This is a repost from Forbes.
The S&P 500 closed today down 0.71%. Analysts blame the trade wars, which accelerated while President Trump was in China. I worry. Academic economists argue that protectionism contributed to the Great Depression.
President Trump says he raised tariffs to punish America’s trading partners (including China, Canada, Germany, and the United Kingdom) for “trade abuse.” He is doing what he promised. In a notable speech at a metal recycling plant in June 2016, Trump pointed to “massive,” “unfair” tariffs and trade barriers creating America’s large and persistent trade deficit, which was $800 billion in goods in 2017 -- proof to him that other nations and the World Trade Organization (WTO) are taking advantage of the U.S. Ironically, after World War II, we set up the trading system that led to the WTO to prevent mutually destructive tit-for-tat or “beggar thy neighbor” spirals.
The president claims tariffs help employers and workers hurt by trade. Is he right? Trade deals did concentrate losses on certain workers, employers, and regions, while the gains of lower prices were dispersed. However, policy tools don’t include time machines. We can't go back.
Launching an escalating series of battles with other nations now will likely hurt more employers and workers than they help.
In January, Trump imposed a 25% tariff on imported steel – primarily affecting the European Union (EU) and China —and a 10% tariff on aluminum. The EU led the way on retaliation with tariffs against U.S. motorcycles, bourbon whiskey, and soybeans. Trump, in turn, is now threatening hundreds of billions in additional tariffs, on everything from tilapia to airplane components.
The retaliatory tariffs are clues to how well U.S. trading partners know America’s complicated political election map. These tariffs are aimed at the heart of the Republican party.
U.S. motorcycle company (and exporter) Harley-Davidson is headquartered in Wisconsin, home of House Speaker Paul Ryan, and Harley has announced it will shift some production to Europe. Bourbon exporters are heavily concentrated in Kentucky, home state of Senate Majority Leader Mitch McConnell. And soybeans come from Midwestern states, including Iowa, home to the first Presidential nominating caucuses. The politics of trade shows there is no such thing as pure “free trade.” All trade is managed and negotiated to balance economic and political interests at home and abroad.
Harvard economist Dani Rodrik sees trade agreements as solutions to a wickedly impossible “trilemma” -- the problem that nations cannot simultaneously fulfill the demands of national sovereignty, democracy, and hyper-globalization. Rodrik views Trump’s tariffs in particular as no solution, but as “knee-jerk protectionism.” Tariffs won’t help his working class voters because they impose real costs and benefits on different industries. Tariffs on imported steel and aluminum may help U.S. producers in say, Pittsburgh, against foreign competition, but they also will raise the prices of all industries that use those metals as inputs. Neighboring businesses in Detroit may raise prices and lower overall production, which will cost jobs. Should we be protecting a steelworker’s job or a beer brewery worker's where aluminum cans are used, and are now more expensive due to tariffs?
This issue will get more heated as the November elections approach. For the economy, we are not currently seeing trade barriers affect overall economic performance, although fear of a growing trade war has affected the stock market. An escalating tit-for-tat trade war, without clear strategic objectives, could grow into a problem that forces the economy into recession.
Trump is not listening to women much, but the voice of economist Joan Robinson in 1937 might be quoted back to him. Banning imports and increasing exports may increase the employment of workers in your country in the short term. But, before long, an increase in the exports of one country leads to a decline in exports of other countries. At the very best “it leaves the level of employment for the world as a whole unaffected” and probably reduces it.
Reducing employment worldwide, including the United States, could be Trump’s legacy.