After years of warnings that it is coming, and after months of threats and rhetoric, the trade war is officially launched. No more deadlines, proposals, and negotiations. It’s here, right now, and it will probably escalate. It’s worth reflecting on all the ways in which this trade war seems to depart from the historical pattern.
To me it suggests something important: this trade war is born not of strategy but of ideology.
1) The economy is strong. The usual path is for politicians to push protectionism in bad times as an ill-conceived attempt to save domestic production during recessions and depressions. As the 1930 Smoot-Hawley Act demonstrated, this path makes matters worse.
These days are different however. After a long and slow crawl out of the 2008 financial crisis, the economy is finally on the move.
What problem is there to solve? You can cite lower employment in manufacturing but not manufacturing output. In any case, jobs in the manufacturing sector peaked in 1980. It seems strange to use economic policy in 2018 to solve a seeming problem that presented itself nearly 40 years ago. The US economy has already adapted to globalization. I would challenge anyone to name a single product purchased in the last 5 years that doesn’t use some “foreign” production process in its making.
The irony of this point is that the strong economy actually enables the Trump administration’s policy, in the same way that a healthy person can better deal with an eating binge than an unhealthy person. Rapid growth and high employment has made it possible to pursue economic nationalism without facing quick and obvious downsides. In a wicked way, economic growth has provided some measure of insulation against damage.
But let’s not forget the point made by Bastiat: to evaluate policy, we have to look both at the seen and the unseen. Vast amounts of wealth will be destroyed in the course of this trade war.
2) There is no end game. Trade officials in all affected countries (Canada, Mexico, Europe, and China) keep asking what the point of all of this truly is. It is up to the country that fired the first shot to deescalate toward the restoration of the global trading order. But nowhere in any official statements has the Trump administration indicated what would cause the US to stand down.
Instead, all messaging is about more, more, more escalation. Already Trump is threatening up to $550 billion in tariffs – which is extremely strange given that the total value of imports from China in 2017 is only $500 billion. This is probably where Trump gets his numbers: he just slapped an extra $50 billion on last year’s trade numbers. Unbelievable.
And get this. Trump’s trade adviser in March told (3:20) Fox News “I don’t believe any country in the world is going to retaliate…” Guess what? He was completely wrong. But there is still no backing down. So what is the goal here? If there is no goal, there is no real victory. Is this man going for full trade autarky? I will consider that in a moment.
3) Tariffs hit inputs not finished goods. This is an insightful observation by Paul Krugman (whose Nobel Prize was given for his work in trade, not his Keynesianism), who cites the research of the Centre for Economic Policy Research. This is where matters get really strange. Most protectionism is about consumer goods. This is not. An amazing 95% of the tariffs paid by Americans so far apply to intermediate and capital goods. These are inputs that American manufacturers need to make products for Americans. Now they have to pay far more.
The first chart is tariff overall.
The second chart concerns China in particular.
These are remarkable numbers. Krugman comments: “Is there a strategy here? It’s hard to see one. There’s certainly no hint that the tariffs were designed to pressure China into accepting U.S. demands, since nobody can even figure out what, exactly, Trump wants from China in the first place.”
Actually there is an explanation: Trump wants everything manufactured in America. He is trying to inspire the retooling of the entire industrial base of the American economy, all in response to high tariffs, which then become permanent. This is not negotiation. This is an egregious form of industrial planning based on the model of autarky – an impossible delusion that would lead to a collapse in living standards in the US.
4) Complaints are all over the map. One way you can discern an excuse from a reason is the existence of a litany. Why can’t you go to a party? You have a paper due, your cat is sick, you are expecting a call from your mother, your car is broken, and the weather might get bad. If you hear something like this, you know for sure that there is something else going on.
It’s this way with Trump’s trade policy. The complaints are without end but always slightly changing: trade deficits, intellectual property, too many industrial subsidies, bad monetary valuations, national defense, or any combination of the above. As with the case of the excuses not to attend the party, at some point nothing is really believable anymore. There is also the fact that Trump has been calling for economic nationalism since the 1980s, so it is not plausible that these actions are really in response to current economic events. Instead, this is a product of ideology.
5) It’s Americans who pay. We keep hearing about how these tariffs are imposed against foreign countries. But as powerful as the US happens to be, the US government has no means to make China, Canada, Europe, or Mexico pay for anything. Tariffs are paid by consumers, manufacturers, and farmers – really everyone – right here in the US. It’s a tax and nothing else. And it is going to hurt.
All these strange features of this trade war point to what is perhaps the spookiest dimension of this whole fiasco: it comes from a place of ideology. Trump is a believer in national economic planning, which means national autarky. This allows him to be the CEO of the country, manage every business, punish enemies and reward friends, and rally people behind him as a great leader. It is the classic tactic of a “great man” operating under the right-wing Hegelian presumption that he is driving history in the right direction.
Ludwig von Mises explained this in his brilliant 1944 book Omnipotent Government.
It is the aim of nationalism to promote the well-being of the whole nation or of some groups of its citizens by inflicting harm on foreigners. The outstanding method of modern nationalism is discrimination against foreigners in the economic sphere. Foreign goods are excluded from the domestic market or admitted only after the payment of an import duty. Foreign labor is barred from competition in the domestic labor market. Foreign capital is liable to confiscation.
This economic nationalism must result in war whenever those injured believe that they are strong enough to brush away by armed violent action the measures detrimental to their own welfare.
A nation’s policy forms an integral whole. Foreign policy and domestic policy are closely linked together; they are but one system; they condition each other. Economic nationalism is the corollary of the present-day domestic policies of government interference with business and of national planning, as free trade was the complement of domestic economic freedom. There can be protectionism in a country with domestic free trade, but where there is no domestic free trade protectionism is indispensable. A national government’s might is limited to the territory subject to its sovereignty. It does not have the power to interfere directly with conditions abroad.
Where there is free trade, foreign competition would even in the short run frustrate the aims sought by the various measures of government intervention with domestic business. When the domestic market is not to some extent insulated from foreign markets, there can be no question of government control.
The further a nation goes on the road toward public regulation and regimentation, the more it is pushed toward economic isolation. International division of labor becomes suspect because it hinders the full use of national sovereignty. The trend toward autarky is essentially a trend of domestic economic policies; it is the outcome of the endeavor to make the state paramount in economic matters.”
This is about power and control, centralization and obedience, not prosperity and greatness. That, my friends, sums it up.