Gordon L. Weil
In his avalanche of actions, President Trump has adopted an
across-the-board tax increase. Like many of his other moves, he should have
asked Congress to approve, but he chose to act on his own.
He is using powers meant for a true national emergency to
radically increase tariffs as he launches his personal view of trade policy and
seeks to use trade as a weapon against other countries, both friends and
allies.
Trump’s trade policy is aimed at making the U.S.
economically self-sufficient. The rest
of the world sells
more to the U.S. than America sells to them. Trump charges they profit because they cheat. In his view, the U.S. buys imports at rigged,
low prices, rewarding countries that use their profits from enormous U.S. sales
to subsidize their own economies.
He uses tariffs to force up the price of imports. As import prices rise, higher cost American
goods can compete. In fact, U.S.
producers may be able to raise their prices.
After claiming he would restore the economy and combat high prices, he
has admitted that prices will rise because of his tariff policy and the country
might face a recession.
That’s hardly what he promised.
Higher prices are the taxes he imposes to finance his
notion of the proper role of tariffs. But the price is wrong. And Congress did not
give the president emergency authority to use tariffs as he does and
effectively raise taxes.
The U.S. is the world’s only economic superpower, for the
time being at least, and Trump takes advantage of its strength to remedy what
he sees as the victimization of the U.S. and to force other countries into
line. By his unchecked action, he raises
prices. That has the exact same effect as if Congress had raised taxes to
support a new policy.
Trump’s view fairly recognizes that traditional free trade
does not always work. Countries must
have market economies where buying and selling are free for free trade to
work. But some countries that benefit
from the low tariffs that are part of free markets have state-run economies
that allow them to take unfair advantage of the system.
Take China, the worst offender. Robert Lighthizer,
Trump’s trade guru, correctly opposed China’s admission to the tariff-cutting World Trade
Organization, because of its state-run system. It became a WTO member by lying about its
intentions. Countries like China have
made a mockery of free trade, but U.S. consumers lap up their lower cost goods.
Higher consumer costs are not the biggest problem. Underlying Trump’s policy are several economic
assumptions that have been disproven.
Much trade is based on economic efficiency, with countries
specializing in production where they are strong. Trade naturally favors
exchanges among countries selling what they are best at producing and buying
from others whose goods are better or cheaper than their own. That’s an efficient division of trade.
Trump complains that most other countries are using the
system to take unfair advantage of the U.S.
That ignores the role of consumers in a market economy. A nation’s import-export balance usually results
more from what its domestic market wants than the trade treachery of others.
The U.S. depends on some countries for essential resources,
like rare earths,
uranium and even some types of oil. A
tough trade policy can get in the way of meeting essential needs. As an alternative to easing trade policy,
Trump pressures
Ukraine to become a major low-cost supplier of rare minerals supposedly to
repay American aid to its defense against the Russian invasion.
The Trump trade policy also ignores the reaction of other
countries. He assumes they will have to
accept the loss of sales to American competitors. He has argued they will pay more tariff
revenues that will fatten the federal budget, though he increasingly recognizes
that those revenues will ultimately come from American consumers when they pay
higher prices.
He has little obvious concern whether, faced with American
protectionism, foreign governments will reject his “beggar thy neighbor”
policy. But they retaliate, trying to
reduce their U.S. imports and to punish the U.S. for its tariff increases. The U.S. itself then retaliates. This spiral is
the essence of a trade war.
Finding the U.S. an unreliable trading partner, other
countries are likely to seek new trade relationships. The world economy can be
reshaped if Trump persists. For example,
Canada could consider joining the EU customs union to replace its former
free-trade relationship with the U.S.
As world commerce reconfigures, the U.S. dollar would lose
influence as the most accepted reserve
currency. With that loss goes much
of American economic power in the world.
The political equivalent of protectionism is isolation and
the loss of world power. That could happen
if Trump’s “America First” turns the country into an economic island.
