My intrepid Mercatus Center colleague, Veronique de Rugy, teams up with Jack Salmon to expose some of the countless fallacies that infect the case for Trump’s idiotic protectionism. Three slices:
70 days into the new Administration, the stock market is down about 10% since the trade war kicked off.
Real GDP is forecast to come in at -3.7% for Q1.
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Economic data thus far doesn’t suggest that the U.S. economy, consumers, or businesses are feeling particularly “liberated” by the ongoing trade war.
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Moreover—and contrary to popular myth—trade deficits are not debt. They create no invoices that we’re on the hook to pay. They arise simply whenever we import more than we export in dollar terms, with foreigners investing in America all the dollars they don’t spend on American exports. (Some of these investments can and do take the form of loans to Americans, but it’s not the case that trade deficits by their nature are debt.)
Foreigners sell us goods and then reinvest the proceeds in America—buying Treasury bonds, investing in startups, acquiring property, and building factories. That’s a vote of confidence in the U.S. economy.
A related error is mistaking America’s so-called “goods trade deficit” for the overall trade deficit. Nearly four-fifths of the U.S. economy is services. No surprise: We have a “services trade surplus.” Now it’s true that we nevertheless import more goods and services than we export. But it’s utterly meaningless to talk about a “deficit” in the trade of one type of output (tangible things) while ignoring trade in another (intangible things).
Jason Furman reveals, in the pages of the New York Times, much of the lunacy of Trump’s trade ‘policy.’ Four slices:
My local bookstore has been taking advantage of me for years. I have run a trade deficit, giving it money with nothing but books in return. At the same time I have been taking advantage of my employer, running a trade surplus with it as it gives me a salary with nothing but educational services in exchange.
Thinking that way about the kinds of exchanges we all engage in is obviously absurd. But that’s precisely the reasoning behind the “reciprocal tariffs” President Trump is expected to announce this week. The details have not yet come into view, but if he does follow through, it’s clear the plan would add to what are already the nation’s highest tariffs since the 1940s. Their effect will be lower economic growth, higher inflation, higher unemployment, the destruction of wealth and a tax increase on American families. It will deal a blow to the rules underlying the global trading system and further empower China.
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Running bilateral trade deficits is generally not an indication of a problem or an abuse. In recent years the United States exported more to Brazil than it imported, a fact that had more to do with Brazil’s appetite for American oil and airplanes than any trade barriers. In fact, Brazil levies an average tariff of 6 percent on goods coming from the United States, well in excess of the 1 percent levied by the United States on imports from Brazil. Same in reverse for the United States and France: We import more than we export despite having a higher tariff on their goods than they do on ours.
In fact, there is generally no correlation between a country’s tariff levels and its overall trade balance. A particularly clear example is the 27 countries in the European Union, which have identical tariffs and other trade policies but range from trade deficits to trade surpluses.
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Even if other countries don’t retaliate against our tariffs with a slew of their own, the situation is still bad. Take automobile tariffs on Mexico. They would cause Americans to buy fewer cars from that country, so we would need fewer pesos, the things with which you buy their cars. As demand for Mexican currency goes down, so does its value relative to the dollar. But a strong dollar makes it more expensive for foreign countries to buy our exports. Either way, less trade, which would be bad for both consumers and workers. (As an aside, if the tariffs do succeed in meaningfully lowering trade deficits it would most likely be because they caused a recession, bringing down the amount U.S. consumers buy or businesses invest.)
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Lower-income families will pay a higher fraction of their income in tariffs, but the revenue will very likely go to tax cuts skewed to high-income households. The stock market has already lost more than $3 trillion since Mr. Trump first dialed up his tariff threats in February. The losses could grow over time as the United States increasingly distances itself from the benefits of imports, exports and global supply chains.
[DBx: I disagree with Furman that higher tariffs will lead to higher unemployment. They might do so in the short-run, but are unlikely to do so in the long-run. Trade policy determines in which particular firms and industries the jobs are; trade policy does not – over the long-run – determine how many jobs there are.]
Veronique de Rugy isn’t swallowing the ridiculous prediction that Trump’s tariffs punitive taxes on Americans who purchase imports and import-competing domestic outputs will bring in so much customs revenue that the government will mail big checks to Americans.
“Trump breaks his promise to lower prices.” A slice:
Major surveys find that fear of tariffs is a major contributor to declining confidence. By a margin of 72% to 5%, voters believe that higher tariffs mean higher prices in the near future, and according to CBS, their concerns extend to the long-term as well.
Tico Moreno’s letter in today’s Wall Street Journal is worth pondering:
Jeremy Siegel provides an excellent explanation that “Trade Deficits Are Capital Surpluses” (op-ed, March 13). An important point to consider: In his hypothetical of an American buying a $40,000 Toyota, nobody was taken advantage of, so long as the transaction was executed freely by both parties. Both sides ended up better off after the exchange, or else it wouldn’t have happened at all.
If we insist that somebody was taken advantage of—or that one benefited less than the other—then it was Toyota. The American has in his hands the real good. Toyota has in its hands pieces of paper that may, in the long run, turn out well or poorly. If the company holds U.S. stocks, they may lose value if the government pursues growth-adverse policies such as tariffs. If Yogi Berra were alive today, he might have told us that imposing such levies is an exercise in “self-inflicted suicide.”
Jacob Sullum reports on some of “the logical contradictions in Trump’s case for tariffs.” A slice:
Trump is still pushing these contradictory claims. The White House claims tariffs “do not raise prices” yet somehow “create new incentives for US consumers to buy US-made products.”
During a recent interview, by contrast, Trump admitted that his 25 percent tariff on imported cars might make them more expensive. “I couldn’t care less if they raise prices,” he said, “because people are going to start buying American-made cars.”
Even that concession was misleading, because those “American-made cars” frequently incorporate foreign-made parts, which are also covered by Trump’s tariffs. Overall, Yale’s Budget Lab estimates, Trump’s tariffs will raise car prices by 13.5 percent, adding $6,400 to the cost of “an average new 2024 car.”
Kimberlee Josephson makes clear that “tampering with trade is a fool’s game.” A slice:
The Trump Administration’s unnerving aspirations for raising tariff rates have received immense attention and intense scrutiny (as well they should). The current administration’s complete disregard for the historical and empirical data on the damaging effects of tariff hikes should be called out (and it is). Given that many are taking up the charge for reminding us about the pitfalls of protectionism, this article will direct attention to a non-tariff barrier to free trade — preferential treatment.
Eric Boehm is correct: “Trump’s trade war will reduce American exports too.” Two slices:
America exports a lot of orange juice to Canada—because we have an obvious comparative advantage when it comes to growing citrus fruit. In 2023, Canada bought $281 million worth of fruit juice from the United States.
In Trump’s flawed way of looking at trade, that would mean America is somehow ripping Canada off, but this is actually a great deal for everyone involved. Canadians get orange juice that they can’t produce on their own. America’s orange growers and juicemakers get a larger market for sales. And lots of other people on both sides of the border make a buck by hauling, warehousing, stocking, and selling all that juice.
A trade war means all those people lose—the Canadians and the Americans. Orange juice is one of the products Canada has included in its package of retaliatory tariffs, and that’s one of the reasons why orange juice prices have declined recently.
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Trump and his allies have framed this trade war as a zero-sum game in which either America or its trading partners must win while the other loses. That’s fundamentally wrong. Trade makes both sides better off.
Equally important: Limiting trade harms both the buyers and the sellers.
David Henderson explains why the United States won’t take over Canada.
Candace Smith is interviewed about her work on etiquette.
