Beneath the Surface

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We are only three months into Donald Trump’s second term, and we can already see how much destruction he is willing to unleash in pursuit of American greatness as he imagines it. He is proving to be much better at tearing things down than building things up.

To address the challenge of making government more cost effective, he demolishes whole agencies and fires thousands of employers with little regard for their competence or the importance of their work. To address the challenge of mass migration from poorer, more violent countries, he tries to shut down immigration almost entirely and deport migrants whether they are dangerous criminals or potential good citizens. To face the challenge of making American workers and their products competitive in global markets, he launches a trade war that risks global trade contraction and recession. In each case, his legal authority to do these things is dubious and contested.

I think the underlying problem here is a nostalgic or backward-looking worldview, combined with a disrespect for democratic process. When Trump and his MAGA supporters think about how to make America great, they think of the country as it used to be long ago, perhaps the 1920s or the late nineteenth century. In those days, the federal government was smaller and did a lot less. We had no Social Security or Medicare, no Environmental Protection Agency, civil rights legislation, or collective bargaining rights. Our immigrants were mostly from Europe, and restrictive legislation of the 1920s aimed to keep it that way. With American manufacturing expanding rapidly, we could look to our domestic industries to meet our needs. Trump and his supporters would rather try to turn the clock back than live in the world of today.

That is why Trump is bringing back the old and largely discredited policy of massive tariffs. His proposed numbers would raise the average tariff on foreign goods from about 2 percent to 22 percent. That is even higher than the notorious Smoot Hawley tariff that economists blame for worsening the Great Depression of the 1930s. Contrary to the historical evidence, Trump blames the Depression on a decline in tariffs, since he claims that tariffs made other countries finance our government. Tariffs are actually a tax on importers and their customers.

Why Tariffs?

The Trump administration has given many rationales for high tariffs. They can sound pretty good, especially when accompanied by the half-truths and rhetorical flourishes of a master marketer. But they do not stand up very well to economic facts and analysis. Supposedly, the tariffs will help negotiate fair-trade agreements, bring in needed revenue, and rebuild domestic manufacturing. Let’s consider each of these objectives in turn.

Negotiate free-trade agreements?

One aim is for the Trump administration to use tariffs as a bargaining chip to make our trading partners treat us more fairly. We threaten them with tariffs, but if they will remove their trade barriers to our goods, we will remove our trade barriers to theirs. This makes a certain amount of sense in cases where other countries are caught engaging in unfair trade practices. One example is “dumping,” the practice of selling a large volume of product at artificially low prices—below cost or below the price in their own country—to drive their competitors out of business. Tariffs that are only bargaining chips may well turn out to be temporary, and they could actually increase global trade rather than curtail it.

But Trump’s enthusiasm for tariffs seems to go far beyond that. One big clue is that he has put a minimum 10% tariff on every country, regardless of its trading practices. In addition, he has added a “reciprocal tariff”—a highly misleading term—to sixty countries, simply because we have a trade deficit with them.

That is obvious from the way the administration estimates the trade barriers erected by each country. It uses a novel formula that most economists find rather silly. The formula takes our trade deficit with a country and divides it by the amount of that country’s exports to us. The result is the percentage of exports to the United States that are not balanced by imports from the United States. For the European Union that figure is 39%, for India 52%, for China 67%, for Vietnam 90%. The administration then assumes that the entire imbalance is due to tariffs and other restrictive trade practices. According to Trumpian logic, this would justify a tariff of the same percentage on the other country’s goods. But since we want to be “nice,” we will impose a tariff of only half of that, such as 26% instead of 52% on India.

Confused? You should be. This is not really a reciprocal tariff, since it is rarely equal to any actual tariff other countries impose on us. Think of it more as a punishment on a country for selling us more than it buys from us, for whatever reason.

The underlying assumption here is that our trade imbalances are inherently unfair—to us. But think about it. Americans use their wealth and their strong dollars to buy products from all over the world, some of which we simply don’t produce here. We get the benefit of a lot of stuff. Our trading partners get access to the world’s dominant currency, which they can either save and invest or spend where they like. They have any number of good reasons for saving dollars—often buying treasury bonds backed by the full faith and credit of the U.S. government—or spending them on some other country’s goods. Maybe they need to buy less expensive goods than ours. Maybe they have product preferences, like preferring smaller, fuel-efficient vehicles to our gas-guzzlers. Why punish either Americans or foreigners for shopping where they please?

Another problem with the tariff formula is that it considers only goods, where the U.S. runs a deficit, and not services, where we run a surplus. That exaggerates the deficits and punishes countries for selling us clothing or cell phones, while failing to credit them for buying our financial services or software.

In Trump’s extravagant rhetoric, the whole world has been beating up on us for a long time. “Our country and its taxpayers have been ripped off for more than 50 years.” And, “For years, hardworking American citizens…were forced to sit on the sidelines as other nations got rich and powerful, much of it at our expense.” Some Americans are on the sidelines, having lost their jobs to foreign competition, and I will get to them shortly. But the idea that other countries have been getting rich at our expense is contradicted by the continuing American supremacy in average wealth and income. For all of China’s advances, our per-capita GDP is still six times as great as theirs. Fareed Zakaria criticizes Trump’s “nostalgic fantasy” that we were relatively better off in the Gilded Age, with its higher tariffs, than we are now. “In 1900, the United States accounted for about 16 percent of the global economy by one measure; it is now about 26 percent of it.” Trump seems willing to blow up the global trading system, based largely on his misconception that the United States is becoming a “loser” among the world’s nations.

