow of trade with something like a cut-throat unmanaged market.  U.S. nationalism is dressed up to look like a serious trade plan.

While his theory might be offered as a bold and original alternative to the WTO, it has in fact previously been tested, and it failed disastrously.  In 1930, the U.S. adopted high tariffs that Trump now tries to surpass.  They were meant to protect the U.S. from the Great Depression, but they stymied world trade and did not spur domestic industries. 

In two of the hardest hit countries, the Depression brought the New Deal in America and the Nazis in Germany.  High tariffs worsened the economic crisis worldwide.  Greer obviously hopes for better this time, but he ignores history.

Trump daily demonstrates that he has no carefully conceived economic strategy behind his tariffs.  Federal courts now consider whether his policy is even legal.  He uses emergency powers in a situation that may not qualify as an emergency.  And his haphazard application of tariffs is hardly a consistent response to an emergency. 

He uses tariffs as a political weapon, not an economic tool, raising them on Brazilian imports, because he dislikes its judicial system treatment of a former president.  He lifts tariffs on trade from India to pressure it to stop buying Russian oil.  He hits Canada hard, well, because it is still Canada.  Many of his actions are based on blatantly false data, but he persists.

He claims to be making deals. The art of the deal is that all participants believe they have benefitted.  He usually does not propose a satisfactory deal; instead, he makes other countries keep making offers, hoping to get Trump tariff reductions.  This is not dealmaking; it is bullying.

The proof that there is no coherent economic policy, despite Greer’s valiant effort, is the frequent adjustments that Trump makes day by day.  No specific level has an economic basis.   It is simply a matter of getting as much as you can now, ignoring longer term economic or political effects.  America loses allies, needed because trade is not the only challenge the U.S. faces.

When other countries hold firm or fight back or Trump realizes the degree to which the U.S. is dependent on certain of their exports, he may back down.  That’s called TACO – Trump always chickens out.  Is that real economic policy, Mr. Greer?