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.

Trump wrong about EU

Gordon L. Weil

President Donald Trump says the EU was “formed in order to screw the United States.”

This statement is both a gross misstatement and a demonstration of his ignorance of history.  It is either the result of intentionally distorting history or the sign of a seriously faulty memory. He insists on using his incorrect claim as the pretext for levying high tariffs on imports from Europe.

I am an eyewitness to the fact that Trump’s assertion is false.  I played a role in the relationship between the U.S. and the EU.

After World War II, leaders in the U.S., Britain, France and Germany agreed to seek ways to prevent yet another clash between Germany and France that could again lead to world war.  They were determined to find a formula that would make such a conflict impossible.

The solution was to intertwine the economies of Germany, France and other European countries so that they would be unable to develop an independent ability to build a war machine.  Even more important, the joint European undertaking would be based on democratic principles, with decisions being made in an organization that could, in many cases, overrule nationalistic action.

That formula worked.  Year by year, new forms of economic integration were adopted.  Eventually, a single market was created where goods and services and even workers could freely move.  As more nations joined, they established the world’s largest trading unit.   It operates along many of the same lines as the U.S. market.

American policy was consistently supportive of the Europeans’ efforts.  The emerging Europe would adopt the principles of democratic liberalism.  Not only could Europe refrain from conflict in which the U.S. would inevitably become entangled, but it could become a powerful ally in facing the aggressive policies of the Soviet Union.

Among Europe’s efforts to create unity was the establishment of a graduate school where the future leaders of the EU and its member countries could study, socialize and develop shared outlooks on common challenges.  As an American, I was selected to attend this school in the hope that I would represent American democratic values.

I would later become the sole American on the staff of the European Commission, the international body responsible for adopting continent-wide policies.  It was not difficult to explain to the American media the details of the new European decisions that were usually quite compatible with Washington’s policies.

The leadership of the State Department was favorable to the European effort and supportive in almost all cases.  I was able to serve as a non-diplomatic link between European and American leaders.

The high point came at a meeting between President Lyndon B. Johnson and Walter Hallstein, the president of the European Commission.  I was present with them in the White House Oval Office when they met to confirm their mutual interest in trans-Atlantic cooperation.  Clearly, Europe was not out to “screw” the U.S.

Of course, the U.S. and Europe would each promote their own economic interests, just as any country would.  Instead of going to war, they entered negotiations to find workable arrangements.  These talks took the form of the Kennedy Round of trade negotiations, named in honor of the late American president.

I became an American journalist, reporting to the Washington Post and other publications on the Kennedy Round and European unification. While the negotiations often focused on specific sectors, the goal was to find a balance of interests.  Each side should be able to end up with a deal that was beneficial to it.

The solution was to increase trans-Atlantic trade by lowering tariffs and non-tariff barriers.  In launching the negotiations, President Kennedy had recalled that “a rising tide lifts all boats.”  By lowering tariffs on both sides to increase trade, everybody could benefit.  The Kennedy Round succeeded.

This is the history that proves Trump wrong on both the facts and the policy.  The creation of the EU was not hostile to the U.S.  While the U.S. has a trade deficit today with the EU, the solution is more likely to be Kennedy’s “rising tide” than punching holes in the bottom of the boat. 

U.S. leadership of the West ending

Gordon L. Weil

The U.S. is like a nation at war.

The federal government is on the attack, deploying the power of the American economy and military to force other nations, states, the media and even citizens to follow the orders of President Trump and his agents.

This brutal campaign would reshape the economy and transform the world order.  It might also replace the American democratic republic with an authoritarian regime.

The end of economic, political and military systems on which many have relied results from the abuse of the awesome powers that Congress has given the president in the naive belief that custom would limit his exercise of them.

The Declaration of Independence states that it was issued out of a “decent respect for the opinions of mankind.”  The actions of the president in the few weeks since his inauguration has shown no such decent respect for the opinions of anybody who differs or objects. 

It would take only a few people to bring the government back under constitutional control.  If even a small number of Republicans in Congress joined with the Democrats, they could pass veto-proof laws to recover from the president the overly broad emergency powers he exercises.  If not, the GOP will share responsibility for Trump’s excesses.

The election certainly produced an administration determined to break with the traditions developed since World War II.  Trump always claimed that was his intent.  But his electoral majority did not give him a blank check to destroy America’s place as world leader or its system of balanced government.

He has routinely abused the congressional grant of emergency authority to take sweeping actions on tariffs and other matters that normally should be handled by Congress.  He has embarked on raising tariffs on imports from virtually the entire world based on a disastrously incorrect understanding of economics. 

He sees normal trade relations as warfare. If purchases from another country exceed sales from the U.S. to that country, for him the net exchange amounts to an intentional and hostile attack on the U.S.  He uses tariffs to raise import prices, and believes foreign suppliers will pay them.  Revenues from tariffs will increase.  Higher import prices will create competitive conditions for U.S. industry, which will prosper.

Other countries have not produced favorable trade balances intending them as hostile acts against the U.S.  Their advantages may come from paying labor too little or damaging the environment.  Higher American tariffs won’t fix either of them, and Trump doesn’t seem to care anyway.

