If President Donald Trump is crazy, he’s crazy like a fox. I’m not talking about his political prowess, which was underestimated at great cost to the country. I’m talking about his trade policy.
His policy of sweeping tariffs is misguided, as it ignores the extent to which global supply chains have scrambled the omelet of goods production in a way that cannot, or at least should not, be unscrambled. Such actions won’t help those who’ve been hurt by trade.
That doesn’t mean tariffs are never a useful tool. They can be, in targeted cases, say to penalize a trading partner for dumping a specific good below cost to gain market share.
But taxing broad supply chains, as Trump is doing, is an economic mistake. That said, it’s clever to do so when the U.S. economy is strong and inflation is low. Under those conditions, the extent to which most people feel the tariffs will be minimized.
For example, according to economists at Goldman Sachs, the latest round of tariffs on $200 billion of Chinese goods might boost the yearly growth rate of consumer prices by three-hundredths of a percent, so that the rate of price growth might go from, say, 2.7 percent to 2.73 percent. How could a tariff on so many billions’ worth of imports have such a small price effect?
Because America is just not that exposed to foreign trade. The newly announced tariff starts out relatively small, at 10 percent. Chinese exports are less than 10 percent of our goods imports, and only about 20 percent of the goods on the $200 billion list are things consumers buy.
But perhaps the most important number in understanding the relatively small, predicted impact is 15 percent. That’s the value of all imports as a share of U.S. GDP; of that, share goods imports (vs. service imports) are about 12 percent, and China’s goods imports to the U.S. are about 20 percent of the total value of goods we import. Since the price effect is roughly the product of all these shares, it ends up pretty small.
OK, then what’s so wrong with Trump’s tariffs? It sounds like I’m making the old Catskills’ complaint: “The food’s terrible — and the portions are so small!”
There are at least two reasons I’m against the tariffs. First, they target precisely the wrong part of the trade problem. What’s good about trade, for both us and our trading partners, is the supply chains. It’s the ability of countries to make what they’re good at making and improve their living standards by expanding the market for the fruits of their labors. Under the right conditions — a significant caveat — this is an important way for poor countries to get wealthier, and for wealthier countries to support both their own growth (and to consume more than they produce) and that of their trading partners while reaping the benefits of lower prices due to expanded supplies.
The problem is, and Trump intuited this way more than his political competitors, politics have corrupted the pristine trade story I just told. Trade deals, which often enshrine protectionist measures, too often ensure that the benefits of trade flow largely to the investor class. And countries often manage their currencies to boost their trade surpluses and our trade deficits.
But sweeping tariffs, along with the tax cuts and America’s strong growth rate, will likely lead to a stronger dollar (which makes our exports more expensive) and a larger trade deficit. And while I’ve downplayed the aggregate price effects, of course the impact of the tariffs is much more negative on certain producers.
The sad part about all of this is that the endgame is probably the same one Trump always delivers: Throw a wrench in the system, create a bunch of chaos, lose interest and declare victory, despite the fact that nothing fundamental has changed.
Really helping the people and places who’ve been hurt by trade would mean making sure they can get good jobs, raising the minimum wage and overtime pay, strengthening unions, directly helping our small manufacturers access global supply chains, investing in future technologies, supporting apprenticeships for displaced workers and pushing back on currency manipulators.
But that stuff takes thought. Tariffs, on the other hand, are as easy as they are ineffective.
Jared Bernstein, a former chief economist to Vice President Joe Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of “The Reconnection Agenda: Reuniting Growth and Prosperity.” He wrote this article for the Washington Post.