These Two Gentleman Love Tariffs
These Economists Were Free TradersĀ
David Ricardo (left), and Adam Smith,
Donald Trumpās anointment of J.D. Vance, a fellow ideologue now hisĀ veepĀ nominee andĀ intellectualĀ Sancho Panza, confirms that, if elected, Trumpās signature economic policy will continue through the next four years and conceivably beyond.
This is the policy that most defines Trump andĀ thatĀ represents his greatest potential for economic harm. Not his tax cutsāwhatever you think of them, taxes have alwaysĀ fluctuatedĀ and Trumpās cuts were nothing new.Ā
The policy that willĀ mark theĀ TrumpĀ eraĀ in the history books is protectionismāaĀ 180-degree pivot fromĀ seven decadesĀ of postwar, bipartisan support for free trade.Ā
TrumpāsĀ venom forĀ trade, a staple of his naĆÆve fantasy to remake America as he imagines it used to be, is a bedrock belief. ItāsĀ one of few issues on which he has been consistentĀ (something that cannot be said for his views on abortion, entitlements, or any number of others).Ā
And itās emblematic of hisĀ largerĀ nationalismāhis wish to fence in America and make it, like Trump himself, suspicious, hostile, and defensive. It expresses his essential pessimism, which darkens his view even of market competition and private enterprise. Better to let the economic commissar in the red necktie decide which products Americans can buy from whom: Donāt leave it to private businesses or consumers, that is, to the American people.
J.D. Vance has Trumpās populist, neo-interventionist instincts. If Mike Penceās nomination in 2016 represented a ransom check to evangelist Republicans, Vance signals the former Presidentās wish to solidify and extendĀ tariff policy andĀ his (similarly harmful) anti-immigrant nativism.Ā
In some ways, Vance is more Trump than Trump.Ā As an economic populist, he isĀ openlyĀ skeptical of business and an admirer of Lina Khan, President Bidenās FTC chairwoman, known for creative theories of antitrust and, so far, mostly losing litigation.Ā
But VanceĀ isĀ a newcomer to protectionism.Ā InĀ Hillbilly Elegy,Ā his 2016 memoir of growing up poor in Appalachia,Ā the book that made him known,Ā he recounted the widespreadĀ unease of folks in Middletown, OhioāVanceās hometownāwhenĀ Kawasaki, a Japanese firm,Ā bought a controlling share ofĀ Armco, a steel company.Ā After the furor abated, Vanceās grandfather, who had worked at the steel plant, told him, āThe Japanese are our friends now.ā As Vance wrote, āIf companies like Armco were going to survive, they would have to retool. Kawasaki gave Armco a chance.āĀ In the interconnected global economy, cutting off capital from a foreign source would be self-destructive, as the Yale Law grad had come to understand.
Or had he? By the timeĀ VanceĀ started runningĀ forĀ the Senate in 2021, the Japanese were not āour friendsāāor not his friends, even though they remain staunch American allies. In a replay of the Armco purchase, late last year Nippon Steel won a bidding war to purchase the foundering U.S. Steel. The deal was clearly in the workersā and in theĀ U.S.ās interest. Nippon offered twice as much as a domestic competitor andĀ promised to inject needed capital and technology to make U.S. steel more competitive. It also promised to keep making steel in the U.S. and to keep the local headquarters in Pittsburgh.
Vance urged Washington to block the deal, in which, he claimed with rabid incoherence, āa critical piece of Americaās defense industrial base was auctioned off to foreigners for cash.ā Since his moonlight conversion, the former venture capitalist has been the most reliable of Trumpās trade hawks,Ā with the possible exception ofĀ Peter Navarro, the resident anti-trade apostle when Trump was in the White House, who has been sketching a tougher anti-tradeĀ agenda for a possible second term while, in fact, serving a four-month jail sentence for contempt of Congress.Ā
It brings me no joy to observe that President Biden, with a similarly wrongheaded show of empty patriotism, hasĀ also opposed the still-pendingĀ Nippon deal. Indeed, he has imitated his predecessorās anti-trade policies,Ā by sustaining some of his tariffsĀ and requiring domestic content in federal projects, more than any Democrat in memory. Douglas Irwin, author of the opus,Ā Clashing Over Commerce: A History of U.S. Trade Policy,Ā told me, āThe two parties seem to have converged.āĀ
I have written about Bidenās protectionism before; this is Trumpās moment. But two distinctions should be made. First, Trumpās tariffs were of far greater magnitude.Ā Trumpās first-term tariff hikes on steel, aluminum, solar panels, washing machinesĀ and other goods hitĀ $400Ā billion in imports;Ā Bidenās tariffs onĀ ChineseĀ semiconductors,Ā electric vehiclesĀ and other goodsĀ affected $18 billion.Ā Ā And Trumpās proposals for a second term are of an order of magnitude larger.Ā
Second, for Trump, who prides himself on being āTariff man,āĀ protectionismĀ fitsĀ organically withinĀ his America First agenda, of a piece with hisĀ reluctance (at best)Ā to aid Ukraine,Ā which isĀ unmentioned in hisĀ platform,Ā and his growth-killing threat toĀ deport āmillionsāĀ of migrants, and his general hostility to multilateralism. Bidenās economic populism attempts to curry some of the same political favor, but he is no America Firster. He fully embraces the globalism that America and its allies institutionalized in the embers of the Second World War.Ā TheĀ ideaĀ then and sinceĀ was that global economic cooperation, including trade,Ā was the surest vaccine against global depressionāwhich in turn would be the surest defense against World War 3.0. As theĀ famedĀ professor of foreign relationsĀ at Cornell University, Walter LaFeber, used to say from aĀ rather imposingĀ lectern, military lines follow trade lines. It is almost a jokeāitĀ isĀ a joke--that the 2024 Republican Platform mourns that the U.S. is in decline relative to the era when it āvanquished Nazism and Fascismā due to āunfair Trade Deals and a blind faith in the siren song of globalism.āĀ
It was just such an anti-globalist mindset, evidenced in the Smoot-Hawley Tariff Act of 1930, and in retaliatory tariffs by other nations, that helped to extend the Great Depression, and thatĀ encouraged democratic governments toĀ ignore the growing Nazi threat.Ā
The theory of free trade isĀ actually muchĀ olderādatingĀ toĀ Adam Smith and David Ricardoāand it is one that any child could understand.Ā Free trade broadens the pool of goods so that the best and cheapest products are more available to all. It would not make sense to force people in Wyoming to grow their own sugar cane or folks in the Mississippi Delta to raise their own beefābetter to let each region specialize on theirĀ particular advantageĀ or skill. Indeed, had tariff wallsĀ been erectedĀ between theĀ statesĀ in 1789, each state now would be immeasurably poorer.
