Trump’s tariffs are a fool’s game
Published: 24 November 2024 https://eastasiaforum.org/2024/11/24/trumps-tariffs-are-a-fools-game/-
Ken Heydon
London School of Economics and Political Science
In Brief
US President-elect Donald Trump's
protectionist trade policies — marked by high tariffs — have been a
major economic setback for the United States. The costs of these
policies have harmed domestic buyers and caused job losses in sectors
related to the targeted
In April 2018, then US president Donald Trump tweeted ‘we have a Trade Deficit of $500 Billion per year … We cannot let this continue!’ In response, US tariffs — which in 2016 under former president Barack Obama were levied on just two per cent of US imported goods at an average rate of 1.7 per cent — in 2020 were levied on 15 per cent of imports at an average rate of 13.8 per cent.
President-elect Trump has now threatened even higher barriers to US imports, vowing as part of the Make America Great Again pledge to impose 10–20 per cent across-the-board tariffs on all US imports and 60 per cent tariffs on Chinese-made goods.
In the face of this threat, it is worth revisiting how the earlier protectionist shift under the first Trump presidency imposed a major cost on the US economy while totally failing to ‘correct’ the trade imbalance.
The penalty tariffs under Trump’s first term on steel and aluminium clearly illustrate the self-harm caused by using tariffs as a trade weapon. US steel users now pay an extra US$650,000 per year for every steel job saved and for each of these saved jobs, 16 are lost elsewhere.
The scale and range of US tariff measures in 2018 were unprecedented — greater even than that of the infamous Smoot-Hawley tariffs of 1930 that heralded the Great Depression.
Further, as a practical demonstration of the risks of regulatory capture — where regulations are influenced by targeted industries rather than the public interest — most restrictions from Trump’s first term have been retained under the Biden administration. They are expected to reduce long-run US GDP by 0.22 per cent (US$55.7 billion), decrease wages by 0.14 per cent and eliminate 173,000 full-time equivalent jobs.
As for ‘fixing’ the trade imbalance, over Trump’s first presidency the US trade deficit soared to its highest level since 2008, increasing from US$481 billion to US$679 billion.
Two trade-adjustment factors help explain this increase. First, retaliation by the countries facing increased tariffs on their exports, notably China and the European Union, and second, the switching of US imports from China to other sources.
But two broader factors were also in play: exchange rates and budget balance.
Raising tariffs on a country’s goods will reduce demand for those goods but also for the currency associated with them, effectively depreciating the foreign exporter’s currency and appreciating that of the country imposing the tariff. In the four months following the imposition of US tariffs against Chinese imports in 2018, the renminbi fell some 8 per cent against the US dollar, prompting accusations by then-US treasury secretary Steven Mnuchin of Chinese currency manipulation.
But the most fundamental factor for the failure to correct the trade imbalance through tariffs is the fiscal expansion undertaken during the Trump administration. The expansion ensured that the United States would continue to spend more than it produced, which is the underlying reason for the trade deficit.
A tax on imports is thus, in effect, a tax on exports. The impact is both direct through raising the cost of inputs, stifling productivity-enhancing competition and prompting retaliation and worsening of trade conditions, as well as indirect through currency appreciation and permitting wage increases in the import-competing industries, which then spill over to the economy at large.
Can the World Trade Organization help avert the harm to both trading partners and the United States itself from the threatened Trump tariffs? Without reform, unfortunately not.
As a likely precedent, in 2018 the Trump administration sought to justify its steel and aluminium tariffs as being ‘necessary for the protection of its essential security interests’ under the General Agreement on Tariffs and Trade’s (GATT) Article XXI. The United States argued that such action precluded WTO dispute settlement panels from examining counterclaims by targeted countries.
Washington lost this argument and its invocation of Article XXI was declared unjustified by WTO panels. Yet WTO law also provides that once an evaluation is made, a member can still pursue the action that it considers necessary, regardless of the panel’s judgement, in a legitimate exercise of its Article XXI rights.
Whether through its law, its hobbled dispute settlement mechanism or the Multi-Party Interim Appeal Arbitration Arrangement — of which the US is not a member — the WTO is thus presently unable to prevent US penalty tariffs from continuing to harm itself and others, not least dollar-debt burdened developing countries.
This risk will not be averted by self-defeating retaliation but rather calls for two things — strengthened advocacy for the economy-wide gains from open markets and also better help for the discontents who do not share those gains and who are the drivers behind Donald Trump’s ill-advised tariff threat.
Ken Heydon is a former Australian trade official and senior member of the OECD Secretariat and Visiting Fellow at the London School of Economics and Political Science.