It’s all about the power — and the cronyism.
Almost exactly one year has passed since Donald Trump declared, “I am a Tariff Man.” Uncharacteristically, he was telling the truth.
At this point I’ve lost count of how many times markets have rallied in the belief that Trump was winding down his trade war, only to face announcements that a much-anticipated deal wasn’t happening or that tariffs were being slapped on a new set of products or countries. Over the past week it happened again: Markets bet on an outbreak of trade peace between the U.S. and China, only to get body slammed by Trump’s declaration that there might be no deal before the election and by his new tariffs on Brazil and Argentina.
So Trump really is a Tariff Man. But why? After all, the results of his trade war have been consistently bad, both economically and politically.
I’ll offer an answer shortly. First, however, let’s talk about what the Trump trade war has actually accomplished.
A peculiar aspect of the Trump economy is that while overall growth has been solid, the areas of weakness have come precisely in those things Trump tried to stimulate.
Remember, Trump’s only major legislative accomplishment was a huge tax cut for corporations that was supposed to lead to a surge in investment. Instead, corporations pocketed the money, and business investment has been falling.
The truth is that even economists who opposed Trump’s tax cuts and tariffs are surprised by how badly they’re working out. The most commonly given explanation for these bad results is that Trumpian tariff policy is creating a lot of uncertainty, which is giving businesses a strong incentive to postpone any plans they might have for building new factories and adding jobs.
It’s important to realize that Trumpian protectionism wasn’t a response to a groundswell of public opinion. As best as I can tell from the endless series of interviews with white guys in diners — who are, we all know, the only Americans who matter — these voters are driven more by animosity toward immigrants and the sense that snooty liberals look down on them than by trade policy.
And public opinion seems to have become far less protectionist even as Trump has raised tariffs, with the percentage of Americans saying that free trade agreements are a good thing as high as it’s ever been.
So Trump’s trade war is losing, not gaining, support. And one recent analysis finds that it was a factor hurting Republicans in the 2018 midterm elections, accounting for a significant number of lost congressional seats.
Nevertheless, Trump persists. Why?
One answer is that Trump has long had a fixation on the idea that tariffs are the answer to America’s problems, and he’s not the kind of man who reconsiders his prejudices in the light of evidence. But there’s also something else: U.S. trade law offers Trump more freedom of action — more ability to do whatever he wants — than any other policy area.
The basic story is that long ago — in fact, in the aftermath of the disastrous Smoot-Hawley tariff of 1930 — Congress deliberately limited its own role in trade policy. Instead, it gave the president the power to negotiate trade deals with other countries, which would then face up-or-down votes without amendments.
It was always clear, however, that this system needed some flexibility to respond to events. So the executive branch was given the power to impose temporary tariffs under certain conditions: import surges, threats to national security, unfair practices by foreign governments. The idea was that nonpartisan experts would determine whether and when these conditions existed, and the president would then decide whether to act.
This system worked well for many years. It turned out, however, to be extremely vulnerable to someone like Trump, for whom everything is partisan and expertise is a four-letter word. Trump’s tariff justifications have often been self-evidently absurd — seriously, who imagines that imports of Canadian steel threaten U.S. national security? But there’s no obvious way to stop him from imposing tariffs whenever he feels like it.
And there’s also no obvious way to stop his officials from granting individual businesses tariff exemptions, supposedly based on economic criteria but in fact as a reward for political support. Tariff policy isn’t the only arena in which Trump can practice crony capitalism — federal contracting is looking increasingly scandalous — but tariffs are especially ripe for exploitation.
So that’s why Trump is a Tariff Man: Tariffs let him exercise unconstrained power, rewarding his friends and punishing his enemies. Anyone imagining that he’s going to change his ways and start behaving responsibly is living in a fantasy world.
WASHINGTON—The U.S. posted its widest monthly trade gap since 2008 in December and a record annual deficit in goods as sturdy economic growth underpinned higher spending by American consumers and businesses.
.. Over the course of 2018, Mr. Trump imposed tariffs on a range of goods that the U.S. imports from other countries, particularly China, in hopes of giving American producers a competitive edge. He publicly lambasted companies that outsourced jobs, renegotiated pacts with major U.S. trade partners like Mexico, Canada and South Korea, and rankled longtime European allies by deeming their steel and aluminum exports a threat to national security.
Still, the trade gap swelled 12% from 2017 to $621 billion. Excluding services that the U.S. sells to foreigners, such as tourism, intellectual property and banking, the deficit grew 10% to $891.3 billion, the largest level on record.
Economists say the shortfall was fueled, ironically, by another Trump administration policy: tax cuts and spending increases that juiced demand from U.S. consumers and businesses at a time when growth in the rest of the world was slowing. Concern that the U.S. economy could overheat prompted the Federal Reserve to raise interest rates four times in 2018, contributing to a strong dollar in the second half of the year that made foreign goods relatively cheap for Americans
As a result, U.S. imports grew 7.5%, while exports increased just 6.3%.
