Trump’s tariff talk could already be hurting the economy

Perhaps the most level-headed defense of Donald Trump’s misguided plan for high global tariffs is that they will never be imposed. Trump surrogates have been assuring the business community of late that the former president, if elected, will only use the threat of blanket import taxes of 10 to 20 percent to pressure other countries to lower their own barriers to American goods. The result: freer trade between participating countries and more revenue for American companies, without ever firing more than a warning shot.

Howard Lutnick, a billionaire who recently co-chaired the Trump transition made a version of this argument on CNBC, using the auto industry as an example. “If we said, ‘We’re going to tax you like you tax us,’ do you think they’re suddenly going to let Mercedes and all these Japanese companies, Porsches and BMWs charge 100 percent rates in America? ?” he said. “Of course not. They will come and negotiate, and their rates will come down, and finally Ford and General Motors will be able to sell in these places.”

The idea that the White House can use import restrictions to influence the policies of foreign governments is not entirely without precedent. Research shows that between the 1970s and the early 1990s, various governments sometimes succeeded in opening up foreign markets by threatening tariffs or other protectionist measures. In fact, a fair case can be made that Trump’s 2019 promise to impose 10 percent tariffs on Mexican imports has pushed our southern neighbor to cooperate more fully in limiting illegal immigration.

However, Trump’s new global tariff threat would likely be far less successful and entail significant costs even if the tariffs were never implemented. The “just a threat” strategy sounds nice in the abstract, but in reality it has fatal flaws: It ignores not only America’s checkered history of such gambling, but also the economic damage that threats alone can inflict on the American and global economies.

David Frum: Trump’s plan to raise your taxes

The occasional success stories on tariff threats are exceptions to a broader negative trend. In one extensive analysis of every U.S. unfair trade investigation between 1975 and 1993—91 cases targeting foreign discrimination against U.S. goods, services, and intellectual property—Kimberly Ann Elliott and Thomas O. Bayard found that U.S. efforts to pressure foreign countries into their markets to open up were successful less than half the time. The authors’ definition of “success” was generous to U.S. officials: it might include only partial achievement of U.S. goals and result in no actual trade liberalization. Even then, the victories took place mainly when a single country was dependent on the US market – a situation that applies to only a few countries today – and for a brief period in the mid-1980s when the US had much more economic influence the global market. markets than is currently the case. (For example, China shipped nearly a third of its exports to the United States in 1991; today that figure is about 15 percent.) Moreover, when the U.S. government actually imposed trade restrictions, the strategy worked only twice in twelve attempts. . In the remaining ten cases, foreign governments did not agree to U.S. demands; Despite new American protectionism, they maintained the policies and practices that Washington objected to.

Trump-era trade actions have encountered similar difficulties. No country lowered its tariffs on U.S. goods in response to tariffs imposed or merely threatened during the Trump administration, and most of those U.S. tariffs are still in effect. Worse, several foreign governments – in China, the European Union, India, Turkey, Canada, Mexico and Russia – retaliated against US exports, which in some cases remain under pressure. Since then, Trump’s “Phase One” deal with Beijing, which was signed in early 2020 and hailed as evidence that the tariffs were working because China had agreed to buy U.S. agricultural products and open certain domestic markets, has buzzing out; China has largely failed to follow this up. And, as current US Trade Representative Katherine Tai just said confirmedthe Chinese tariffs have not changed the policy or behavior of the Chinese government.

In short, a recent one analysis the Trump-era retaliation shows that “a one percentage point increase in foreign tariffs was associated with a 3.9 percent reduction in U.S. exports.” So Trump’s previous strategic tariff experiment resulted in fewer trade, no more, and America still pays for it.

The mere threat of a tariff can have significant economic costs by increasing uncertainty for businesses, which has been the case found to reduce U.S. investment, production, and hiring. An unpredictable policy environment gives private companies an incentive to stay out of the U.S. market until policies are clarified, resulting in an overall lower level of current economic activity. Numerous studies have confirmed these effects, but they’re really just common sense: who would want to bet millions of dollars on a new U.S. factory that could soon face higher production costs, or be unable to produce products abroad? sell, thanks to possible tariffs?

Various measures of what economists call “trade policy uncertainty,” or TPU, pointed during Trump’s term in office, when he routinely announced or teased radical changes to U.S. tariff policy on Twitter. According to one index, the average TPU during the Trump administration was the highest under any president since 1960, when the series began. A study in the Journal of Monetary Economics estimated that the increase in uncertainty in the Trump era has reduced total US investment by $23 billion to $47 billion in 2018 alone.

U.S. trade law increases this uncertainty by giving the president broad and ambiguous power to quickly impose new tariffs without input or approval from Congress. Like my Cato Institute colleague Clark Packard and I detail In a new article, after the Smoot-Hawley tariff debacle of the 1930s—in which Congress dramatically increased U.S. protectionism, sparking a global trade war that worsened the Great Depression—the Legislature delegated much of its constitutional trade authority to the executive power. Congress assumed that the president, with national constituency and foreign affairs responsibilities under Article II, was less likely to repeat Smoot-Hawley. This approach to US trade policy has worked reasonably well for over eighty years, but Trump (and, to a lesser extent, Joe Biden) has exposed a major flaw: the laws in question are so broad and ambiguous that a president can act unilaterally. impose or enforce harmful tariffs on dubious grounds.

Rogé Karma: Reaganomics is on its last legs

Moreover, over the past seven years, U.S. courts have rejected any challenge to Trump-era tariffs on steel, aluminum and China imports, and to the laws under which those tariffs were imposed. Judges have proven to be especially deferential to the executive branch in cases alleged to involve “national security,” a term so broad and undefined that a famous Trump administration lawyer refused to give in that it could not apply to imported peanut butter.

Given this precedent, the next president will essentially have the green light to impose new tariffs — and dictate U.S. trade policy — without any concern that the other branches of government will stand in the way. Such tariffs, as well as their size and scope, will therefore come down to the whims of one person in the Oval Office, and that could be Trump. Future courts may conclude that global, blanket tariffs are fundamentally different from past actions and thus fall outside the bounds of whatever law was used to justify them, but that outcome is far from guaranteed. Until Congress changes the law, trade policy will be vulnerable to abuse and will therefore continue to thicken the fog around trillions of dollars in annual U.S. trade.

Unfortunately, that fog is piling up again now that uncertainty about trade policy has increased back to levels not seen since Trump’s term in office. His victory next week would likely increase uncertainty even further, causing inevitable collateral damage to the US investment climate and economy. Indeed, with reports by corporate anxiety And deferred investments al proliferatingit seems the damage has already begun.