Trade fight: Trump tariffs as vehicle to free trade?

Trade fight: Trump tariffs as vehicle to free trade?

The debate over tariffs on foreign products continues here and overseas as President Donald TrumpDonald John TrumpLawmakers prep ahead of impeachment hearing Democrats gear up for high-stakes Judiciary hearing Warren says she made almost M from legal work over past three decades MORE labors to address what he believes are trade arrangements that put the United States at an economic disadvantage. Among his recent moves is an increase the levels of some tariffs.  Centuries of theory and evidence, though, suggest that imposing tariffs is an economically harmful exercise.

Trump may actually recognize the harm tariffs can do. He has offered to subsidize U.S. farmers he knows are harmed by retaliatory tariffs, for example, and he walked back the threat of new tariffs on the European Union. He claims to want a trade deal with Europe, with zero tariffs, subsidies and other hurdles to trade. So maybe all of this action and bluster is just a strategy that will lead to a good outcome. If so, it is a risky one.

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People have studied trade for centuries. David Ricardo first developed his law of comparative advantage more than 200 years ago, laying the foundation for an intellectual defense of trade. Modern economists — most, anyway — conclude that trade is a net benefit for those nations engaged in it, providing more goods and wealth for more people.

 

That is why the higher tariffs — and perhaps an all-out trade war — are so dangerous. The U.S. sold $1.5 trillion worth of goods around the world in 2017 and imported another $2.3 trillion. As the U.S has struck trade deals, it has exported more. Merchandise trade increased from $693 billion in 2002 to $1.5 trillion in 2017. Exports to China alone increased from $22.1 billion to $130 billion over the period. All these figures represent a staggering increase in peaceful, voluntary, and presumably, profitable associations that higher tariffs and a trade war may put in jeopardy.

In simple mathematical terms, the deficit is just an accounting exercise. I have my own trade deficit with Walmart — I buy a lot from them; they buy nothing from me — yet I am not worse off as a result. For those that are not convinced, however, consider that among the 20 countries with whom the U.S. has a trade agreement, it had trade surpluses with 14 of them through 2015, according to economist Jason Taylor. The list of 14 includes Canada, our largest trading partner. As Taylor has argued, trade deals, however imperfect, are keys to both fairness and growth.

Will the president be able to negotiate better trade deals and make them more “fair” and profitable? Perhaps, but anything he does that benefits some workers and businesses may ending up hurting many more.

Trying to protect favored steel producers and workers, for example, hurts automakers, their workers and their customers by raising the costs of making cars.

Last week the Ford Motor Company alone reported a $145 million increase in costs associated with the new tariffs, and that only for one quarter. A year of tariffs may increases expenses by $600 million for just this one company, and the repercussions could reach far into the economy. New tariffs may benefit workers in the steel industry, but for every steel worker, about 80 workers elsewhere are threatened by higher steel prices brought on by tariffs.

The Tax Foundation of Washington, D.C., has calculated that the net job losses from existing and threatened tariffs may exceed the benefits of jobs created by the Trump administration’s historic tax reforms.

If any industry is protected by tariffs, the benefit happens at the expense of Americans as a whole — as consumers, as workers in other industries, and finally, as taxpayers and citizens. For bad trade policy is now begetting bad fiscal policy. Other nations have responded to Trump’s tariffs by imposing their own tariffs on U.S. agricultural products. Anticipating the economic damage to U.S. agriculture, the president has offered up $12 billion in taxpayer support to farmers harmed by his trade fights.

Last week, the Trump administration and European Commission President Jean-Claude Juncker announced that Europe and the U.S. would stand down their disputes over trade and work toward an arrangement with no tariffs or any other barriers. This is good news if it comes to pass, but that’s uncertain at this point.

In the meantime, talk of trade wars and steps to increase tariffs will likely inflict significant economic damage to U.S. and global growth.

Michael LaFaive is senior director of fiscal policy at the Mackinac Center for Public Policy, a research and education institute in Midland, Michigan, and author of a report on NAFTA.