“Higher take-home incomes for households have definitely proven to be very conducive to imports,” said Pooja Sriram, an economist at Barclays. “The outcome has been in almost the opposite direction of what the administration has wanted.”
U.S. imports of consumer goods last year jumped 7.7% to $647.9 billion, fueled in part by a 22% rise in inbound shipments of drugs. Industrial supplies like fuel and crude oil were another driver of the trade gap, with imports rising 13% from 2017 to $575.7 billion.
Highlighting the limitations of Mr. Trump’s trade policies, the goods deficit widened most with China, the U.S.’s largest commercial partner and the main focus of White House efforts. That is partly because Chinese authorities responded to tariffs by drastically scaling back their country’s purchases of key U.S. exports like soybeans, cars and metals, production of which is concentrated in states that Mr. Trump won in the 2016 election.
U.S. goods exports to China fell 7.4% in 2018 to $120.3 billion, while imports from China grew 6.7% to $539.5 billion as Americans increased their purchases of electronics, furniture, toys and other products... But deficits do subtract from gross domestic product, and the widening of the trade shortfall at the end of 2018 was a factor in slower U.S. growth in the fourth quarter... “Trade now looks set to be a more serious drag in the first quarter,” Mr. Hunter said in a note to clients. He estimates annualized GDP growth will slow to just 1.5% in the first three months of 2019, down from 2.6% in the fourth quarter.
In his first week he withdrew from the unratified 12-nation Trans-Pacific Partnership. He prepared to pull out of the U.S.-Korea Free Trade Agreement (Korus) and the North American Free Trade Agreement. Earlier this year he imposed steep tariffs on imports of steel and aluminum, using a little-used national security law, and threatened the same for autos.
Today, Korus and Nafta have been replaced by updated agreements(one not yet ratified) that look much like the originals. South Korea accepted quotas on steel. Mexico and Canada agreed to higher wages, North American content requirements and quotas for autos.
These represent a step back from free trade toward managed trade, but they will have little practical effect: The limits on how many cars Mexico and Canada can ship duty-free to the U.S., for example, exceed current shipments. Mr. Trump hasn’t stopped threatening auto tariffs, but for now his officials have elected instead to seek broader tariff reductions with Japan and the European Union.
.. Meanwhile, the U.S. trade deficit that incenses Mr. Trump has grown during his presidency, especially with China and Mexico, as a strong American economy sucks in imports. His exhortations to manufacturers to bring jobs back to the U.S. have largely fallen on deaf ears.
The “best” outcome of President Donald Trump’s narrow focus on the US trade deficit with China would be improvement in the bilateral balance, matched by an increase of an equal amount in the deficit with some other country (or countries). In fact, significantly reducing the bilateral trade deficit will prove difficult.
.. macroeconomics always prevails:.. if the United States’ domestic investment continues to exceed its savings, it will have to import capital and have a large trade deficit... because of the tax cuts enacted at the end of last year, the US fiscal deficit is reaching new records – recently projected to exceed $1 trillion by 2020 – which means that the trade deficit almost surely will increase, whatever the outcome of the trade war. The only way that won’t happen is if Trump leads the US into a recession, with incomes declining so much that investment and imports plummet... The “best” outcome of Trump’s narrow focus on the trade deficit with China would be improvement in the bilateral balance, matched by an increase of an equal amount in the deficit with some other country (or countries). The US might sell more natural gas to China and buy fewer washing machines; but it will sell less natural gas to other countries and buy washing machines or something else from Thailand or another country that has avoided the irascible Trump’s wrath... But, because the US interfered with the market, it will be paying more for its imports and getting less for its exports than otherwise would have been the case. In short, the best outcome means that the US will be worse off than it is today... The US has a problem, but it’s not with China. It’s at home: America has been saving too little. Trump, like so many of his compatriots, is immensely shortsighted. If he had a whit of understanding of economics and a long-term vision, he would have done what he could to increase national savings. That would have reduced the multilateral trade deficit... There are obvious quick fixes: China could buy more American oil and then sell it on to others. This would not make an iota of difference, beyond perhaps a slight increase in transaction costs. But Trump could trumpet that he had eliminated the bilateral trade deficit... As demand for Chinese goods decreases, the renminbi’s exchange rate will weaken – even without any government intervention. This will partly offset the effect of US tariffs; at the same time, it will increase China’s competitiveness with other countries—and this will be true even if China doesn’t use other instruments in its possession, like wage and price controls, or push strongly for productivity increases. China’s overall trade balance, like that of the US, is determined by its macroeconomics... China has more control of its economy, and has wanted to shift toward a growth model based on domestic demand rather than investment and exports. The US is simply helping China do what it has already been trying to do. On