March 9, 2018
The “free trade” crowd, which includes virtually every economist, is up in arms about President Trump’s imposition of across-the-board tariffs on steel and aluminum. And to a large extent they are right. Through trade Americans have attained access to a broader array of goods and services at lower prices than would otherwise have been the case. The U.S. and the rest of the world have been moving steadily in the direction of free trade since the end of World War II and its benefits have been widely recognized by all.
But implicit within that free-trade-is-good hypothesis is an assumption that there is also “fair trade”. But therein lies the problem. Many countries do not play by the rules. The primary culprit is China, but there are others. China, for example, unfairly subsidizes its export industries. It routinely exports raw and semi-finished materials to other countries which alter the product slightly and re-export it to the U.S. as a different product. By doing so China can escape high U.S. tariffs. The cheater countries show no respect for intellectual property rights and unfairly reproduce movies, books, and music. They ignore patent and copyright laws. We do not live in the idyllic, textbook world that economists studied while they were in school. Something needs to be done to level the playing field. The question is, how do you penalize the bad guys while simultaneously protecting your neighbors and allies? Trump’s initially-announced across-the-board tariffs on all steel and aluminum products were ill-advised and not the way to go. We believe that a more targeted approach has a better chance of success.
Part of the problem is that we do not know what Trump is trying to accomplish. His mantra has always been “America First”. During the campaign he repeatedly threatened big tariffs on a variety of products from China. He threatened to (and did) pull the U.S. out of the Transpacific Partnership. He talked about pulling the U.S. out of NAFTA or, at the very least, renegotiating the agreement. And he said that “trade wars aren’t so bad”. Thus, he seems to embrace a much more protectionist trade policy. His initial announcement of across-the-board tariffs on steel and aluminum is consistent with such a philosophy. But across-the-board tariffs will not go uncontested. Friends, neighbors, and allies are threatening to counterpunch with tariffs on quintessential American products like bourbon, Harleys, Levi’s, and who knows what else. Tariffs applicable to steel and aluminum are one thing and, by themselves, would not have a major impact on GDP growth or inflation. The fear is not what happens today but what happens tomorrow, and it is 100% certain that reprisals will occur if Trump follows through on across-the-board tariffs. A trade war could emerge. While we acknowledge that a trade war is possible, we do not think such an outcome is likely for the following reason.
Trump is notorious for shooting for the moon by saying or tweeting something outrageous, and then backtracking. Already he has said that Mexico and Canada will not face the levies if they agree to re-negotiate NAFTA. He pointed out that the U.S. has a trade surplus with Australia and called it a long-term partner. Sounds like Australia may be exempt as well. Then he noted that many countries are involved with us on trade and the military. More countries will presumably fall through the cracks. He claimed on Thursday that he intends to go down the list country by country and drop out various countries as circumstances warrant. Suddenly a very different sense emerges. Under this scenario it sounds like he intends to find the bad guys and stick it to them. If so, bravo! It is about time to go after the cheaters.
But where is the “real” Donald Trump. Is he a staunch protectionist? Or is he the guy that recognizes that some countries are not playing by the rules and he intends to level the playing field. Let’s hope he chooses Option 2 and that seems to be the direction he is headed. He can then claim that he fulfilled another campaign promise without doing too much damage to the economy and, in the process, enable U.S. exporters to compete fairly with the rest of the world.
It is also important to understand that trade deficits are not inherently bad. In 2017 the U.S. had a trade deficit of $568 billion. Specifically, it had a trade deficit of $811 billion in goods, combined with a $243 billion trade surplus in services. What we do not hear enough people talking about is that a deficit of that magnitude means that $568 billion of foreign capital flowed into the U.S. That money is used to stimulate GDP growth, create jobs, and boost the stock market. What’s so bad about that? Furthermore, that foreign investor attitude is not going to change any time soon. With the recently enacted tax cuts GDP should grow a bit more quickly in coming years. The U.S. stock market should continue its ascent.
We certainly support the idea of “free trade”. Its positive impact on the global economy is well documented. But the “free trade” concept assumes that there is also “fair trade”. While President Trump’s leadership style often obscures his objective, we hope that he is trying to achieve a fair trade objective. If so, we support a package of narrowly-defined tariffs and wish him well. We vigorously oppose a more protectionist trade policy. Nobody “wins” a trade war. Everybody loses — including the U.S.
Stephen D. Slifer
NumberNomics
Charleston, S.C.
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