Trump's trade deals punish US allies. American consumers will pay the cost.

USA Today

3 days ago

President Donald Trump has set up a grand contest between his Economics 101 textbook and what mainstream economists teach.
President Donald Trump recently gave U.S. allies a painful whack in the international trade arena. Among the victims were Japan, South Korea and Europe. Why did Trump punish these countries? What punishments were served up? Why did the allies accept unequal deals? Finally, were the beatings deserved?
Punishment was delivered because the three allies, like many others, sold more wares to U.S. customers than they purchased from U.S. vendors.
In 2024, Japan sold $148.4 billion of goods to U.S. buyers and bought just $79 billion, resulting in a trade surplus of $69.4 billion.
On similar arithmetic and terminology, South Korea enjoyed a 'subsidy' of $66 billion, and the European Union (27 countries) received a whopping $236 billion.
In Trump's edition of Economics 101, the trade surpluses not only equate to unfair subsidies paid to foreigners, but they also destroy millions of U.S. manufacturing jobs. These are huge offenses, according to Trump's thought process, especially when committed by U.S. friends and allies.
Punishment is accordingly severe. Starting on Aug. 7, Japanese and Korean goods reaching U.S. ports will pay tariffs of 15%, up from about 1% in 2024.
Trump's trade practices turn back clock on economic theory
Average U.S. tariffs at 15% have not been seen since the 1930s. So a $10,000 auto imported from either country would now cost the U.S. buyers $11,500. Tariffs on steel, an important export for both countries, will be much higher, at 50%. POSCO steel from Korea, which previously cost about $1,000 a ton, could now cost $1,500.
But wait! In Trump's version of Economics 101, Toyota, Hyundai and POSCO will eat the added cost of the tariffs rather than passing them along to their customers. That would run counter to history, though.
Experience with past trade wars, such as those over steel and aluminum in Trump's first term, demonstrated that U.S. customers pay nearly all the tariffs, not foreign suppliers.
New tariffs, contravening prior U.S. obligations, are the main − but not the only − punishment. As part of the package, South Korea promised to buy $100 billion of U.S. energy products over the next four years, such as liquefied natural gas, and invest $350 billion in the U.S. shipbuilding and advanced technology sectors.
How that investment will be managed remains to be determined. One possibility is that one or more South Korean business conglomerates will make proposals, subject to Trump's approval. Another possibility is a South Korean pot of money will be spent according to Trump's dictates.
Either way, this part of the agreement is a step down the road to state capitalism.
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According to the White House, Japan agreed to invest $550 billion directed by the United States in core industries, and the U.S. will retain 90% of the profits. Japan offered a looser interpretation of the agreement, with no mention of the 90% profit provision.
The European Union package was icing on Trump's week of tariff deals. After heated internal debates, contesting appeasement versus retaliation, EU leaders reluctantly agreed to new U.S. tariffs of 15%, even though the average and legally promised rate was just 1% in January.
The higher 50% tariff will apply to steel and aluminum exports.
According to the White House, the EU agreed to buy $750 billion of U.S. energy and invest $600 billion in the U.S. before Trump leaves office. But the EU sees a best efforts deal, not binding terms.
European tariff cuts remain to be negotiated and then be approved by the 27 member states.
Consumers create trade imbalances, not governments
Why did the allies accept highly unequal terms? Put simply, security overrides economics. Europe is desperate to keep Trump on its side in the Ukraine war. Japan and South Korea see their only hope of withstanding Chinese military strength is through American backing.
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Did the allies deserve the beatings they accepted? Mainstream economists do not agree that it's unfair when a country sells more than it buys. Nor do they believe that tariffs will reduce U.S. trade deficits.
Deficits arise because Americans as a nation spend more than they earn. Excess spending spills into imports from abroad. A household that spends more than it earns builds up credit card debt. Similarly, the United States builds up debt to foreign countries.
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Higher import prices resulting from tariffs will cost American consumers more than $3,000 per household. Mainstream economists see no evidence that higher import prices will prompt Americans to spend less than they produce.
Moreover, mainstream economists predict that tariffs on intermediate goods, like steel and auto parts, will destroy as many manufacturing jobs as tariffs on finished goods, like iPhones and furniture, might create.
In fact, manufacturing employment is down.
Trump has set up a grand contest between his Economics 101 textbook and what mainstream economists teach.
Americans will soon know whether the mainstream text or the Trump version has better predicted the outcome of America's trip to the yesteryear of high tariffs.
Gary Clyde Hufbauer is nonresident senior fellow at the Peterson Institute for International Economics.
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