Donald Trump thinks he's winning on trade, but America will lose

Mint

4 days ago

More than 100 days after President Donald Trump's 'Liberation Day", the new global trading order is becoming clear. It is a system of imperial preference. Canada has angered the president, partly by planning to recognise Palestine as a state, and so it faces a duty of 35%. Because Mr Trump reckons that exporters unfairly cheat America, on July 31st he said he would impose 'reciprocal" tariffs on many trading partners, ranging from 10% to 41%. Meanwhile, in order to ward off tariff threats the European Union, Japan and South Korea have all struck deals with Mr Trump, where they promise to open their markets and invest hundreds of billions of dollars in America, in return for levies on their exports of 15%.
A seductive idea is settling in that America is winning from all this. The president has, after all, got his biggest trading partners to make deals that are closer to his demands than theirs. Financial markets have shrugged off higher duties, the real economy shows little sign of damage and all the time tariff revenues are rolling in. But that thinking is deeply misguided. The game is not over. And it is one that America cannot win.
For all the crowing about how Trump Always Chickens Out, the president has pressed forward with tariffs. America's effective tariff rate is due to rise to 18% on August 7th, according to the Yale Budget Lab, nearly eight times the prevailing rate last year, and back to levels last seen in the Depression. The way MAGA paints it, this is a triumph for Mr Trump, because America's trading partners are eating higher tariffs, helping US Customs rake in nigh on $30bn in revenues a month. Unfortunately, that idea is gaining currency even outside America. Soon after the EU struck its deal with Mr Trump, opponents in European capitals lamented the fact that the bloc would have to pay.
This is a fundamental misunderstanding of trade economics. Years of experience show that tariffs do not harm the sellers of goods as much as they harm the buyers. The more the president raises tariffs, the more his own compatriots will be deprived of choice at low prices. Even though foreign suppliers are lowering their prices more steeply than after Mr Trump's first-term tariffs, analysts at Goldman Sachs reckon that fully four-fifths of tariff costs have so far been borne by American firms and consumers. Just ask Ford, or GM: the carmakers reckon they paid $800m and $1.1bn in tariff costs, respectively, in the second quarter of this year alone.
What of the muted economic and financial market reaction so far? The IMF has raised its projections for both global and American economic growth this year, compared with forecasts it made in April. Although it has fallen since Mr Trump signed his order, the S&P 500 remains nearly 12% higher than it was on Liberation Day; the dollar, though down, has strengthened in recent weeks.
The answer is that the economy is being buffeted by various forces, including heavy stockpiling before tariffs came into effect—delaying the pain, but not eliminating it—as well as an extraordinary boom in artificial-intelligence-based capital spending. According to Renaissance Macro Research, capital investments in AI have contributed more to America's gdp growth in the past two quarters than all of consumer spending. Partly propelled by this, stockmarkets have gone from strength to strength. Perhaps, too, investors believe that companies will adapt to higher tariffs. The incentive to route trade through places with relatively low duties will be strong—even though Mr Trump has vowed to punish such 'trans-shipment" with tariffs of 40%. An uncomfortable dynamic has also set in: because investors think that the president will eventually chicken out, they are emboldening him to press ahead.
As he does so, however, the long-term costs to the economy will mount. In the name of fairness Mr Trump is discarding a multilateral system in which tariffs were charged on the same goods, regardless of where they came from. In its place is a bilateral system where products can face differential rates depending on their origin. These new rates are not just higher; they are subject to ceaseless bargaining over almost any issue. Just this week, those issues included the Brazilian courts' pursuit of a Trump ally and a border war between Thailand and Cambodia. Because tariff policy is set by one man alone, the bargaining will be subject to lobbying and presidential whim. Because of who he is, Mr Trump will consider exemptions when he is next flattered, and threaten duties when he is next displeased.
American shoppers will pay the price. Once they were spoilt for choice, as both domestic and foreign producers competed to sell to them. Now the companies that succeed will do so not only because they are the most innovative, but also because they are the cleverest at playing the system. And remember that a ratchet effect is at work here. When—or rather, if—future presidents want to restore tariffs to their original level, they will be met by furious lobbying from American firms that got used to sheltering behind tariff barriers and have thereby become uncompetitive in world markets. Everything about this is harmful. And, whatever Mr Trump says, nothing about it is fair.