The same dynamic holds internationallyāwe sell wheat to the world and buy French wine, Korean appliances, Vietnamese textiles. Even in industries in which the U.S. is well-represented, such as autos, foreign competition is a vital check on quality and price. You donāt have to be asĀ old as Biden or Trump to remember the pre-import days when Detroit gouged the public on overpriced clunkers. The special case of security threats posed by adversaries (China today) was recognized by Adam Smith, who, inĀ The Wealth of Nations,Ā defended an act to compel the use of British merchant ships (which could be commandeered by the navy in time of war) because, as he noted, ādefenceĀ ā¦ is of much more importance than opulence.ā But the portion of trade that poses a security threat, then or now, is slim, certainly less frequent than Presidents or Prime Ministers allege.Ā
Mostly, the argument against trade is economic, and it doesnāt hold water. According to Gary C.Ā Hufbauer, a senior fellow at the Peterson Institute for International Economics, Americaās engagement with the world economy since 1950 has produced cumulative gains that in 2022 boosted the GDP by 10 percent, about $7,800 per person or $19,500 per household.Ā
To be sure, imports have cost the countryĀ jobs,Ā an estimated 300,000 per year. That sounds like a lot, but 50 million people change jobs every year, fewer than 1% because their job was exported to China or elsewhere. Many more jobs are lost due to the relentless capitalistic processes of firms moving, or reducing output or going under, or innovating in ways that render some positions obsolete, including automation and improvements to efficiency (which is occurring in factories around the world, not just in the U.S.). The remedy for people victimized by such losses is to retrain them to work in growing, largely high-tech industries in which the U.S. is leading, artificial intelligence among them, not to prop up remnant factories in shrinking industries.Ā One day this will be obvious. As Irwin notes, most millennials do not listen toĀ SpringsteenĀ and they have never beenĀ insideĀ a steel mill.Ā
The benefits from trade are frequently said to favor elites, but the benefits of lower prices accord disproportionately to people of lesser means. Elites do not shop at Walmart. To people on a budgetāsome of them may live in Middletown,Ā Oh.āa $4 blouse makes a big difference.Ā
Trade also delivers tremendous benefits to exporters. But you canāt have exports without imports. If Americans didnāt spend overseas, other nations wouldnāt have the dollars, or the political will, to buy our products.Ā
This was seen during the Trump administration, when the E.U., Mexico, Canada, India, China and others slapped retaliatory tariffs that cut into U.S. exports. Agriculture was a particular loser. Farm exports to China plunged by $10 billion, or nearly two thirds, in a single year. Soybean farmers and whiskey distillers suffered and bankruptcies in the farm beltĀ hit a decade-long high.Ā The Administration responded with $23 billion in welfare checks to farmers (responding to a crisis of its own making). This is the crazy illogic of tariffs:Ā the government restricts imports of superior orĀ more affordable foreign goods and punishes the industries in which America is most competitive.Ā
Moreover, though Trump protected a few jobs in steel, downstream firms that use steel (and employ many more workers) suffered. On a net basis no jobsĀ wereĀ saved; possibly some were lost.Ā Meanwhile, the tradeĀ deficitĀ increased.
If you want more of that, Trump/Vance is your ticket. Trump has floated plans for a 10% across the board tariff hike on most imports (from everywhere) and a 60% levy on China. This would amount to an estimated ten-fold increase in trade taxes.Ā Trump has suggested he could then dispenseĀ with income taxesāalso a fantasy. It would require a 60% tariff on every import to make up for income taxes (the total of imports is $3.83 trillion, while the U.S. collects $2.28 trillion in income taxes)ābut of course, such a tariff (or anything close) would cause prices to soar, sales to plunge, and importers to look for other work. The sure result would be inflation and a serious economic dislocation or worse. This is the kind of protection that neither American businesses nor workers need. Given its basis in a fundamental misconception of trade as a zero-sum exercise instead of, like most free market transactions, one that produces net gains, it would push America into a darker futureānot an imagined idyllic past, but a fearful constricted present. Ā
We want āfair tradeā. Reciprocal tariffs until removed, then āfreeā trade until āthe cows come homeā.
Always grateful for Roger's good sense and ability to illuminate financial issues.
I sent this column to a couple conservative friends, both who came out of the traditional Republican mode but have voted for Trump and will again. I was curious how they'd react on a topic I felt they'd be sympathetic to.
Their responses were very similar. Here's one: "In a nutshell, definitely gets to the heart of my issue. I do have trouble reading any of these articles on either side that go to such great lengths to inject just political oration. I would love a good article on the topic that is just based on the facts and well informed opinions without the political hyperbole."
I didn't feel Roger used any "political hyperbole." But this is how it landed on them. So, I wonder how this same column might be turned a little to be more persuasive with Republicans such as they.