Beyond Trump’s Tariffs and Trade War

BY JOHN MILLER | | May/June 2018

This article is from Dollars & Sense: Real World Economics, available at

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Mr. Trump raised the stakes late Thursday in his tariff showdown with Beijing, vowing to impose another $100 billion in tariffs on Chinese goods in light of its “unfair retaliation” after his initial $50 billion in tariffs. ... Then China popped off in return, saying it is ready to “forcefully” strike back if the new tariffs are imposed.

The basic economic problem with trade protectionism is that it is a political intervention that distorts markets. One political intervention leads to another, and the cumulative consequence is higher prices, less investment and slower economic growth. —“Punishing America First” by the Editorial Board, Wall Street Journal, April 7, 2018.

The Wall Street Journal editors are right that President Trump’s tariffs will undoubtedly harm the U.S. economy. Just how much will depend on whether his tariffs and trade bluster ignite a trade war. Not that it much worries Trump, who insists that trade wars “are easy to win.” (See box below for an account of Trump’s tariffs and trade threats.)

But that doesn’t make the non-interventionist, free-market policies the Wall Street Journal editors are peddling a desirable alternative. Their hyper-globalization policies have not brought and will not bring economic relief to those who have been left behind and will instead continue to shower gains on financial elites.

The Trump Tariffs and the Triumph of Economic Illiteracy

The Wall Street Journal editors have complained that it is hard to discern the overall strategy to Trump trade policy, which seems to be backed up by little other than “nonsense trade economics.” Economists of all stripes, advocates and critics of market-led globalization, agree.

To begin with, there’s Trump’s fixation with the U.S. trade deficit with China ($337 billion in 2017), when the United States trades with many other countries, too. Martin Wolf, the pro-globalization columnist at the Financial Times, the leading British business daily, likens worrying about running a trade deficit with one country to worrying about running a consistent trade deficit with your local supermarket (where you buy without selling). Your supermarket deficit is of no concern to you (or the supermarket) as long as you continue to pay your bills. Economist Joseph Stiglitz, a leading critic of corporate globalization, adds that even if tariffs reduced Chinese imports, they would not create jobs in the United States. Those tariffs would just increase prices for U.S. consumers and create jobs in Bangladesh, Vietnam, or any other country that steps in to replace the imports that had come from China.

Then there’s Trump’s exports-only approach to trade policy. “Selling stuff [made in the United States] to foreigners is good, and buying stuff [that could have been made in the United States] from foreigners is bad,” is conservative economist Robert Barro’s best guess as to what constitutes Trump’s theory of international trade. For Barro, Trump has things backward: “Imports are things we want,” and “exports are the price we have to pay to get the imports.” One doesn’t have to accept Barro’s vision of trade to acknowledge that any coherent trade theory needs to take into account the benefits of imports to consumers and producers as well as the production and employment effect of exports, and to recognize that running a trade deficit (imports that exceed exports) is not in and of itself a sign of a failed trade policy.

On top of that, Trump’s tariffs are likely to cost U.S. manufacturers jobs, even without considering the debilitating effects of Chinese retaliatory tariffs. Take the 25% tariff that Trump imposed on imported steel. Steel tariffs might protect the jobs of workers in the steel industry, but they will damage industries and cost jobs in the many industries that use steel as an input. That includes the automobile sector, aerospace, heavy equipment, and construction, all of which will have to pay higher prices for steel. And the industries that use steel employ 80 times as many people as steel-producing industries, according to the estimates of economists Lydia Cox and Kadee Russ. While the United States might not get punished first, as the editors maintain, Trump’s tariff policy does amount to a “stop or I’ll shoot our economy in the foot strategy,” as former Clinton Administration Treasury Secretary and Obama Administration economic advisor, Lawrence Summers, has put it.

The Trump Tariff Saga in a Nutshell
(As June 11, 2018)

In February, the Trump administration imposed a 30% tariff on solar imports, an industry dominated by China. A month later, the Trump administration added a 30% tariff on steel and a 10% tariff on aluminum. After a multitude of country exemptions, several Asian countries and Russia are likely to be the only major importers subject to the tariffs. In April, China retaliated with tariffs on 128 U.S. products. Trump then announced 25% tariffs on another 1,300 Chinese products, about $50 billion of China’s exports into the United States. In response, China threatened a 25% tariff on 106 U.S. exports (including soybeans, cars, and airplanes), to go in effect whenever the U.S. tariffs do. Then Trump vowed to impose another $100 billion in tariffs on Chinese goods because of China’s “unfair retaliation” to his initial $50 billion in tariffs. That’s when the Wall Street Journal editors chimed in with the editorial above.

Since then, Trump has angered Mexico and U.S. allies Canada and Europe by adding them to list of countries on which he will impose his steel and aluminum tariffs set to go into effect of July 1.

