U.S. becomes economic island; Trump's tax increase

 

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.