Trump’s Master Plan for Tariffs
I have heard Trump supporters offer the following rationale for Trump's tarris, "It is a bargaining strategy." Then they sit back and smirk, and tell me, "Trump really wants zero tariffs, but to get these other countries to come to the table he has to get their attention. And once he has softened them up, they'll be willing to reduce their tariffs."
I have heard Trump supporters offer the following rationale for Trump’s tarris, “It is a bargaining strategy.” Then they sit back and smirk, and tell me, “Trump really wants zero tariffs, but to get these other countries to come to the table he has to get their attention. And once he has softened them up, they’ll be willing to reduce their tariffs.”
To put it simply I think this is pure nonsense. There are a number of reasons to think this is nothing other than pure nonsense and magical thinking people engage in to justify sticking with their current tribe. First, if this were true why pull out of the Trans Pacific Partnership (TPP)? That was a negotiation between a number of Pacific Rim countries like Australia, Japan, Mexico, Canada, Chile, Vietnam, etc. The goal was to lower various trade barriers. It would have cut 18,000 tariffs. Tariffs on all U.S. manufactured goods and almost all U.S. farm products would have been eliminated completely and most of those eliminations would have occurred immediately. So if reducing tariffs was Trump’s ultimate goal, staying in TPP would have made the most sense. Trump kept calling it a “bad deal” but my guess is he was completely ignorant of what TPP would have done.
Then there is NAFTA. Trump has repeatedly state that NAFTA was another “bad deal”. That the US was losing billions of dollars every year. Never mind that we were getting goods and services that were valued at more than the billions of dollars that were supposedly “lost” (consumer surplus is an actual Thing™). But if lowering tariffs and trade barriers is the goal, then this leads to the immediate question of, “Why get rid of NAFTA?” Why not something like, “NAFTA was a great start, but we need to build on that and strengthen our trade ties with our allies Canada and Mexico”? If Trump’s goal is to reduce tariffs then that rhetoric would make sense. But instead he was practically gleeful in the middle of 2017 as he decided he was going to pull the U.S. out of NAFTA entirely.
Third, President Trump seems to be completely unaware that when it comes to national income accounting identities there are two accounts that deal with foreign transactions. There is the current account which measures goods and services and currently is showing a deficit—i.e. the trade deficit that Trump keeps going on about. Then there is the capital account which measures the ownership of assets. These two accounts comprise what is known as the balance of payments. These two accounts when combined must balance to zero. So if the current account is in deficit then it must be the case that the capital account is in surplus. That is, the money that “goes out” via the current account eventually “comes back” via the capital account. And that money coming back is usually in the form of investments and those investments can and do create jobs. So while it is possible that the increased specialization and innovation on the current account side reduces jobs in the U.S. the capital account is also creating jobs. What is the net effect on jobs? Very hard to say, but considering that unemployment is rather low, probably not that bad.
Trump’s insistence that the trade deficit is in and of itself a bad thing. That the money spent buying goods and services from other countries is a loss. We get goods and services for that money. As I already noted consumer surplus is indeed a thing in microeconomics. The idea of consumer surplus is that whatever it is you are buying must have greater value than the money you are exchanging for it. If I am buying a book for $20 it must be the case that my valuation of that book is at a minimum equal to the book (in which case I’d flip a coin if I’d buy it or not since I am indifferent), but most likely I value it more. That is I might be willing to pay $30 for the book in which case my consumer surplus is $10. So yes, last year we had a trade deficit of $817 billion according to Trump, but whatever was bought was valued at more than $817 billion otherwise people would not have bought those goods and services.
Lastly a thought experiment. Suppose we got to this magical world of zero tariffs. All our trading partners showed up at the White House and said, “Donnie baby…we agree zero tariffs. Tomorrow. Yeah?” And Trump agreed. And suppose it turns out due to specialization and innovation and we….still run a trade deficit. What would Trump do? My guess is run right back to tariffs. My guess is that Trump has got it into his head that somehow the U.S. should either have zero trade balance or a trade surplus if there were no trade barriers. That the U.S. can only be “losing” (i.e. have a trade deficit) if the other side is somehow cheating and the trade deficit is proof of such cheating.
In the end, I think all this rhetorical nonsense about Trump and his grand strategy to eliminate tariffs is an example of tribalism and magical thinking. People like to belong to a tribe and changing tribes can be stressful and upsetting. And tribalism often comes with varying degrees of rational irrationality. After all, sports fandom is a type of tribalism and the rational irrationality there is sticking with your team even when it is having a bad year. You hang out with your fellow tribe members and complain about the teams problems, have a few beers, watch some stuff on television. Same thing with political parties. Look for any reason to justify the things about your party you do not like. Basically a type of confirmation bias. So all this talk of Trump having this clever end goal is just nothing more than Republican tribalism and a healthy dose of magical thinking…”If I love him enough he’ll stop beating me.”
Oh how could I forget this link, ‘If We Didn’t Trade,’ Trump Argues, ‘We’d Save a Hell of a Lot of Money’
Yes, it is true. However, saving is not the “point” of the economy. The “point” of the economy is not profits, not to make money, not to for “us” to win and “others” to lose. The whole “point” of the economy is so we can have stuff we want and need to make our lives better and easier. The economy is not a household, although it is partly comprised of household. Nor is the economy a business, although it is also partly comprised of businesses. Since the economy is comprised of households and businesses and those are in turn comprised of people, the “point of the economy” is allow people to make their lives better. Admittedly it sure isn’t perfect, but the market process is so far the only way that has been found that lets this goal of “making people’s lives better” be accomplished on a staggering scale. We want to enhance and improve the market process…not clamp down on and make the process less effective at making people’s lives better.
Also, there is this excellent post by Veronique de Rugy.
As we embark on a trade war, let’s put this question to rest. Deep down, President Trump is not a free trader.
Nothing in what the president has ever said suggests that he’s anything but a diehard mercantilist. Yes, it’s true that he complains loudly of the treatment of U.S. exporters abroad—treatment he no doubt wants to change. It’s also true that he has endorsed dropping all tariffs around the world to zero.
But even these seemingly free-trade stances stem from fundamentally protectionist beliefs: First, that if there were no tariffs, U.S. exports would rise dramatically and surpass imports, shrinking the dreaded trade deficit. And second, that exports are great and imports are bad. In other words, America wins with low imports and high exports.
He is wrong on all counts. If the U.S. trade deficit were to ever disappear, America’s economic health would take a turn for the worse. As long as the United States is growing and remains an attractive place to invest, we will continue to run a trade deficit with the rest of the world.
Exactly right, note that I mentioned there are two accounts regarding international economic activity, well if the U.S. is always seen as a desirable place to invest then that means we’ll almost sure have a current account deficit. If foreigners are coming to the U.S. and giving U.S. citizens money then inevitably that money will be used to buy foreign goods and services. Remember is the capital account is in surplus then the current account has to be in deficit. In other words, the U.S. as a desirable place to invest means we will have a trade deficit. But since that trade deficit can be summarized as foreigners selling us stuff we want to buy, where exactly is the problem?
[Note: I am using quotes because the economy is not a thing or person, it is a process. It does not think, have wants or desires. Unfortunately our language does not really have a suitable way to describe what a process like an economy or an ecosystem does. When we say, “the market decides” that really isn’t right. There is not a thing called the market that decides, instead people have made decisions and the sum total of those decisions are “the market”.]