Each country has promised to retaliate by imposing tariffs of U.S. goods. Canada announced a list tariffs it would impose on steel imports from the United States as well as 84 other U.S. products from yogurt to lawnmowers (both made in the swing state Wisconsin) to beer kegs to hair lacquers. The European Union would impose $3.4 billion of tariffs on U.S. imports including Harley Davidson motorcycles (manufactured in Wisconsin), bourbon whiskey (from Mitch McConnell’s Kentucky), Levi’s jeans and a host of other U.S. imports. Mexico promises “dollar for dollar” tariffs on U.S. imports, targeting steel, pork, bourbon, motorboats, apples, potatoes, cranberries, and many other U.S. imports.

Finally, when the conference of G-7 nations held in early June ended in conflict, the threat of a trade war was yet closer to becoming a reality.

Free-Trade Free Fall

The free-trade policies favored by the Wall Street Journal editors and traditional trade economists might be more disciplined than Trump’s hodgepodge of tariffs, but they would do no less to serve the rich and do no more to improve the lot of those who have been left behind by globalization. In fact, a populist backlash against those policies helped to elect Trump president.

Honestly presented trade theory never promised a “win-win for everyone,” as economist Paul Krugman puts it. Rather, traditional trade theory suggests that trade, rather than increase or decrease the number of jobs in a country, instead changes the mix of jobs. That in turn causes massive dislocation that leaves many behind, especially when they get little or no support from government. In his book The Globalization Paradox, economist Dani Rodrik finds that the primary effect of reducing tariffs in the United States would be to shift income from some groups to others, typically from those already hurt by globalization to those who are already benefitting. Rodrik calculates that in the case of the United States, for every $1 of overall gains, $50 of income gets shifted from one group to another. For typical working families, the $1 of overall gains is likely to be swamped by the fact that they are on the losing end of the $50 income shift. On top of that, much of the gains from trade are diffuse, going to millions of consumers in the form of lower prices for cheap imports, while losses are highly concentrated, materializing in the form of lost jobs and the economic decline of towns and regions. An honest case for freer trade would require government to compensate those losers to ensure that everyone wins. But in the United States that compensation seldom, if ever, happens.

Even the net gains from free trade have been called into question. In their exhaustive empirical study of the major studies of trade policy and economic growth, Rodrik and fellow economist Francisco Rodriguez found “little evidence that open trade policies...are significantly associated with economic growth.”

Historical evidence also casts doubt on the benefits of free trade. New York Times columnist Thomas Friedman once challenged the critics of globalization to name “a single country that has flourished, or upgraded its living or worker standards, without free trade and integration.” The accurate answer is that every one of today’s developed countries relied heavily on government policies that managed and controlled its involvement in international commerce during its rise to prowess. The world’s first industrial power, Great Britain, advocated free trade only after protectionist policies helped 18th-century industries become well established. In the half century following the Civil War, the United States imposed tariffs on imports that averaged around 40%, a level higher than those imposed in virtually all of today’s developing economies. During the second half of the 20th century, both Germany and Japan relied on managed trade, not free trade, to propel their rapid economic growth, as did South Korea and Taiwan during the 1960s and 1970s.

What Would Be Better?

A progressive policy would not turn away from trade but would engage the global economy with rules and policies that are more democratic and serve the interests of people across the globe. To begin with, a global commitment to sustained full employment would help workers escape jobs with dangerous working conditions that pay rock-bottom wages. It would also go a long way toward limiting transnational corporations’ ability to pit the workers in one country against their employees in another country.

Nor should a progressive policy sweep away all tariffs. In his column last year (“What Would a Progressive Trade Policy Look Like?” D&S, July/August 2017), Arthur MacEwan made the case for two changes in U.S. international agreements that would use tariffs to reduce inequality and insecurity. First, goods produced under conditions where workers’ basic rights to organize and to reasonable health and safety conditions are denied would not be given unfettered access to global markets. Second, goods whose production or use is environmentally destructive would likewise face trade restrictions.

Beyond those changes, with increased international trade comes the need for increased government intervention. Government must support people displaced by changes due to trade, from employment insurance funds to well-funded retraining programs to provisions for continuing medical care and pensions. Those sorts of trade policies would help the majority of the world’s people flourish economically.

is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.

“Trump’s China Tariffs,” Wall Street Journal editorial, March 22, 2018; Joseph Stiglitz, “Trump’s Trade Confusion,” Project Syndicate, April 5, 2018; Martin Wolf, “The Folly of Donald Trump’s Bilateralism in Global Trade,” Financial Times, March 14, 2017; Robert Barro, “Trump and China Share a Bad Idea on Trade,” Wall Street Journal, April 10, 2018; Bob Davis and Lingling Wei, “U.S. Set to Boost Pressure on China,” Wall Street Journal, April 12, 2018; Lydia Cox and Kadee Russ, “Will Steel Tariffs put U.S. Jobs at Risk?” Econofact, February 26, 2018; Paul Krugman, “Oh, What a Trumpy Trade War!” New York Times, March 8, 2018; Larry Summers, “Tariffs Are a ‘Stop or I’ll Shoot Myself in the Foot’ Policy,” CNBC, April 6, 2018; Dani Rodrik, The Globalization Paradox (W.W. Norton, New York: 2011); John Miller, “The Misleading Case for Unmanaged Global Free Trade,” Scholars Strategy Network, January 13, 2015.

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