The ultimate absurdity of Trump’s trade policy is slapping high tariffs on imports from Canada, a hostile act that will damage its economy.  Why?  Under a deal Trump made, most trade both ways is duty free. The American trade deficit in goods is more than offset by surpluses in trade in services and investment flows.

He charges without evidence that Canada allows floods of illegal immigrants and fentanyl into the U.S.  People on both sides of the border are bewildered about his real intentions.

He wants Canada as the 51^st state.  Canada, with an economy the equal of Russia’s and composed of 10 state-like provinces, has no interest in national suicide. If Canadians remain unwilling, he would coerce them by using American economic power.  Is that what an aging American president sees as his historic achievement?

He would treat Canada as a mere satellite, and just as he does Ukraine, a nation invaded by and at war with Vladimir Putin’s Russia.  Trump wants to be a peacemaker, with an eye on the Nobel Prize.  No matter that he would sacrifice Ukraine’s land and security for his dealmaking with Putin, whose favor he clearly seeks.

European countries, which share Ukraine’s worries about future Russian aggression, get in Trump’s way.  They embrace President Zelenskyy.  It may have pained Trump to see him received at King Charles’ private residence, just after Trump had received a royal invitation for a state visit.

When a group of European leaders met in London to plan their help for Ukraine, Canada’s prime minister, having turned away from the U.S., was among them.  For the sake of making a deal, Trump is losing American leadership of the West.

The Europeans cling to the belief they need American backing to defend Ukraine and to pursue a lasting peace and not merely a headline.  They must gear up, but meanwhile they could rapidly deploy major support.  Britain once faced Hitler alone, while the original America First movement kept the U.S. neutral.  Europe now needs its own version of Winston Churchill.

In this column, I try to make fair judgments, pro and con, about Trump and the Democrats.  I will continue to do so.  Now, it is necessary to speak out about Trump as he becomes increasingly dangerous, even to the freedom of the press. 

Foreign policy by threats has high cost

 

Gordon L. Weil

Donald Trump conducts foreign policy by threats.   If you don’t do as I demand, he implies, I will simply take you over.  Forget about pursuing traditional diplomacy with friendly nations.

Bullying may work on real estate competitors in New York City, where Trump gained his education in his father’s business, and the volatile world of local commerce allowed him to crush competitors.  

Real estate moguls may come and go, but sovereign nations tend to hang on tenaciously.  Look at Ukraine.  Still, you may dream of your place in history by expanding American territory.  Meanwhile, your diplomats can demand concessions from others by warning them about the president’s unpredictability if they don’t yield.

Trump’s threats may be false, but he uses intimidation as the shortest path to getting what he wants.  Beat up Denmark about Greenland, Panama about its canal and Canada for its supposed dependence on the U.S.  Even if his real goals are unknown, as the powerful leader of a powerful nation, he tries to pressure friendly nations to bend to his will.

In one aspect of this approach, Trump seems to believe that when one country sells more goods to another country, their margin represents a subsidy – getting something for nothing.  In fact, each country gets paid for its products.  It looks like the U.S. should always have a favorable trade balance with others and not “subsidize” anybody.

That policy doesn’t account for trade in services and cross-border investments. It also ignores the mutual benefits that can flow from trade, but measures only money and even that only partially.  It is virtually impossible for a country to have a neutral or favorable trade balance all the time with everybody else.

Trump’s remedy is to boost the prices of imports by imposing tariffs.  If foreign suppliers want to avoid being priced out of the market, they must swallow the tariff.  Otherwise, when tariffs boost their prices in the export market, domestic producers can raise both their prices and their sales.  Either foreign producers’ incomes are cut or American customers pay more or both.

Trump bullies Canada, which he claims without evidence that the U.S. “subsidizes” by $100 billion a year.  He threatens to raise tariffs on imports from Canada to cut the subsidy, and force it to increase its military spending and border controls. 

Trump’s crude and insulting solution is that Canada should become the 51st state.  One Canadian counters that Canada should absorb some U.S. states, including Maine.

Does the U.S. pay more to Canada than it receives? 

In 2023, the U.S. bought about $64 billion more goods from Canada than it sold there.  Canada paid $23 billion more for American services than flowed the other way.  That left a U.S. trade deficit of $41 billion.  But Canadian investment into the U.S. was $77 billion more than U.S. investment into Canada.  (There’s no U.S. foreign aid to Canada.) 

The net result was a favorable U.S. balance of payments with Canada.  Trump chooses to ignore the full facts, the essential details showing there’s no $100 billion “subsidy.”

Canada’s vast territory provides a protective buffer for the U.S., like the Atlantic and Pacific Oceans.  But it needs to boost its military spending.  Trump is right in saying it leans too much on the U.S.  And he has already succeeded in inducing increased Canadian border protection.

To accomplish his objectives, Trump has alienated many Canadians by devaluing their loyalty to their own country. You don’t have to be American to think your country is great. By insulting a close ally and its leaders, Trump may prevail on some current issues, while sacrificing a highly valuable partnership for the long term.

