Donald Trump’s warning that new taxes (tariffs) on Americans who buy imports from China will be “the first of many” should worry U.S. consumers, companies and financial markets. There is no question the Trump administration imposing tariffs on over 1,000 different imports from China valued at $60 billion is bad economic policy. The only question is how much it will harm Americans and the U.S. economy.
In a March 22, 2018 signing ceremony and presidential memorandum, Donald Trump made clear that although the use of “Section 301” trade powers is nominally about Chinese policies on intellectual property, in reality, the latest measure concerns Trump’s obsession with lowering America’s trade deficit – even though no respected economist believes a trade deficit matters or that tariffs would change it.
During the signing ceremony, Donald Trump said that he has talked with China’s president and other Chinese representatives and “I’ve asked them to reduce the trade deficit immediately by $100 billion.” Such a demand displays a fundamental lack of understanding of economics, particularly as it relates to trade.
During an interview with Donald J. Boudreaux, a professor of economics at George Mason University, he said, “When it comes to trade, President Trump has the dubious distinction of being unfailingly and spectacularly wrong on every issue, big and small.” Yet over the years Congress has granted authority to presidents on trade matters that are inappropriate in a democracy.
Economists have known since the days of Adam Smith that focusing on trade balances is a recipe for harming a country’s consumers. I asked economist Daniel Griswold of the Mercatus Center about the wisdom of the United States trying to reduce a trade deficit with another country. “Targeting bilateral trade balances is a fool’s errand,” said Griswold. “There are perfectly good reasons why we run trade surpluses with some countries and deficits with others, driven by supply chains, comparative advantage and other perfectly normal factors. If a president could succeed in forcing a targeted country to buy more of our exports or send us fewer imports, without a change in the underlying macro-factors that drive the overall trade balance, the result would be to simply re-allocate the balance among our other trading partners.”
Even usng the term “trade deficit” is questionable, since economists note that international transactions balance once one considers financial flows. “Our $500 billion current account deficit is exactly offset by a $500 billion investment surplus,” notes Griswold. “The net inflow of foreign capital allows our level of domestic investment to exceed our level of national savings, fueling productivity and growth. If politicians try to ‘fix’ the trade deficit, they will only succeed in cutting off the net inflow of foreign investment, leading to higher interest rates and less investment in foreign-owned factories.” Ironically, when announcing the recent actions against China Donald Trump also praised investments made in the U.S. by Taiwan-based Foxconn.
Economist Mark Perry agrees with Griswold. “The trade deficit is almost always reported in the media as a sign of America’s economic weakness, when that is not the case at all,” said Perry, a professor of economics and finance at the University of Michigan’s Flint campus and editor of the popular economics blog Carpe Diem. “After all, the flip-side of the ‘trade deficit’ is an inflow of foreign capital that provides a vital source of financing that fuels capital creation and business expansion in America, which leads to increased future output and employment in the U.S., and a more dynamic and vibrant economy.”
China is likely to retaliate against the Trump administration’s actions, which will only create further economic damage. The Information Technology & Innovation Foundation (ITIF), which favors better Chinese policies on intellectual property, opposes using tariffs as a weapon. “Applying tariffs on information and communications technologies (ICT) imports would needlessly harm the U.S. economy,” concluded ITIF.
The new taxes on Chinese imports come on the heels of the Trump administration announcing tariffs of 25% on steel imports and 10% on aluminum. And it follows continuing threats by the president to pull out of both the U.S. trade pact with South Korea and the North American Free Trade Agreement (NAFTA). Under the Trump administration, the United States has already imposed tariffs against softwood lumber from Canada, raising construction costs for new homes. “The National Association of Home Builders estimates that the tariffs will increase the price of an average single-family home built in 2018 by $1,360,” reported The Hill.
The only solution is for Congress to take back its trade authority to ensure that no president can impose tariffs without legislative approval. A bill by Senator Mike Lee (R-UT) would do just that. Until then, American consumers will pay the price for trade laws that grant excessive authority to a U.S. president who believes higher prices on imports are a good thing – despite all the evidence to the contrary.