Trump, the one-trick tariff pony

(Image credit: Illustrated | Mark Wilson/Getty Images, MANDEL NGAN/AFP via Getty Images, Mike Theiler-Pool/Getty Images, Chip Somodevilla/Getty Images, Aerial3/iStock)

By Jeff Spross

published 4 December 2019

One key reason President Trump won in 2016 is he recognized an unmet need in U.S. politics: Tons of working-class voters view trade as a destructive force that guts their communities and takes their jobs. Trump railed against trade like no other presidential candidate in modern history and broke the Obama coalition by flipping the states of the deindustrialized Rust Belt.

Unfortunately, Trump seems to have taken only one simple lesson from this victory: slap tariffs on everything in sight. The president actually has no idea how the global trade system works, and thus no idea why it's causing the pain he exploited. Nor does he know what could actually be done to fix the mechanism.

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Let's start with Brazil and Argentina. You may recall, back in March 2018, that the president announced tariffs on all steel and aluminum imports coming into the U.S. But Brazil and Argentina were among a handful of countries that managed to carve out an exemption. On Monday, Trump canceled their exemption. Why? Not because of anything about Brazil and Argentina's exports, specifically. But rather because Trump's trade war with China has led that country to import fewer soybeans and other agricultural products from the U.S., and Brazilian and Argentinian exporters have taken up the slack. Trump knows the rural vote is crucial to his re-election, so he's trying to punish Brazil and Argentina for taking the business American farmers lost ... due to the trade war Trump started.

The crucial point here is that Trump accused the two countries of lowering the value of their currencies to make their exports cheaper than U.S. competitors. "Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers," Trump tweeted on Monday. In fact, Brazil and Argentina have both been selling off their U.S. dollar reserves lately — moves which, all other things being equal, raise the value of their currency relative to the dollar.

As much as a strong dollar can undermine the competitiveness of American exports, it can also devastate countries whose economies aren't as fully developed. That's because most all international trade is done in dollars and other countries stockpile dollars in order to participate in the global economy. Countries like Brazil and Argentina tend to export cheap stuff and import crucial resources like food, oil, energy, and high-tech products like cars and computers. When their currency plunges relative to the dollar, all those imports become way more expensive, and the dollars countries have borrowed to buy them become much harder to pay off. Western investors flee, making the devaluation even worse, decimating the economy, and risking a debt crisis and an austerity crunch. Argentina in particular is staring down the barrel of such a chain of events: "Everybody is moving their money out of Argentina," as Desmond Lachman, an economist at the American Enterprise Institute, told the Washington Post. "I'm not sure what [Trump] wants the government to do."

He could pressure the international community to resurrect the global use of capital controls — rules that prevent investors from yanking their money out of countries at a moment's notice, and setting off this sort of devaluation spiral. Trump could also go bigger, and push to replace the U.S. dollar's role in global trade with something like the bancor system that economist John Maynard Keynes proposed after World War II. The point of the bancor was to serve as an exclusively international reserve currency, modulating between national currencies, and preventing exchange rate crises. That would lower the value of the dollar and close the U.S. trade deficit, and it would protect developing countries like Brazil and Argentina.

Why hasn't the world done either? Because, as destructive as the current global trade setup is — to both developing countries and to the working classes in the advanced West — the status quo is very good for mega corporations and the global wealthy. Capital is essentially free to roam the planet, seeking the cheapest labor and inputs and the most attractive markets, ripping up established industries and communities as it goes. Global capital is also free to arbitrage between different nations' tax systems, and thus minimize its tax burden.

That brings us to France, which levied a new tax on the internet economic activity of big tech companies like Amazon, Apple, and Facebook back in the summer in an attempt to deal with exactly this sort of tax avoidance. But since most big tech companies are American, the Trump administration took the policy as a nationalist affront. Which is why the White House also announced on Monday that it was considering slapping tariffs on French exports like wine and cheese — including the threat of absurd 100-percent tariff rates.

Obviously, the best solution to international tax avoidance would be a coordinated global tax regime, just like the best solution to exchange rate crises is a coordinated global currency system. There are international efforts to develop such a tax, and France's specific national tax would have to give way if those efforts bear fruit. But France's heart was in the right place. And a president who actually understood the workings of our global trade order, and the specific ways that system screws workers both here and abroad, would recognize the big tech companies as a mutual enemy — and would have celebrated France's effort.

Trump has no such understanding. He cannot conceive of the trade system in any terms other than a nationalist slugfest between countries. He punishes France for combating international tech companies just because those companies wave the U.S. flag. He punishes Brazil and Argentina for crises they cannot control and that were brought on by the same global trade system that destroyed America's Rust Belt to the benefit of wealthy corporations.