the other hand, US actions come at a time when China is trying to manage excess leverage and excess capacity; at least in some sectors, the US will make these tasks all the more difficult... if Trump’s objective is to stop China from pursuing its “Made in China 2025” policy – adopted in 2015 to further its 40-year goal of narrowing the income gap between China and the advanced countries – he will almost surely fail. On the contrary, Trump’s actions will only strengthen Chinese leaders’ resolve to boost innovation and achieve technological supremacy, as they realize that they can’t rely on others, and that the US is actively hostile... If a country enters a war, trade or otherwise, it should be sure that good generals – with clearly defined objectives, a viable strategy, and popular support – are in charge. It is here that the differences between China and the US appear so great. No country could have a more unqualified economic team than Trump’s, and a majority of Americans are not behind the trade war.Public support will wane even further as Americans realize that they lose doubly from this war: jobs will disappear, not only because of China’s retaliatory measures, but also because US tariffs increase the price of US exports and make them less competitive; and the prices of the goods they buy will rise. This may force the dollar’s exchange rate to fall, increasing inflation in the US even more – giving rise to still more opposition. The Fed is likely then to raise interest rates, leading to weaker investment and growth and more unemployment... Trump has shown how he responds when his lies are exposed or his policies are failing: he doubles down. China has repeatedly offered face-saving ways for Trump to leave the battlefield and declare victory. But he refuses to take them up.Perhaps hope can be found in three of his other traits:
- his focus on appearance over substance,
- his unpredictability, and his
- love of “big man” politics.
.. Perhaps in a grand meeting with President Xi Jinping, he can declare the problem solved, with some minor adjustments of tariffs here and there, and some new gesture toward market opening that China had already planned to announce, and everyone can go home happy.
.. In this scenario, Trump will have “solved,” imperfectly, a problem that he created. But the world following his foolish trade war will still be different: more uncertain, less confident in the international rule of law, and with harder borders. Trump has changed the world, permanently, for the worse.
Even with the best possible outcomes, the only winner is Trump – with his outsize ego pumped up just a little more.
<blockquote class=”twitter-tweet” data-lang=”en”><p lang=”en” dir=”ltr”>China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…</p>— Donald J. Trump (@realDonaldTrump) <a href=”https://twitter.com/realDonaldTrump/status/1020287981020729344?ref_src=twsrc%5Etfw”>July 20, 2018</a></blockquote>
<script async src=”https://platform.twitter.com/widgets.js” charset=”utf-8″></script>
And yet, both his tax cuts and trade war are contributing to these dynamics.
- You juice the economy at full employment with a deficit-financed, $2 trillion tax cut, and the Fed’s naturally going to ramp up their concerns about overheating.
- At the same time, the extra fiscal impulse is leading to stronger U.S. growth, relative to that of our trading partners, and that, too, puts pressure on both the dollar and the trade deficit.
- Meanwhile, tariffs tend to reduce the circulation of dollars in foreign exchange markets, yet another pressuring factor of the value of the greenback.
The figure below, an index of the value of the dollar against a basket of foreign currencies, shows the dollar beginning its most recent appreciation around when the first salvos of the trade war hit. Relatedly, as Trump’s tweet mentions, the Chinese yuan is falling sharply against the dollar, down about 7 percent since April, a movement that directly offsets that same amount of Trump’s tariffs.
In other words, the president has a point. But while part of this is what he gets from inheriting a strong economy — something I suspect he wouldn’t trade — part of it is because of his and his party’s actions.
.. The Fed is different, as its independence from politics is so vital. There are many sad examples of countries whose economies did a lot worse than they should have because their central banks became an arm of the government.
.. That said, I’m not reaching for the vapors. I really wouldn’t want to see Trump ratchet up his Fed critiques to a regular feature of his daily rants.
.. So, if you’re listening, Mr. President, no point in whining about a currency appreciation to which you’re contributing. Whine as you might, you can’t have a “great economy” closing in on full employment, an independent Fed, a big tax cut, a trade war — and a falling dollar.
These figures are usually described as a huge vulnerability for the United States. They are also often told as a morality tale of American self-indulgence or (alternatively) American naivety. Either because Americans do not work hard enough or because they have been sold out by globalist elites, America is losing and China is winning.
.. In about 1890, the U.K.-U.S. relationship looked a lot like the U.S.-China relationship today. In 1890, Britain held the world’s largest pool of investible wealth, as the United States does today. In 1890, the U.S. economy was growing much faster than the U.K. economy, much as China’s economy grows faster than America’s today.
.. In 1890, investment capital flowed from Britain (the more mature economy) to the United States—and on a huge scale. In those days, Britain invested something like 6–8 percent of its national income overseas, with the U.S. as the single largest destination.
