Opinion: Trump's Tariffs are Completely Irrational
The "Liberation Day" tariffs further no conceivable public policy objective. What are we doing here?
Tuesday, according to President Trump, was “Liberation Day” in America. What were we liberated from, exactly? If the tariffs Trump announced go into effect, it appears we will have broken free from the shackles of mutually beneficial trade and our status as a first-world country.
Trump’s “Liberation Day” tariff policy has two main components. First, all foreign goods, excepting those covered by the US-Mexico-Canada trade agreement and certain energy and raw material products, will be subject to a 10 percent baseline tariff, set to go into effect on April 5th. Second, countries deemed to have engaged in unfair trade practices, such as instituting tariffs and non-tariff trade barriers and currency manipulation, will receive a “reciprocal” tariff on top of the 10 percent baseline, effective April 9th.
The Trump White House justifies its new tariffs with reference to fairness and the “Golden Rule.”
Today’s action simply asks other countries to treat us like we treat them. It’s the Golden Rule for Our Golden Age.
They claim that American workers have been taken advantage of by wily foreigners as previous administrations stood by and watched. Finally, they argue that tariffs will restore economic prosperity and bring jobs back to the United States.
As convincing as this reasoning might sound, a quick glance at the tariffs Trump is actually implementing will reveal that his policy is less a response to actual malfeasance by foreigners than it is a reflection of his administration’s entrapment in a paranoid nativist fever-dream.
Let’s look first at the “reciprocal tariffs.” A reciprocal tariff is usually a response to a tariff implemented on one’s exports by another country. For instance, if Nicaragua were to implement a 15 percent tariff on all American goods, a “reciprocal tariff” would be America tariffing Nicaraguan goods at 15 percent, matching the rate at which our goods were taxed. Reciprocal tariffs punish other countries for tariffing our goods and prevent those countries from taking advantage of us through uneven trade barriers. If Trump really only implemented true reciprocal tariffs, there would be little to complain about.
However, reciprocal tariffs are difficult to implement. If we want to retaliate dollar-for-dollar against other countries’ tariffs, non-tariff barriers, and currency manipulation, we would have to engage in extensive research and calculations to determine just how much we are being charged. The Trump administration apparently had little patience for this hard work. Instead, they calculated their “reciprocal tariff” rate by taking a country’s trade surplus with the United States, dividing it by that country’s exports to the United States, and multiplying that number by 1/2 (the 1/2 multiplier is a “discount” given out by Trump, apparently because he’s just that nice of a guy). The assumption underlying this calculation is that bilateral trade imbalance would be driven to zero in absence of trade barriers. As the US Trade Representative website explaining the tariff calculations tells us:
While individually computing the trade deficit effects of tens of thousands of tariff, regulatory, tax and other policies in each country is complex, if not impossible, their combined effects can be proxied by computing the tariff level consistent with driving bilateral trade deficits to zero. If trade deficits are persistent because of tariff and non-tariff policies and fundamentals, then the tariff rate consistent with offsetting these policies and fundamentals is reciprocal and fair.
This assumption is completely insane. As Jeremey Horpedahl and Phil Magness of the Cato Institute point out, deficits resulting from mutually beneficial trade aren’t detrimental, and there is no reason to expect all bilateral trade deficits to approach zero. They give the example of small tropical nations that produce bananas: we might want to buy their bananas, but they might not want to buy any of our goods. That doesn’t mean that their selling us bananas represents them “ripping off” the United States, or that their not buying our goods is the result of some secret trade barrier.
The fact that countries can run bilateral trade surpluses with the US without having any trade barriers presents a major stumbling block for Trump’s tariff policy. As Roge Karma writes in The Atlantic:
[T]here is no clear or obvious path that countries could take to get those tariffs removed even if they wanted to. Countries can remove all of their trade restrictions and still run a trade surplus. South Korea, Mexico, and Canada, for example, export more to us than they import from us despite imposing virtually no trade barriers.
Finally, even when the White House does point out specific “trade barriers,” it often gets things wrong. The White House identifies the European Union’s value-added tax (VAT), the equivalent of a sales tax, as a trade barrier harming American businesses. But the VAT applies to domestic and foreign goods at exactly the same rate. The only way for Europe to engage in “fair trade,” under Trump’s rubric, would be to give a tax subsidy to American imports. The White House’s desire to see foreigners scamming us around every corner has led them to vilify other countries’ perfectly harmless policies.
As a result, American consumers will be forced, for no good reason, to pay exorbitant taxes on imported goods, including a total rate of 54% on Chinese goods (subject to an initial 20% tariff) and 30% on European goods. These price increases will wallop an American public already stretched thin by inflation.
At last, a brief word on the universal 10% tariff barrier. There is no justification, even theoretical, for this policy. Included in the 10% tariff will be goods, such as coffee and bananas, that the US simply cannot produce at scale as well as other countries. Also included will be clothing and simple manufactured goods, which are currently made overseas since the American workers that used to make them are now more profitably employed elsewhere. Anyone excited to drop out of college and work at the sock factory?
Ultimately, Liberation Day is the product of a delusional worldview in which win-win exchanges are impossible and everyone is out to get poor old America. This is the sort of worldview we might expect of a crackpot Peronist dictator in a third-world kleptocracy. It is not one we would expect of a President of the United States, particularly one from the Republican Party, a party which is supposed to understand how free markets and voluntary trade work. Should Trump fail to change course, Republican members of Congress will need to find their courage and vote to take the President’s power to unilaterally impose tariffs away. Otherwise, they will have made everybody poorer for no reason.