Bring in needed revenue?

After allegedly being left behind by other countries, Trump says that “it’s now our turn to prosper and in so doing, use trillions and trillions of dollars to reduce our taxes and pay down our national debt.” That way of putting it glosses over the fact that tariffs are themselves taxes that will be paid by American importers and largely passed on to their customers. We will pay them in the form of higher prices for shoes, clothing, furniture, appliances, electronics and other items manufactured abroad. (And before we’ve even started paying them, the hit to the stock market is also costing us trillions in retirement savings.)

How much revenue those new taxes generate for the national treasury will depend on how much Americans continue to import, as opposed to either substituting domestic goods or cutting back spending. Out of one side of his mouth, Trump talks about the trillions to be collected, while out of the other side he talks about how people can avoid those costs by buying American.

The promise to pay down the national debt is hard to take seriously, considering that the revenue from tariffs will probably be more than offset by other revenue losses from the administration’s policies. Republicans are soon to unveil their plan to increase the debt ceiling to extend the 2017 tax cuts and probably add new ones. In addition, the elimination of thousands of IRS jobs is expected to weaken the agency’s ability to collect what taxes are owed. Even if we think of tariffs as just a substitute for other taxes, that does not make them a good idea. They are among the most regressive of taxes, since they especially hurt low-income consumers who spend their income on inexpensive imports to make ends meet. Cutting income taxes while raising import taxes tends to shift the tax burden away from the rich and toward the poor. Like many of his policies, tariffs will hurt many of the working-class families he promised to help. And If the Republicans make good on their threats to cut Medicaid and other “safety-net” programs, low-income Americans will get a double whammy of higher costs and reduced benefits.

Rebuild domestic manufacturing?

The dominant theme in Donald Trump’s rhetoric about tariffs is the aim to rebuild America’s manufacturing economy. The globalization of trade has allowed other countries to supply more of the manufactured goods that used to be made in America. Our job losses have been greatest for workers with limited educations and for small towns that relied on one or two factories for their employment base. Trump places the blame mainly on the countries that gained manufacturing jobs, describing them as raping and pillaging America.

Tariffs on foreign goods could bring some manufacturing jobs back, but probably not as many as the Trump administration hopes. Domestic manufacturing industries with underutilized capacity, notably the automobile industry, might add some jobs quickly. (That’s why the President could pack his rollout event with UAW workers who applauded the tariffs.) However, even these industries rely on global supply chains for many of their components. Tariffs will increase their costs, and passing those costs on to customers may hurt their sales. In addition, retaliatory tariffs will hurt their sales in other countries. As David J. Lynch wrote in the Washington Post:

…Trump’s hopes of repatriating all of the manufacturing capacity that moved offshore during globalization’s heyday will almost certainly be disappointed, economists said. The average car, for example, contains about 30,000 parts with roughly half coming from abroad. Activating the domestic suppliers capable of producing those may take years and cost billions of dollars.”

For products that we haven’t made in America for a long time, like sneakers, U.S. manufacturers would have to play catch-up. The task of creating factories and supply chains would be even harder and take longer. American companies are unlikely to invest the billions of dollars required to expand manufacturing capacity unless they are confident that the tariffs will remain in place for a few years. But they are so unpopular with both economists and consumers that Congress or a new administration could easily reverse them. So could the courts, since Trump chose to declare a national emergency and impose them unilaterally instead of working through Congress.

The larger issue involves global economic trends. Manufacturing capacity has been growing in the rest of the world, while the manufacturing share of global economic work has been falling, due to automation. More American jobs are being lost to automation than to outsourcing. So our efforts to increase manufacturing jobs run up against two powerful limits: An increasingly hi-tech economy does not need as many manufacturing workers, and the United States cannot expect to regain the dominance in manufacturing that it enjoyed after World War II.

If not tariffs, what?

The good news is that the American economy has remained relatively strong despite the lost manufacturing jobs. It has survived the increase in global competition, the Global Financial Crisis, and the pandemic. Both times Trump took office, he inherited an economy that was coming back strong after a previous crisis. Now he threatens to create a new crisis by trying to take us back to a bygone era.

A more realistic approach to the future would be to acknowledge that we are predominantly a service economy, and build on that strength. We should not abandon manufacturing, but we should compete fairly on price and quality, not start trade wars. What tariffs we impose should be carefully targeted to sanction unfair trade practices. Maintaining or increasing America’s share of the good service jobs being created requires that we invest heavily in the health and education of our work force, especially the portion of the work force that has been left behind. The Trump administration seems to be doing the opposite, cutting funding for everything from cancer research to assistance to poor school districts. I doubt that this approach will make America greater, but it can make us poorer.