It's hard to know where to start with Trump's "shock and awe" tariff wars: its economic foundations. its legal/constitutional case, its dubious process and outcome. his unconventional use of language (e.g., reciprocal tariff)
Let's start with Trump's conceptual misunderstanding of the trade imbalance. Countries in general do not engage in transactions; individuals or businesses do, voluntarily (domestically or internationally) Free trade does not require state-level oversight; it happens naturally without state restrictions. Trump is obsessed with accounting artifacts, summaries of net pairwise international goods transactions. Note we don't do that for interstate transactions, because the Constitution explicitly provides for a free trade zone among states.
Trump's conceptual misunderstandings of trade and economics cannot be understated. First of all. most manufacturing job losses have more to do with robotics and other improvements in production technology, and this trend has been observed globally, not just in America. Consider the example of agriculture; our once agrarian economy now "direct on-farm employment comprised about 2. 6 million positions, amounting to 1. 2 percent of total employment. Employment in agriculture is predicted to decline by 2 percent from 2023 to 2033"; "the U.S. remains the largest agricultural exporter globally, with dominance in soybeans, corn, tree nuts, and beef. Its advanced agri-tech, large-scale mechanized farming, and strong trade ties with China, Mexico, and the EU power its export performance." As for manufacturing, "the United States is the world's second-largest manufacturer after the People's Republic of China with a record high real output in 2021 of $2.5 trillion...Though still a large part of the US economy, in Q1 2018 manufacturing contributed less to GDP than the 'Finance, insurance, real estate, rental, and leasing' sector, the 'Government' sector, or 'Professional and business services' sector." In terms of employment, about 7.7% versus 80%+ in services. Yet in output. US manufacturing this decade has reached an all-time high.
Trump ignores that until the 1870's or so, we ran trade deficits before flipping to surpluses and flipped back to deficits a century later. Yet we've seen robust economic growth and job growth, particularly in the service sector, especially in the 80's and 90's. Our manufacturing sector has transitioned from a less competitive labor-intensive manufacturing (like my maternal grandmother's textile mill job in Fall River) to more value-added, more automated manufacturing:
While it is undeniably true that certain manufacturing industries—particularly labor-intensive, low-tech ones—are no longer primarily located in the United States, many other, more advanced ones have flourished. Thus, factories producing consumer staples such as textiles and furniture, for example, have made way for facilities that produce products less often found in retail stores, such as chemicals and machinery. At the same time, productivity gains unleashed by automation and other technologies have enabled manufacturing output to remain near record highs even as direct manufacturing employment has declined. Many other Americans, meanwhile, still work in manufacturing or are involved in the manufacturing process through the design of new products, even if their employers don’t operate actual factories... In 2021, it ranked second in the share of global manufacturing output at 15.92 percent—greater than Japan, Germany, and South Korea combined—and the sector by itself would constitute the world’s eighth-largest economy. The United States was the world’s fourth-largest steel producer in 2020, second-largest automaker in 2021, and largest aerospace exporter in 2021.That the United States has achieved these rankings with a relatively small industrial workforce is a testament to its world-beating productivity: the country ranks number one in real manufacturing value-added per worker by a large margin. With value-added of over $141,000 per worker in 2019, the United States bested second-ranked South Korea by over $44,000. The gap with China was over $120,000 per worker
This is particularly impressive when you realize our population is about 4.22% of the globe's and has a fraction of the world's resources. Don Boudreaux of Cafe Hayek points out the trade deficit implies a capital surplus which in our context could offset our minuscule national savings rate, contributing to investment in our private economy.
One important consideration is more than half of imports Trump is obsessed with are actually used as inputs for American producers:
Over half of all US imports are either intermediate components or raw materials. These imports are sold as inputs to domestic businesses rather than as goods consumed directly by households. (Doug Irwin)
In 2015, imports of capital goods (machinery, equipment, aircraft, semiconductors, engines, tractors, etc.) and industrial equipment (lumber, chemicals, aluminum and copper, iron and steel, cotton and wool, plastics, fuels, etc.) together accounted for 53% of total imports last year. It’s an important point that more than half of what enters the US as imports are orders from US companies (e.g. manufacturers) for equipment, supplies, raw materials, commodities, and other imports that serve as direct inputs into the production process that takes places in American factories and businesses that employ millions of American workers. And the lower the price of inputs for US businesses (whether sourced internationally or domestically), the more competitive those companies are, the more of their products they can sell (both international and domestically), the greater market share they can achieve, and the more US workers they can hire.