If Trump raises tariffs on Canadian goods, Canada has plans to retaliate dollar-for-dollar.  A trade war only leaves victims and no real winners.  It would harm the relationship for many years, reducing Canadian trust in its “neighbour” (even their spelling is different).  Trump dismisses cooperation to confront China, their common adversary. 

Does Trump really believe that Canada’s ten provinces would readily join the U.S. as a single state, and that Canada would simply drop its own national identity, foreign policy, health care system, gun control, and abortion law, just to avoid high American tariffs or confrontation with him?

Trump’s policy of “America First” must inevitably turn into “America Alone.”  Canada would focus increasingly on trade with other countries.  The European Union, which includes Denmark, might either build its own defense arrangements or see the rise of anti-American nationalism in countries there, leaving the U.S. with fewer reliable allies in either case.

Whatever may be gained by bullying rather than negotiating could come at the loss of long-term trust among allies.  That would be a high price to pay by the U.S., long after Trump’s “America First” has faded.

 

 

Trump's tariffs: both good and bad

Gordon L. Weil

Many years ago, I found myself in the middle of an international war.

As tough as each side was, I was fortunate that the ammunition was not bullets.  It was chickens.

The U.S. was the major supplier of chickens to Europe, but the organization now called the EU or European Union wanted to promote its own production, mainly in Germany.  So, it increased its tariff on imported chickens.  American producers protested, and the government retaliated by raising U.S. tariffs on several products.  The result was the “Chicken War.”

The most important U.S. tariff was placed on trucks with the aim of cutting imports of VW vans.  But trucks from all over the world were affected.  Eventually, tariffs on other items, including chickens, were either dropped or lost importance.  But the tariff on trucks remains, decades later, though some foreign producers learned how to dodge it.

As the sole American on the EU staff, my role was to improve understanding between the U.S. and Europe and help defuse the conflict.  Eventually, EU President Walter Hallstein met with President Lyndon Johnson.  Acting on behalf of the Europeans, I had the unusual opportunity of negotiating with the State Department the joint statement of the two presidents.

The moral of the story is that tariff wars have consequences.  Trucks are probably more expensive in the U.S. today thanks to the surviving tariff and because American producers could raise their prices when faced with less competition from abroad.   The Chicken War was hardly just chicken feed.

President-elect Trump likes tariffs.  He sees them as both a threat and a promise.  He seems reluctant to accept that they drive up prices and are likely to bring retaliation that will reduce U.S. exports.  Because other countries can sometimes sell Americans essential products or have lower costs of production, he claims the U.S. is subsidizing them.

Beyond economics, Trump clearly would use tariffs as an instrument of foreign policy.  If he wants a country to halt the flow of immigrants or drugs or even to increase its own military spending, he uses the tariff threat to force change.  Trump’s surprising style, untethered to tradition, can cause others to take his threats seriously. 

Aside from the impact on exports and imports and on consumer prices, the liberal use of tariffs may bring political and economic change.  Trading partners will look for alternatives and not merely submit.

He threatens both Canada and Mexico with higher tariffs unless they stop illegal immigration.  As a result, they may take action even before he takes office.  But the U.S. depends heavily on Canadian crude oil.  If a 25 percent tariff were added, U.S. refineries and their customers would pay more.  And Canada can redirect some sales to Asia.

Trump may do a lot to boost European unification.  Europe is equal to the U.S. as a market, so it could absorb much of its production that can’t enter the U.S.  Higher world prices created by the Trump tariffs would be an incentive for the Europeans to step up their own production to displace American imports.

The aspect of tariffs that holds promise for Trump is that new federal revenues would be collected at the border.  His assumption must be that imports will not be slowed by higher tariffs, so they could create the income necessary to finance the federal government, which meanwhile would be cutting income taxes.

For the moment, that’s pure theory.  Tariffs drive up prices unless foreign suppliers swallow them.  In practice, imports decline when imported goods cost more. Lower imports may produce lower tariff revenues. The revenue effect is greater when the tariff increase is greater. So, tariffs may not be quite as magical as Trump seems to believe.

Yet good reasons exist for raising some tariffs.  That happens when Americans are willing to pay more for goods through a tax disguised as a tariff to achieve national policy goals. 

If the U.S. is concerned about excessive dependence on imports of essential goods, aiding domestic producers or ensuring worldwide environmental standards, greater tariff protection may make sense.  Labor unions oppose trade deals because jobs may be shipped abroad.  But helping workers comes at a price.

China profits from exploiting its own labor and using its polluting coal to produce low-cost goods for American merchants.  Its gains pay for increased Chinese military spending used to expand its influence, threaten Taiwan and to menace the U.S. and its allies on the seas. 

It makes sense to cut China’s sales to the U.S. to level the playing field and reduce its funds for military expansion.  Customers may willingly be taxed for this effort.

Trump’s tariff threats may sometimes work, but their effect goes well beyond raising consumer prices.  Higher tariffs have both economic and political effects, sometimes long-term and often not obvious.