Bottom line, Trump’s tariffs and trade war lay bare his colossal ignorance of economics. For one thing, he misunderstands what a “trade deficit” is.
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
— Donald J. Trump (@realDonaldTrump) March 2, 2018
At Econolog, David Henderson takes this tweet apart.
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with.
Trump’s premise is false. You don’t lose billions of dollars on trade: you gain on trade. If people were to lose from trade, they wouldn’t trade. They trade to gain–and they do gain. Let’s say I buy a car from Japan or a toy from China–pardon me, since the Chinese government temporarily banned the use of the letter “n”–I buy a toy from Chia. I value that car or that toy at something greater than what I pay for it or I wouldn’t buy it. So I don’t lose; I gain.
Economists have been pointing out that Trump doesn’t “get” international trade, even before he was elected. See, for example, “What Donald Trump Doesn’t Understand About the Trade Deficit” by Neil Irwin in the New York Times, from July 2016. But Trump thinks in terms of winners and losers; if the U.S. has a trade deficit, it must be losing.
Paul Krugman wrote of Trump’s tweet:
Trump has always had a thing about trade, which he sees the way he sees everything: as a test of power and masculinity. It’s all about who sells more: if we run a trade surplus we win, if we run a trade deficit, we lose …
This is, of course, nonsense. Trade isn’t a zero-sum game: it raises the productivity and wealth of the world economy. To take a not at all random example, it makes a lot of sense to produce aluminum, a process that uses vast amounts of electricity, in countries like Canada, which have abundant hydropower. So the U.S. gains from importing Canadian aluminum, whether or not we run a trade deficit with Canada. (As it happens, we don’t, but that’s pretty much beside the point.)
Trump isn’t intelligent enough to grasp what stopping trade and starting trade wars with long-established trading partners would actually do to our economy. As Scott Sumner wrote at Econolog, “How’d Smoot-Hawley work out?”
Part of the problem for working Americans is that the big, splashy trade agreements produced mixed results. Yes, they create more wealth, but some jobs are lost, and many wages are suppressed. And it seems to most working folks that the big shots didn’t care about the parts of the economy that got left behind, and until that aspect of “free trade” is worked out, trade deals will be regarded with great suspicion. But that doesn’t mean throwing up a bunch of trade barriers to protect individual industries will necessarily help anybody, especially in the long run.
Even I can grasp that if Canada really is able to produce aluminum more efficiently than we do, it makes sense for American manufacturers to buy aluminum from Canada rather than make it ourselves. Otherwise, it becomes more difficult to make things with aluminum that are competitive with stuff made in other countries with aluminum. However, somebody’s got to think of what to do with out-of-work aluminum workers and the communities they live in.
But I digress. Steel is something Trump probably thinks he knows about, because buildings are made of steel. Back during the 2016 campaign, Kurt Eichenwald reported that for years Trump had been importing Chinese steel for his buildings. (Ironically, China is not a major steel exporter to the U.S. any more and won’t be much affected by the tariffs. The top steel importers to the U.S. are Canada, Brazil, South Korea, Mexico and Russia.) But Trump doesn’t really seem to know much of anything.
The bigger concern is that, according to many sources, nearly everybody advising Trump on trade told him not to do the tariff thing, and he did it anyway. It appears that he is kicking his perpetual tempter tantrum mode into even higher gear. Mike Allen and Jonathan Swan write at Axios that Trump is getting ready to blow off everybody:
His staff at times managed to talk him off the ledge. No more. Tired of the restraints, tired of his staff, Trump is reveling in ticking off just about every person who serves him.
Trump hates rigidity and rules. He has grown to especially hate Kelly’s rigid rules, so he purposely blew off Kelly’s process and announced planned tariffs in a haphazard way.
There are signs Trump has also had it with his National Security Adviser H.R. McMaster, who he complains is long-winded and inflexible. MSNBC’s Nicolle Wallace reported Trump is ready to bounce him.
The tariffs call was also a big middle finger to economic adviser Gary Cohn, who has fought for more than one year to kill tariffs that would provoke a trade war or higher prices for consumers, a de facto tax increase. Cohn, who stuck around to fight tariffs, now seems more likely to leave.
Trump has decided to put the global economyat risk because he was in a pissy mood.
The evidence for this scary-sounding theory comes from a Friday afternoon report published by NBC News, tracing Trump’s recent decision to slap large tariffs on imports of steel and aluminum. These tariffs have already prompted threats of retaliation from America’s leading trade partners; European Union President Jean-Claude Juncker has discussed putting tariffs on blue jeans, bourbon, and Harley-Davidson motorcycles — three iconic American exports. Australian Trade Minister Steven Ciobo is openly warning that Trump’s actions may cause another recession.
So how did Trump come to such a monumental decision? According to NBC’s sources in the White House, it was because he got some bad press.
On Wednesday evening, the president became “unglued,” in the words of one official familiar with the president’s state of mind.
A trifecta of events had set him off in a way that two officials said they had not seen before: Hope Hicks’ testimony to lawmakers investigating Russia’s interference in the 2016 election, conduct by his embattled attorney general and the treatment of his son-in-law by his chief of staff.
Trump, the two officials said, was angry and gunning for a fight, and he chose a trade war, spurred on by Commerce Secretary Wilbur Ross and Peter Navarro, the White House director for trade — and against longstanding advice from his economic chair Gary Cohn and Treasury Secretary Steve Mnuchin.
Back to Zack Beauchamp:
Dig deeper into the NBC story and the picture gets even more worrisome. Even after his initial outburst, Trump apparently didn’t bother to consult with his economic and diplomatic advisers on the best way to implement these tariffs. In fact, almost no one important was warned of Trump’s monumental decision before it was made, and the White House did virtually nothing to prepare for the all-too-predictable angry response from foreign leaders. …
…The reason this kind of thing hasn’t happened before, according to report after report from inside the White House, is that Trump’s advisers have been able to keep his impulses in check. …
…The problem is that Trump’s staff is disintegrating amid a series of mounting scandals. The Russia investigation, allegations of domestic violence by a top White House staffer, reports of outlandish spending by Cabinet officials, and just general frustration with Trump’s chaotic management style have led to a number of departures from the Trump White House. This has led to a weakening of the personnel wall between Trump and his more outlandish impulses.
This whole mess played out in the tariff case: A piece in Politico suggests that Rob Porter — the former White House staff secretary who resigned amid multiple allegations of domestic abuse — had been organizing meetings designed to block imposition of new tariffs. “Porter’s resignation removed a fierce opponent of the tariffs from the West Wing and revived the chaotic policy review process that defined the early weeks of Trump’s presidency,” Politico reports.
White House staff chaos is letting Trump be Trump.
I’ll give Paul Krugman the last word:
Never mind the net loss of jobs from a full-scale trade war, which would in the end probably be a relatively small number. The point instead is that the gross job losses would be huge, as millions of workers would be forced to change jobs, move to new places, and more. And many of them would suffer losses on the way that they would never get back.
Oh, and companies on the losing end would lose trillions in stock value.
So the idea that a trade war would be “good” and “easy to win” is surpassingly stupid. And the way Trump seems to be starting his war is also remarkably stupid: start by protecting goods that are inputs to industries that employ far more people than those being protected? Do so in the name of national security — a justification that is, for good reason, almost never invoked — when the biggest source of those inputs is that hostile foreign power Canada?
In themselves, these tariffs aren’t that big a deal. But if they’re a sign of what future policy is going to look like, they’re really, really bad.
For another last word, see David Atkins, Trump’s Ignorant, Infantile Game of Civilization.