So here's a key point: in both Trump terms Trump has illegally sought to protect domestic steel and aluminum producers, something I have pointed out is a classic example of concentrated benefits and diffuse costs. The few domestic producers win an artificial corrupt pricing advantage through their corrupt bargain with Trump over foreign producers. However, this is an anticompetitive constraint; the favored vendor has little incentive to innovate or reengineer to gain production efficiencies and lower prices to incentivize demand downstream or to compete globally, especially when leading international competitors enjoy comparative advantages. [To give a relevant example, one of the .most protected crops: sugar (cane/beets). While sugarcane can grow in parts of the US, it lacks comparative advantage in terms of higher land and labor costs and less tropical/subtropical weather (where sugar cane thrives) than other producers, say Brazil.. "To encourage domestic sugar production, the U.S. government imposed strict limits on sugar imports. As a result, Americans now pay almost twice as much for sugar as people elsewhere around the world." Trump was noticeably upset when Nabisco shifted some Oreo production to Mexico. In fact, domestic sugar producers complained Mexico was flooding the market with cheap sugar in 2014; the US responded with tariffs and later reached an agreement with Mexico capping its exports. But clearly sugar is a key ingredient in producing cookies, and there were cost advantages to producing cookies in less-protectionist Mexico.]
However, the total picture must include downstream steel-using producers and consumers, not just steel producers. For steel-using producers, s robust diversified competitive/innovative market, including international suppliers, is key to cost containment, profitability, and global competitiveness. Passed-along increased costs may adversely affect global competitiveness versus freer-trading foreign suppliers and lower domestic consumer end-product demand killing net manufacturing jobs overall:
Tariffs on goods used by a large number of U.S. firms, like steel, make it difficult for U.S. producers to compete against foreign rivals, both at home and in export markets. Tariffs on steel may have led to an increase of roughly 1,000 jobs in steel production. However, increased costs of inputs facing U.S. firms relative to foreign rivals due to the Section 232 tariffs on steel and aluminum likely have resulted in 75,000 fewer manufacturing jobs in firms where steel or aluminum are an input into production. In addition, depressed global demand for durable consumption and investment goods related to policy uncertainty and increased costs from the trade war may be dampening demand for steel and weighing on steel prices. Tariffs on additional inputs into production made with steel are likely to exacerbate these adverse effects on the manufacturing sector.
There are a number of problems with Trump's tariffs. First, from a legal and constitutional standpoint, he lacks authority. A tariff is a tax, which only the Congress can levy as part of its power of the purse. Second, the US is party to ratified trade treaties and WTO (1995)., GATT (1948) agreements. Trump has violated all of these without Congressional approval. Second, partners generally reciprocate against aggressive tariffs against their own products at their expense. The likely result is a lose-lose job-killing trade war. In fact, after Trump's first-term trade wars, the trade deficit worsened: " in 2016, the trade deficit was approximately $481 billion, and by 2020, it had risen to about $679 billion, representing roughly a 41% increase. " Third, Trump's tariffs are unprincipled and incoherent; he wants to quadruple tariffs against nations where the US enjoys a trading SURPLUS; in fact, one of them (Brazil), Trump wants to hike the rate to 50% because he doesn't like the prosecution of their former far-right president. He has deferred rate hikes if/when Canada/Mexico have cooperated on fentanyl smuggling or border control. More recently he's threatening trading partners of Russia with 100% tariffs. .He used reciprocal tariffs in an unconventional way; he doesn't mean matching tariff rates on the other country's rates on American product types: "specifically, the White House documents appear to allege the “tariffs charged to the USA” are the greater of two different quantities: (a) 10 percent, and (b) the 2024 US trade deficit in goods with a given country, divided by the total quantity of US imports from that country."
Trump's mentally unstable, arbitrary, volatile tariff policies exacerbate economic uncertainty which is toxic to business planning and investment. It is especially a state of denial of mutually beneficial integrated supply chains, in part reflecting comparative advantages of trading partners. Trump's policies are hurting domestic economic growth, will cost the average household thousands of dollars, aggravate inflationary pressures, and lower our standard of living. It is time for Congress to end the madness.
