Why Is Trump a Tariff Man?

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.

At the same time, his trade war was supposed to shrink the trade deficit and revive U.S. manufacturing. But the trade deficit has widened, and manufacturing output is shrinking.

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.

U.S. Posts Record Annual Trade Deficit

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.

Trump Hasn’t Killed the Global Trade System. Instead, He Split it in Two.

Allies find relations modestly tweaked, despite the president’s rhetoric, while relations with China are entering a deep freeze

When Donald Trump entered the White House on a platform of defiant nationalism nearly two years ago, many feared he would dismantle the global trading system the U.S. and its allies had built over the past 70 years.

He hasn’t. Instead, he is presiding over its realignment into two distinct systems.

  1. One, between the U.S. and its traditional, democratic trading partners, looks a lot like the system that has prevailed since the 1980s: free trade with a smattering of quotas and tariffs like those Ronald Reagan once deployed.
  2. The second reflects an emerging rivalry between the U.S. and China carrying echoes of the Cold War. On trade, investment and technology, the U.S. is moving to undo some of the integration that followed China’s accession to the World Trade Organization in 2001.

There are two big questions hanging over this realignment. The first is deciding how far the U.S. is prepared to decouple from China. The U.S. has given China until March 1 to avoid higher tariffs by addressing complaints it discriminates against foreign companies and steals their technology. Mr. Trump is counting on a deal that avoids a trade war. But many in his administration and Congress don’t trust China to make the necessary concessions and would likely advocate a sharper break.

The second question is whether the U.S. can persuade allies to join a united front to contain China. Other countries don’t relish the choice. Their economic ties to China are far greater than they ever were to the Soviet Union during the Cold War.

Two years ago, it was easy to predict a grimmer fate for the global trading system. Mr. Trump campaigned as a protectionist willing to tear up trade agreements and raise tariffs to shrink the trade deficit and bring back factory jobs.

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.

Douglas Irwin, an economist and trade historian at Dartmouth College, calls these results the “status quo with Trumpian tweaks: a little more managed trade sprinkled about for favored industries. It’s not good, but it’s not the destruction of the system.”

.. Yet the status quo with China is crumbling. Businesses have grown disillusioned with China’s restrictions on their activities, forced technology transfer and intellectual-property theft, all aimed at building up domestic competitors at foreign expense. Meanwhile, legislators in both parties are alarmed at increased military assertiveness and domestic repression under President Xi Jinping.

.. When Mr. Xi visited the U.S. in 2015, Mr. Sullivan urged his colleagues to pay more attention to China’s rise. On the senate floor, he quoted the political scientist Graham Allison: “War between the U.S. and China is more likely than recognized at the moment.”

Last spring, Mr. Sullivan went to China and met officials including Vice President Wang Qishan. They seemed to think tensions with the U.S. will fade after Mr. Trump leaves the scene, Mr. Sullivan recalled.

“I just said, ‘You are completely misreading this.’” The mistrust, he told them, is bipartisan, and will outlast Mr. Trump.

While delivering one message to China, Mr. Sullivan gave a different one to the administration and its trade negotiators: Don’t alienate allies needed to take on China.

“Modernize the agreements but stay within the agreements,” he says he counseled them. “Then we have to turn to the really big geostrategic challenge facing our country and that’s China.”

His was one voice among many urging Mr. Trump to single out China for pressure. Presidents Obama and George W. Bush sought to change China’s behavior through dialogue and engagement. Obama officials had begun to question engagement by the end of the administration. Last year, in its National Security Strategy, the Trump administration declared engagement a failure.

The Trump administration regards economic policy and national security as inseparable when it comes to Beijing, because China’s acquisition of Western technology both strengthens China militarily and weakens the U.S. economically.

The administration has yet to publicly explain its goals. In 1946, at the start of the Cold War, diplomat George Kennan made the case for containing the Soviet Union in his famous “long telegram.” The Trump administration hasn’t done anything comparable for China. One reason might be that administration officials are divided. Mr. Trump appears torn between wanting to halt China’s rise at any cost and hoping for “a big and very comprehensive deal” that lifts the cloud of a trade war.

.. U.S. and domestic concerns have prompted Australia, New Zealand, Japan, Britain and Canada to restrict or consider restricting Huawei equipment in their telecom infrastructure, in particular for the next 5G mobile phone standard.

The U.S. is also seeking to wall China off from future trade deals. It insisted the pact replacing Nafta include a clause letting the U.S. quit if either Canada or Mexico signs a free-trade agreement with a “non-market economy,” i.e., China.

.. The first goes to the heart of Mr. Trump’s goal. If his aim is to hold back China’s advance, economists predict he will fail. China’s innovative capacity has expanded dramatically. China now accounts for 18.6% of articles in international scientific journals, according to one study, and nearly a quarter of global venture-capital investment, according to another.

Indeed, some China experts fear that the U.S., by adopting a more adversarial approach, weakens China’s reformers and strengthens its nationalist factions, making conflict more likely. They predict China will intensify its pursuit of technological self-sufficiency.

.. Persuading other countries to hold China at arm’s length will be harder than containing the Soviet Union. China accounts for 11% of world exports, whereas the Soviet Union in the 1980s accounted for less than 3%,

.. China is 22% of Japanese imports and exports; the Soviet Union was less than 1%.

.. Many of China’s close neighbors depend far more, economically, on China than on the U.S.

.. U.S. officials note that China’s aid, such its Belt and Road infrastructure program, often saddles recipients with debt. Yet the U.S. offers no alternative, said Mr. Rudd.
.. Some of Mr. Trump’s trade policies undermine the united front he wants against China. He hasn’t sworn off protectionism against U.S. allies, promising to withdraw from Nafta even if its replacement isn’t ratified by Congress. His steel and aluminum tariffs, most of which remain in place, outraged such allies as Canada.

U.S. officials play down such frictions as easily worked out. Abroad, they are seen as more serious. Canadian ambassador to the U.S. David MacNaugton said he told U.S. trade negotiators that if Mr. Trump carried through on his threatened 25% tariff on Canadian autos, it would fundamentally change bilateral relations for the worse for years to come. In a letter accompanying Nafta’s replacement, the U.S. agreed not to levy the tariffs.

The US is at Risk of Losing a Trade War with China

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:
  1. his focus on appearance over substance,
  2. his unpredictability, and his
  3. 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.