How Trump bungled his trade war
President Deals strikes again
President Trump sparked another international frenzy when he abruptly announced substantial new tariffs on steel and aluminum, of 25 and 10 percent respectively. Both partisan Democrats and free trade-worshipping neoliberals immediately panicked. "Protectionism" has been a dirty word in elite circles for decades, and that combined with general disgust towards Trump to make the move seem like sheerest madness.
It's hard to say just what will happen as a result of Trump's action. But we can say that insofar as he is trying to achieve some kind of positive economic effect, he's going about it in the worst possible way.
Now, Trump's tariffs are not nearly as objectionable as the liberal freakout would suggest. As David Dayen points out, Presidents Obama, Bush II, Clinton, and Reagan also put through steel tariffs, all with different details but in the same general ballpark as the Trump tariffs. The results were not much of anything, positive or negative — probably because they were short-lived political stunts more than a considered strategy.
The case for some kind of overhaul of the international trade order — going much further than haphazard tariffs on a couple random commodities — is actually very strong. As former Greek finance minister Yanis Varoufakis writes in his book The Global Minotaur, the basic problem with unregulated international trade is that imbalances develop between surplus and deficit countries. Without a mechanism to continually recycle the surpluses back into the deficit countries, the result is eventual crisis and years of depression, as seen in Greece and Spain.
Surplus countries like Germany like to posture that they are somehow moral exemplars due to exporting more than they import. But they could not have a surplus without other countries having a corresponding deficit. And currently, the United States has by far the largest deficit in the world (and has for over 40 years), a development rooted in the collapse of the Bretton Woods system. To make a long story short, surplus countries (notably China, which gained permanent normal trade relations with the U.S. in 2000, and thence colossal surpluses) have financed the American trade deficit through U.S. debt and Wall Street hocus-pocus, thus getting dollar-denominated assets to settle their international accounts, manage their own currencies, and recycle their surpluses.
American elites, in thrall to knee-jerk neoliberalism, blithely enabled this process — flooding the country with imports and severely damaging the U.S. industrial base in the process.
The American working class developed an instinctive and largely correct suspicion that they were being sold out by free traders in both parties. Trump, like Obama in 2008, got much political mileage out of railing against slanted trade deals, and it was unquestionably a very important part of how he tipped Wisconsin, Michigan, and Pennsylvania — disproportionate victims of trade-fueled de-industrialization as they are.
Nevertheless, when carrying out measures like this, you need to be measured, deliberate, and clear about what you're trying to accomplish. Simply jacking up tariffs willy-nilly might inspire retaliation and an escalating trade war that doesn't change anybody's relative position. That's doubly true when it comes to countries that don't have a big surplus with the U.S. — like Canada, our largest trading partner at $582 billion in total trade last year, but a relatively small net deficit on the American side of $17.6 billion. (Compare that to the Chinese total of $535 billion net trade and a $375 billion deficit.) The Canadians are understandably rather miffed and promising to respond in kind if they don't get an exception. The E.U. has also promised retaliation.
An aggravating factor is the sudden and cavalier way Trump announced the decision. First it was going to happen, then it wasn't, then finally White House staff sat and waited to see what was going to happen. Trying to ratchet down the gigantic trade deficit with China at least is an eminently reasonable idea, but to achieve it will likely require careful planning, the buy-in of U.S. allies, and above all a clear signal about what the dang goal is.
A comprehensive approach would be even better, because if the U.S. can't serve as the importer of last resort, then the whole international trade system could potentially fall apart. A new system ensuring balance for both deficit and surplus countries, as John Maynard Keynes once proposed, would be a great end goal.
But Trump evinces no sign of understanding the nature of the trade deficit problem, much less the relative weights thereof, and has not outlined any deliberate strategy or goal. For him everything is a zero sum contest and he's going to "win" by being tough and aggressive (read: loud and obnoxious).
However, Democrats should be wary about fighting Trump from the free trader position. The reality is he's making a move, however ill-advised, on an issue that matters very much to an important voting bloc. If Democrats cast themselves as the party of reducing Detroit to a rubble-strewn hellscape so China can get rich, they'll have stomped on a political rake in addition to being wrong on the merits. They ought to outline their own balanced trade vision that actually makes sense, instead of repeating the follies of Wolfgang Schäuble and Bill Clinton.