Trump's ‘Tariffmaggedon' is back… and with a vengeance

Independent

5 days ago

Looked at as a version of a real estate deal, Donald Trump has done very well with his tariffs policy. In many cases, the deals he has struck, or the regime he has imposed unilaterally, have seen foreign markets open up for US goods with more zero tariff rates and claimed reductions in non-tariff barriers.
By contrast, pretty much every trading partner sees higher tariffs imposed on their exports to the United States.
The Donald shook them all up on April 2nd, so-called Liberation Day and then messed around with threats and bluffs until they mostly capitulated – abolishing tariffs, agreeing to invest in the US (though no one can be sure how much more than they would have invested anyway), and buying huge amounts of US defence kit and energy for the provolone of access to the vast American market.
This is all supposed to count as an American/Trump/Maga win, and, for example, a great loss for the European Union.
Like when he used to buy and seek property, Trump and his allies see international trade as a zero sum game. But it is not, and that's why pushing US tariffs to their highest level since 1934 is a disaster for the world economy and for Americans. It's a lose-lose scenario.
Even if there are benefits for boosting American manufacturing, you have to ask the question, too often left unposed, why Trump wants to get Americans working in factories all over again – making garments in New York, or building cars in Detroit. It's not going to be as highly paid as it was in the immediate post-war glory years, because other countries can still undercut US wage rates even with tariffs.
It's sometimes argued that if US workshops still can't compete with imports (because Vietnamese labour costs are a multiple lower), then superior American automation and artificial intelligence can regain the competitive edge. That's fine – but where are the jobs going to come from if the robots are doing all the grafting? Who benefits?
Answer: the people who own the robots, not the people whose jobs they've taken. It's bad if you get supplanted by some guy in China, but no different to being replaced by one of Elon's cyberworkers.
American manufacturers also rely on foreign inputs – and always have. Many of these, such as copper and timber from Canada – which has seen its tariffs rise to 35 per cent, reputedly as payback for Mark Carney announcing this week he is to recognise a state of Palestine – will inevitably be more expensive than in the past, ironically making American industry pay more. Of course some can be substituted by American raw materials, components or semi-finished goods, but they too will be pricier than before (free of foreign competition), and not necessarily of the same quality or usefulness.
This all adds up to a serious disruption of free markets, and a consequent misallocation of resources – trying to force the US back into a 1950s world where it was the industrial superpower, before Europe recovered from war, and when China and India basically left the world economy.
If it's natural and cost-effective for Honda to make its vehicles in China, Japan and Mexico, for the benefit of its customers as well as its shareholders, then why coerce it into doing so in America? You don't have to be Adam Smith or David Ricardo to scratch your head about this.
It's the strangest thing – Trump turning America into a command economy where he says what it should be producing, not market forces. Tariffs always have been and always will be about protecting the producer interest – shielding relatively inefficient firms, and the innocent workers employed by them, from foreign competition.
In many societies, such protectionism for the producer interest is also linked to political interest – because workers are voters, and should be grateful enough to support the party that 'saved' their jobs. In that sense, it's a fairly corrupt sort of bargain – but, unfortunately, it can work.
But what about the consumer interest? This is where Trump's policy is so badly misguided, and will have the opposite effect to what is being boasted about. Because, in the end, countries and companies don't pay for tariffs as much as consumers do.
Tariffs are a purchase tax levied on goods that happen to have been imported. Sometimes, the original manufacturer or the importing company may take a bit of a hit on their profit margins and 'absorb' some of the shock – but they can't absorb the kind of hikes Trump is imposing.
Chances are that, if he's slapping 25 per cent on the cost of a Bentley from the UK, then most of that will be paid by the American who ends up gliding out of the showroom in it. He or she could buy a US made Cadillac instead – but it's presumably not what he or she wants.
One way or another, the consumer pays. That means inflation is higher than it would otherwise be, and, as the chair of Fed, Jerome Powell points out, that means interest rates will have to stay higher for a bit longer, to suppress the tendency to put retail prices up.
As propaganda about America First and how the US is being 'cheated' by foreign powers, and a way to win votes in states lucky enough to benefit from this industrial distortion, tariffs are, as Trump might say, 'smart'. As a way to keep Americans prosperous by buying the best value available from world markets, building a truly competitive economy, and forging strong international partnerships, any obstacles to free trade such as import taxes are decidedly stupid.
Impoverishing trade partners and allies in this lose-lose game makes them less able to buy US gear and help fight its wars. Many will turn to China instead. The last time the world thought tariffs were an answer to its problems, in the 1930s, we ended up in a world war. Couldn't happen again, could it?