Trump, Trade Wars and Economic Reality

Last week on Thursday President Donald Trump announced that he will impose tariffs of twenty-five percent on imported steel and ten percent on imported aluminum. He indicated that the tariffs will remain in place for a considerable length of time. Predictably the OMG chorus of congressional members, bureaucrats, and mainstream media responded immediately that the world was coming to an end and that Mr. Trump was starting a trade war. The Wall Street traders who listen to those morons panicked and the Dow dropped about 420 points. The media, having panicked the market, then declared that the drop was evidence of the beginning of the end for America’s economic stability. Curiously, that same mainstream media said nothing when the stock market fully recovered by close of business on Monday and continued to accelerate in Tuesday’s trades. Apparently they were still busy flogging the “end is near” story of trade wars.

I am a believer in free trade. I abhor tariffs and any other government sponsored favoritism that subsidizes a country’s exports or imposes barriers on its imports. Having said that I find it hysterical to suggest that Mr. Trump’s proposed tariffs will result in a trade war. Neither Wall Street nor a single member of the mainstream media made a similar suggestion when the liberal/progressive and media-beloved former President Barack Obama slapped a thirty-five percent tariff on the import of Chinese tires. And, in fact, a trade war did NOT develop. (As usual the feckless former president allowed the tariff to expire and the Chinese continued its practices of over-producing and dumping products on the United State’s markets – the same thing that China is doing today with steel.)

In actuality a “trade war” has been going on for decades and has gotten materially worse since the adoption of the North American Free Trade Agreement (NAFTA) and the Obama administration’s failure to address the trade deficits with China – particularly the currency manipulation that exacerbated the dumping tactics used by China. Even the European Union has a blatant tariff protection for its automobiles industry – assessing a ten percent penalty on the imports of American automobiles (as opposed to the United States tariff of 2.5 percent). The Canadian government imposes a de facto advantage for soft wood exports to the United States by minimizing the cost of harvested timber on government land to exporting lumber producers – most of Canada’s soft wood timber is on government land.

The United States suffers a total trade imbalance of nearly $566 Billion annually of which China accounts for nearly $375 Billion and Mexico accounts for $71 Billion. That trade imbalance rises to nearly $860 Billion if you exclude “services” as opposed to “goods” from the equation. (For those of you who have been forced to endure a teachers’ union led education in the Portland Public Schools, that means there is a trade surplus on the “services” element of trade that offsets a portion of the trade imbalance for goods.)

The growth of the trade imbalance was the result of “do nothing” policies of the previous four administrations. Mr. Obama, following his belief that most of the world problems were caused by an America that was “too strong” and “too dominant” was the worst, while Presidents George H.W. Bush, Bill Clinton, and George Bush succumbed to the “popular wisdom” that pushing back on egregious nations would start a “trade war.” Their collective reticence amounted to pinning a “KICK ME” sign on their own backs.

The nearly three decades principle of trade appeasement has not worked and the trade deficit has gotten worse – materially worse. The “popular wisdom” has proven to be a fool’s errand. Appeasement as a policy never works over the long run. Great Britain’s Prime Minister Neville Chamberlain proved that at the outset of World War II and Mr. Obama repeated that mistake with both Iran and North Korea. And it is as true for international trade policy as it is for foreign policy.

There are basically only two choices when a trade imbalance is caused by foreign government sponsored actions – grin and bear it or do something. And the “do something” is either tariffs (a tax by any other name) or import restrictions.

The fear of trade wars is rooted in a bleak period of America’s history – principally, the Smoot-Hawley Act which imposed dramatic increases in tariffs on some 20,000 imported products. It was a purely protectionist measure designed to “wall off” America from the economic repercussions of World War I and the cheap labor resulting from a lack of industry in Europe as a result. Many economists have declared that it was a contributing factor to the Great Depression.

But the danger lies not in the tariffs themselves but in the purpose for their application. Despite the hysterics of the mainstream media, Mr. Trump’s proposed tariffs are limited to two items – not 20,000 – and are designed to address an existing specific foreign government sponsored trade imbalance rather than to isolate America from foreign production. And in Mr. Trump’s case – as always seems to be the case – Mr. Trump is using them as a negotiating tool. (Mr. Trump always seeks to bargain from a position of strength and never gives away the end game. That is in marked contrast to the feckless Mr. Obama who, with his chief appeaser Secretary of State John Kerry, routinely gave away everything before the negotiations actually began – witness the Iran nuclear deal.) So it should not have been any surprise to those who watch Mr. Trump, that on Monday of this week, he suggested to Canada that imposition of the tariffs for steel and aluminum may not apply to it if the two countries could complete re-negotiation of NAFTA.

A tariff to remedy an existing foreign government sponsored trade imbalance is an important tool. A tariff designed to protect America from the competition of a free market is foolish. Why don’t we wait and see how Mr. Trump and his administration handle the matter before committing economic seppuku. As a reminder, the stock market has already recovered from its initial panic and so might we.