Trumpian trade theory: Raise tariffs and risk retaliation

Protecting jobs by raising tariffs? Trump’s desire to make American industries great again creates global mistrust and leaves Americans worse off.

What is the right thing to do in politics? Keeping unemployment low is the obvious answer for most decision-makers. When it comes to achieving that objective, the means reveal the politician’s ideological mindset. Unsurprisingly, the American President Donald Trump too is concerned about the labour market in his country. Yet, his attempt to secure jobs reflects a 16th century approach – for solving a 21st century problem.

By imposing tariffs on foreign goods entering the US from Europe and China, American consumers ought to buy less of them as they get more expensive and switch to domestic goods instead. This would reduce US unemployment (because domestic production increases) and reduce the current account deficit (because imports decrease).

If only it were that straightforward, both politically and economically.

Mercantilist misconception

His Mercantilist logic is flawed.
In Trump’s worldview, trade creates winners and losers, and the US is among the latter. Even though it is true that China exports a lot, this is only because the US demands Chinese goods. Trump laments this situation, but there are just two ways out of it: spend less, or save more. In Trump’s America, neither of the two is an attractive option. As the President has shown so many times before, it is foreigners who are supposed to adapt to American priorities. This time though, his policy might very well backfire.

Trade theory has evolved since the Mercantilist era, despite Trump’s best intentions to ignore the progress. At the end of the 18th century, David Ricardo proposed that trade is always beneficial for the countries involved – and his theory of comparative advantage still remains uncontested, at least among economists.

Today’s international trade system is based on the belief that the exchange of goods raises incomes and living standards. Consequently, the traditional view has held that disruptions to commerce should be avoided. Even in official trade disputes at the WTO, conciliation is the prime objective and retaliation merely represents the last resort (Art. 3.7 DSU). Trump takes that credo and breaks it into pieces.

Mutual mistrust

His gamble comes at a cost. He accepts the risk of retaliation for the sake of “making America great again”. China and the EU have already announced their intentions of reacting in kind, raising tariffs on American goods such as Bourbon, jeans or motorcycles. Hence, not only do consumer goods in the US become more expensive due to the introduction of tariffs, but American companies are hit by less demand for their products abroad.

In the end, Trump might achieve the opposite of what he set out to do: slow down business investment, increase unemployment and hurt the economy of his country. Very quickly, beggar thy neighbour can turn into beggar thy citizens. Protecting US jobs is a noble idea, but igniting trade wars is not a clever way to do so. 16th century theory meets 21st century reality.

The President always claims to put America first. When it comes to trade, it is time he puts Americans first.

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