Trump's tariff move shows he flunked economics

President Donald Trump fired the first shot in a delusional and destructive trade war: tariffs of 25% on steel and 10...

Posted: Mar 2, 2018 3:00 PM
Updated: Mar 2, 2018 3:00 PM

President Donald Trump fired the first shot in a delusional and destructive trade war: tariffs of 25% on steel and 10% on aluminum. Shares of US Steel jumped 5.75%, about $460 million in market capitalization, but the overall US stock market capitalization fell by more than 1%, around $340 billion.

A few steel companies might benefit a little -- in the short term -- but the United States as a whole, and the world, could suffer enormously from Trump's reckless ignorance.

Whatever US steel producers might gain from a trade war would be offset by the losses to steel users and consumers, plus the social costs of protecting uncompetitive jobs. But the blow to the stock market reflects the possibility of something far more dire: a downward spiral to a global trade war in which all countries, including the US, will be deep losers. We have been there before: The trade wars of the early 1930s helped to trigger, then deepen and prolong, the Great Depression.

But don't expect an impulsive and ignorant man like Trump to heed the lessons of economic history, logic of retaliation, and the basics of trade.

His actions are based on three primitive fallacies.

First, Trump thinks that America runs trade deficits with countries like China and Germany because the US is being swindled by them. The real reason is that the US saves too little and consumes too much, and it pays for this bad habit by borrowing from the rest of the world. The Trump theory of international trade is like a man in deep debt who blames his creditors for his spendthrift behavior.

Come to think of it, that is precisely how Trump has spent his whole business career: over-borrowing, going bankrupt, and blaming his creditors.

Second, Trump thinks that trade barriers will protect the US. Nonsense. These measures might temporarily protect US Steel, but not US society. American consumers will lose. US businesses that buy steel will also lose because now they must pay higher prices. American export competitiveness will suffer as production costs rise.

Third, Trump believes that US trade barriers will crush China and sustain American global economic and military dominance. How pathetic. China and Europe will surely retaliate. American companies will face reduced access to China's fast-growing market. China will shift its own exports to other markets, especially towards fast-growing Asia, as well as towards Africa, Europe, and Latin America.

American exporters will lose their relative competitiveness in those markets as well.

Nor will jobs be saved even in the US steel industry, except perhaps in the very shortest term. The US has been protecting its primary metals industry, off and on, for decades while employment has declined from around 1.2 million workers at the end of the 1970s to about 375,000 workers now.

It is automation more than international trade that costs jobs in the sector in the long term, and that will mean no boost of long-term employment in steel, much less in the economy at large (with a sure loss of jobs outside of the protected metals industries).

Within one day, other countries announced their displeasure and in some cases, their intention to retaliate. The European Union Trade Commissioner Cecilia Malmstrom stated that the EU would have no option but to respond. "Imposing sweeping measures like this is generally not the way forward. We risk seeing a dangerous domino effect from this."

Others pointed to the US violation of World Trade Organization rules. China reacted coolly, objecting to the US action but without any immediate declarations of retaliation. A former Chinese vice minister of trade stated, "China does not want to see a trade war with the United States. But if Trump insists, China is not afraid of it."

Trump is making these primitive errors because he hasn't a clue as to how the world economy works and how to deliver on his promises to raise US living standards. Raising US living standards requires long-term investments in education, research and development, environmental sustainability, and infrastructure.

But for Trump, it's always gimmicks and lies: tax cuts and increased budget spending that are paid for by rising public debt. Federal budget cuts on science, advanced technology, and environmental safety that leave the US less competitive and highly vulnerable to hurricanes, floods, and forest fires. And reckless trade wars that will harm US competitiveness and trigger global retaliation.

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