.. Instead of attracting capital, however, China is repelling it.
.. China’s trade surplus is the flipside of its failure to attract foreign direct investment. It’s an axiom of national accounting that the current account (the trade balance plus earnings on overseas investment) must precisely equal the capital account (net foreign investment in a country)... China’s foreign investment is working out exactly as economic theory would predict:China’s foreign investment is working out exactly as economic theory would predict: It is yielding much lower returns than it would if it were invested in productive enterprise at home... A 2008 World Bank study found that the average return on multinational corporations’ investments in China was 22 percent. American multinationals earned even more, an average of 33 percent. China earns less than 3 percent on its immense holdings of U.S. Treasury... In 1890, when the U.S. was fast industrializing, it was not the dream of every candy maker in Cleveland or every furniture maker in Buffalo to gain a French passport for his children and a second home in Germany for himself... not only earned its profits in the U.S., but it saw its future and its security here as well... When Chinese business leaders invest tens of millions of dollars in second homes in Vancouver or send their granddaughters to Los Angeles to give birth to U.S. citizens, what are they saying about their expectations about China?
.. She looked at entrepreneurs a rung or two below the ruling oligarchy, people with some money but no political power. Their overwhelming wish was to see their children emigrate to a democratic country: Canada, Australia, the United States. Their overwhelming fear: the democratization of their own country, which they worried would mean their poorer fellow citizens seizing the opportunity to plunder them.
.. When the United States was growing fast, in the 1890s, it imported goods on a massive scale from the United Kingdom: locomotives, engineering equipment, and other high-technology items; high-quality consumer goods like Sheffield cutlery and Staffordshire ceramics; and hot-weather commodities grown within the British empire and reexported from London to the U.S., including rubber, chocolate, and palm oil.
.. They were paid for by U.S. food exports—but even more, by selling the British an opportunity to participate in future U.S. growth, which is what a capital account most fundamentally represents.
.. Because China cannot or will not attract foreign capital, it must run a huge trade surplus. That means fewer food imports (and thus a lower standard of living for its people). That means China must finance its future development out of its own savings (which means its people must consume much less of the proceeds of their own development).
.. very visibly, those who have accumulated savings are redeploying them elsewhere.
.. They accept radically lower returns on their investments in order to gain from Canada or Australia or the United States the security of property that their own government cannot provide.
If this is winning, it’s no wonder that so many Chinese every year seek to emigrate to the countries on the “losing” side.
What is a wonder is that so many in the Trump administration want to emulate on this side of the Pacific the Chinese model of economic development that terrifies so many of those who must live under it.
The May 19 deal between the US and China seems to have reduced tensions between the two countries. But, given the global nature of America’s trade deficit, any effort to impose a solution focusing on one country will likely backfire.The bad news is that the framework of negotiations is flawed: A deal with any one country will do little to resolve America’s fundamental economic imbalances that have arisen in an interconnected world... In May 1930, some 1,028 of America’s leading academic economists wrote a public letter to US President Herbert Hoover urging him to veto the pending Smoot-Hawley tariff bill. Hoover ignored the advice, and the global trade war that followed made a garden-variety depression “great.”President Donald Trump has put a comparable spin on what it takes to “make America great again.”.. Tracing outsize current-account and trade deficits to an extraordinary shortfall of US domestic saving – just 1.3% of national income in the fourth quarter of 2017 – counts for little in the arena of popular opinion... Nor does it matter when we point out that correcting for supply-chain distortions – caused by inputs from other countries that enter into Chinese assembly platforms – would reduce the bilateral US-China trade imbalance by 35-40%... Indeed, with budget deficits likely to widen, America’s saving shortfall will only deepen in the years ahead. That points to rising balance-of-payments and multilateral trade deficits, which are impossible to resolve through targeted bilateral actions against a single country... China’s vague promise to purchase more American-made agricultural and energy products borrows a page from the “shopping list” approach of its earlier trade missions to the US. Unfortunately, the big-wallet mindset of a deal-hungry China reinforces the US narrative that China is guilty as charged... Since 2000, the largest annual reduction in the US-China merchandise trade imbalance amounted to $41 billion, and that occurred in 2009, during the depths of the Great Recession. The goal of achieving back-to-back annual reductions totaling more than double that magnitude is sheer fantasy... Without addressing the shortfall in domestic saving, the bilateral fix simply moves the deficit from one economy to others... Therein lies the cruelest twist of all. China is America’s low-cost provider of imported consumer goods. The Trump deal would shift the Chinese piece of America’s multilateral imbalance to higher-cost imports from elsewhere – the functional equivalent of a tax hike on American families. As Hoover’s ghost might ask, what’s so great about that?