April 2, 2018
The Danger of the Deal
Even if America wins concessions, worry
Donald Trump’s trade policy is economically muddled and politically toxic
Mar 28th 2018
JUST six words suffice to sum up President Donald Trump’s approach to trade (and, you may mutter, too much else): make threats, strike deals, declare victory. In recent weeks Mr Trump’s campaign-trail threats of 2016 have been turned into tariffs of 25% on imports of steel and 10% on aluminium, and proposed levies on up to $60bn-worth of Chinese goods.
Foreigners have duly queued to sue for peace. On March 26th South Korea agreed to limit its steel exports to America, and accepted an extension of American tariffs on its pickup trucks. China is said to be discussing cuts in tariffs on American cars, increased purchases of American semiconductors and the further opening of its financial industry. With many of America’s allies belatedly exempted from the metals tariffs, and consensus among policymakers and business types that China should indeed change its behaviour, stockmarkets are less fearful of an outright trade war (see Buttonwood). The man who tweeted that “trade wars are good, and easy to win” may be able to claim a string of victories with scarcely a shot fired.
Vindication? Far from it. For one thing, no deal has yet been done with China. Other countries have politics too, even dictatorships. Despite the South Korean deal, and keen as China is to avoid a trade war—keener than Mr Trump, it seems—the danger of a transpacific escalation remains real. Even if conflict is averted and China gives ground, however, the result will be a bad one for the world, and for America. That is partly because of Mr Trump’s character. If he thinks he has won one fight, he is likelier to start another. It is also because his policy is founded on wretched economics and dangerous politics.
Take the economics first. The President is obsessed with America’s trade deficits—not just the total, of $568bn, or 2.9% of GDP, last year, but its bilateral ones, especially the yawning $375bn deficit in goods trade with China, which he wants cut by $100bn. Mr Trump’s bluster cannot change basic economic logic. America’s total trade deficit reflects the shortfall in saving by its households, companies and government—the excess of their combined spending over their income. Tariffs and quotas can bring trade into balance only if they somehow encourage national saving or reduce investment. Protectionism predicts trade balances poorly. Just look at India, where, historically, high tariffs and high trade deficits have coexisted.
Bilateral deficits, it is true, can more easily be altered by trade policy. If America slaps taxes on Chinese goods (and nothing else changes), it will buy less of them and the $375bn gap will shrink. However, unless Americans change their total spending and saving, they will buy more from elsewhere.
The tax cuts that the President signed into law in December make his fixation on trade deficits even more senseless. Boosting the budget deficit to 5% of GDP in 2019 will, other things being equal, widen the trade gap. It is hard to imagine Mr Trump blaming himself for that—and all too easy to see him making a new round of threats against foreigners.
The President’s more fundamental error is to see trade as a zero-sum game, in which exporting is for winners (or cheats, if they are foreign) and importing is for dupes. In fact, the gains from trade come from the specialisation permitted by the free exchange of goods, capital and know-how that allows, for example, Californian-designed iPhones to be assembled in China and sold worldwide by the bucket load.
So long, Geneva’s conventions
Mr Trump’s misunderstanding of economics explains why his politics are so irresponsible. Rather than join with other aggrieved countries to put legal pressure on China, Mr Trump has threatened putative allies. Rather than work within the rules-based system of trade, which America helped create and which, despite the system’s imperfections, has served the country well, he bypasses it at will. He is particularly reckless to claim that the steel and aluminum tariffs are justified by national-security concerns (a get-out-of-jail-free card under World Trade Organisation rules that should be used sparingly). If America thumbs its nose at the WTO, why shouldn’t others?
Managed trade is a mistake, not a victory. It substitutes the power of political lobbies for market forces, favouring loud, well-organised producers over silent, disparate consumers and robbing economies of the nimbleness needed to adapt to changing technological conditions. Other countries will feel freer to follow America’s example, making a trade war a repeated risk rather than a one-off danger. Mr Trump’s approach threatens to leave everyone much worse off. Some deal.
This article appeared in the Leaders section of the print edition under the headline “The danger of the deal”