The presidency of Donald Trump has been marked by a war between two totally inconsistent intellectual mindsets: his disastrous trade policy and his wise domestic policy. Let’s start with the good news first.
On the domestic front, Donald Trump has largely followed, to great positive effect, the classical liberal playbook, which spurs growth through a combination of low taxation and market deregulation. Under Trump’s leadership, removal of the government’s heavy foot from the throat of the economy has paid off. The key move was to junk the popular Keynesian paradigm with its flawed assumption that one or more low-interest economic stimulus programs could spend the United States back to prosperity. But these glorified transfer programs only take from Peter in order to pay Paul. Their net effect is virtually always negative. Making money cheap encourages borrowing, but it also discourages lending, creating at best a wash. The administrative costs of aggressive monetary policy, coupled with high levels of economic uncertainty it engenders, are a net drag on the overall economy, leading to the anemic growth levels and relative wage stagnation of the Obama years.
In contrast, neither Trump’s rollback in domestic regulation nor his implementation of lower corporate tax rates indulge in these legislative shenanigans. To the contrary, this one-two punch reduces barriers to voluntary exchange, increasing the volume of win-win transactions that spell growth for the transacting parties and for the third parties who receive additional opportunities for trade. Of course, successful markets always leave disappointed competitors, who fall into two camps. The first are those who go out of business, which yields the social benefit of letting assets be redeployed into more productive uses. The second are those parties who regroup existing businesses to find new niches in an ever-expanding economy. Systematically, competitive losers are part of a large process often described by the phrase “a rising tide lifts all boats.” The great forgotten Americans that Trump pledged to help during the 2016 campaign have already been helped, but not by his pointless bluster against American companies that take business overseas or import goods from foreign countries. No: The expanded economy creates new opportunities that make American workers more competitive than before—and better able to face foreign competition by profiting from doing business with foreign firms.
So why does Trump favor these pro-growth domestic policies? Sadly, it is not because of systematic arguments about the efficiency of competitive markets. Rather, as a worldly businessman with an open disdain for academic musings, his response is purely visceral. Domestic regulators used to come after his real estate and casino ventures, so they remain villains even after he is ensconced in the White House. But foreign competitors could always disrupt his cozy domestic arrangements, so they too have to be stopped. Find out what bothered Trump in his private life, and one grasps the seeds of his disjointed public policy. And there is no relief when he chooses poor advisors such as Wilbur Ross as Secretary of Commerce and Peter Navarro as Director of Trade and Industrial Policy.
And thus to the bad news. Trump’s musings foolishly focus on international trade deficits, and then dress up his prejudices in bellicose terms that reveal his willful and persistent economic ignorance. His number one obsession is with the United States’ net deficit in foreign trade. His crusade amounts to bringing back mercantilism with a vengeance. His agenda for trade with China centers on the misguided goal of making the Chinese buy greater volumes of American goods. But by this maneuver he throws his weight behind a sideshow. The real agenda should always be to reduce barriers to trade by lowering tariffs in both directions, trade deficits be damned.
Why? Because trade is not one mega deal between the United States and its former friends. It is a set of thousands of individual transactions by informed players, each of whom gains from the deals it makes. Increase the velocity of the deals, and you increase the social gains on both sides. American farmers and exporters, both part of his base, benefit by getting into foreign markets with more attractive prices. Putting up tariffs will, for example, shut out Maine lobstermen from selling to China. It will block American producers and consumers who benefit from getting cheaper goods from abroad. It ignores the reality of complex supply chains, whereby U.S. companies repackage imported components for re-export or vice-versa, as with iPhone production. The trade war slows down imports and exports alike. It shows no winners, for no nation wins a trade war when tariffs and other restrictions shrink the overall size of the pie.
Trump’s trade supporters naively claim that our master poker player can pull out a better long-term deal from this short-term mess. Dream on: Short-term losses are etched onto the social DNA. Long-term restrictions are even worse. It is absolutely critical never to take the first step toward a trade war, given that all trade wars are unwinnable, except in that destructive sense that allows the President to trumpet a U.S. victory by claiming that we have lost less than any of our angry trading partners.
This defense of free trade is not insensitive to the risks that it could pose to national security. No one in his right mind thinks that we should sell top-secret defense technology to our enemies. But like all rationales, national security is all too capable of abuse. Thus, the Trump administration has entered into a gratuitous quagmire by arguing that national security is impaired by imports of cheap steel and aluminum that undercut domestic capability to make wartime weaponry. But he never once committed to stockpiling steel or purchasing production options from American companies that trigger in time of war, neither of which would precipitate trade wars.
In the meantime, the President continues to bellow. Take his tweets denouncing Harley-Davidson for announcing that it will shift some of its production overseas in order to avoid the 31 percent tariff that the EU slapped on U.S. motorcycles. To the President, it is again the politics of the personal: “Harley-Davidson should stay 100% in America, with the people that got you your success. I’ve done so much for you, and then this.” He begins with a ridiculous economic demand, followed by a statement which makes it appear that he, and he alone, is responsible for the company’s success. Such blindness! Does Trump really expect Harley-Davidson to absorb over $2,000 in losses per motorcycle produced in the U.S. that is sold in Europe? They cannot make up in volume what they lose on each piece. Does Trump want the firm to go bankrupt and cause more American workers to lose jobs? Given that his tariffs led to Harley’s domestic production woes, the President should have tweeted Harley-Davidson: “My deep apology for perverse trade policies!! I need to RETOOL my economic theories NOW!!!”
Trump’s political isolation has become ever more apparent to American business leaders. Just this past week, General Motors filed a strong statement with the Department of Commerce noting that the imposition of tariffs on foreign imports will result in “a smaller GM.” Why? Because GM cars in the United States depend on key components imported from outside America. Those components become more costly to acquire when subjected to tariffs. The higher costs create a double whammy for GM and its workers in the form of losses in both domestic and foreign sales. Don’t think that foreign automakers will chortle at GM’s demise, for as Toyota commented, Trump’s automobile tariffs “would have a negative impact on all manufacturers.” There are, in short, no winners, for every trade war shrinks the global economic pie. The entire automobile industry depends on elaborate supply chains that pays no attention to national borders. The tariff walls disrupt these chains for everyone. Higher system-wide costs lead to lower system-wide sales.
The real question now is whether a grand alliance of business firms can talk the President back from the brink. They should mention to him that his policies will hurt those “great” American workers who will lose jobs in the downturn, and who may take out their vengeance come November on Republican candidates up and down the line. It’s sad that Trump never understood why American workers languished in the Obama years. Hint: It wasn’t foreign competition. It was domestic regulation. Failing businesses left the United States to escape domestic regulation. The correct way to staunch the flow is to improve the economic climate at home, which Trump’s domestic deregulatory program is doing. Without those overdue reforms, U.S. firms that are trapped at home will take other measures. If they cannot move to Mexico, they will move to friendly Tennessee. If they can’t move to Tennessee, they will shrink or go bankrupt in Illinois or Wisconsin. A weak domestic economy is not helped by presidential efforts to kneecap foreign nations.
But domestic deregulation makes all the difference. Those reforms drove down levels of unemployment in the United States so much that many firms are now scrambling to find more skilled workers to fill the demand. Even if some manufacturing jobs go overseas, construction jobs will not. And both types of work will flourish if Trump does not wreck them by unilaterally instigating pointless trade wars.