Nobody knew trade could be so complicated!
Except, you know, economists.
Plenty of news has been made in the past month, and I doubt most people remember the mess that was the G7 meeting. However, this meeting and Trump’s behavior in it are still relevant. Of particular importance are the tariffs and counter tariffs that went into effect following the meeting and Trump’s assertion that he would even go beyond that in further rounds of tariffs.
As this trade war continues to heat up, it’s worth breaking down why this whole situation is behind moronic.
Last month, President Trump, at his second ever Group of Seven meeting (G7), went off the rails when he suggested that the U.S. will stop trade with countries that impose “ridiculous and unacceptable” tariffs on U.S. products. This follows months of talk and weeks of action by the president in his attempt to achieve what he believes will be a fairer deal for domestic manufacturers and consumers by leveling tariffs against our closest allies.
As with most things Trump, it may be wise to not take his rhetoric at face value. After all, Trump has a record of backing down from his threats. He could not further expand tariffs on our allies beyond the initial round, avoiding an all-out trade war. However, given the executive branch’s considerable power to raise tariffs and other impediments to trade, it may be worthwhile to explore why both the reasoning behind and the consequences of such an act are flawed.
Trump, in his time as a businessman, as a candidate and as president, has routinely denounced the U.S. trade deficit as bad for jobs and the economy as a whole. With a very surface level understanding of trade deficits, that would make sense, right? If the money going into the country is lower than the money going out of the country, the very nature of a deficit, wouldn’t that be bad for us? Yet, like most things in economics, surface level knowledge won’t quite cut it.
The president is correct to state that we have a trade deficit; however, his claim as to what this actually means for the economy misses the mark. In fairness to Trump, the jury is largely out on whether or not trade deficits are bad for the economy, but most economists believe that a deficit in trade is either a positive force or has little overall impact on the system as a whole. In fact, as some economists have pointed out, the politics of a trade deficit are far more impactful than the actual economics of one.
That being said, it is important to understand why Trump believes what he does. Take his claim that trade deficits are bad for jobs. In a sense, he’s right. Trade deficits, particularly in manufactured products, can and have done damage in some sectors, like manufacturing. However, what Trump gets wrong is the assumption that job loss in one sector of the economy is job loss in the economy as a whole – this is incorrect.
While jobs may end up in China or other low wage countries, the low cost of the products brought in (cheaper Chinese steel in this case) that displaced these jobs in the first place may have a positive impact on the businesses that use these products. Given that Trump’s targets for this first volley of tariffs are foreign steel and aluminum industries, let’s take a look at what the theoretical impact they would have on the economy.
For a start, it’s important to understand that steel and aluminum producing jobs are only one part of the equation. In the U.S., “steel-using industries employ 80 times as many people as steel-producing industries,” and that gap is even wider for aluminum as the U.S imports far more aluminum than steel. So, while the tariffs may be good for steel and aluminum producers, who will now hire more workers as prices overall are higher, every industry that relies on cheaper foreign steel and aluminum will face cuts in profits and will likely lay off workers as a result.
Given that there are more who use than those who make, some economists estimate that the overall impact of these tariffs will be a net loss of over 400,000 jobs. In fact, the Council on Foreign Relations estimates that the tariffs could result in 40,000 jobs lost in the auto sector alone. Hell, it could even hurt your favorite beer companies, an arguably even more American industry than steel. Tariffs, in general, operate in this paradigm of increased job growth in the protected industries and job loss in those that profit from cheaper input goods (the materials they make their own goods with).
A good way to think of it is like what happens to your body when you go out drinking with friends. Have a few beers and you’ll be feeling pretty good, but the side effects on your body, like a hangover, only increase with the more beers you drink. So, while it might make sense in the moment to keep drinking, that good feeling can quickly turn into a bad one by morning because the net effect of a night on the town is negative as far as your body is concerned.
Now that we’ve broken down Trump’s flawed reasoning behind his threat to cut off all trade to some of our biggest trading partners, let’s look into what could happen if he actually carries it out.
To begin with, does the President even possess the power to unilaterally cut off trade? Probably not, as any concrete regulation forbidding trade with another country, particularly a country not deemed a national security threat, would likely take an act of congress. However, Trump may choose to go a different route, to simply tariff most trade with these nations to the point where it becomes nonviable. Assuming Trump ends up going this route, what could happen?
In short, it would devastate the world economy. The U.S., in 2016, imported over $2.1 trillion of goods, over 30 percent of which came from G7 members. As the U.S. doesn’t exist in a void, one would expect similar counter tariffs to be placed on U.S. exports. Considering we export over $1 trillion of goods, we would certainly feel the impact of this as well.
More to the point, however, the U.S. simply doesn’t have the capacity to suddenly become self-sufficient. As a huge number of industries in the U.S. rely on cheap imports to stay profitable and as a large amount of manufacturing for these products no longer exists in the U.S., our economy would come to a sudden, abrupt and disastrous halt.
Honestly, the fact that Trump continues to push ahead with these tariffs is astounding. Broad tariffs, from a historic perspective, simply don’t work as advertised. I mean, even “Ferris Bueller's Day Off” ridicules them. The idea that the president could make them work when they haven’t before is simply ridiculous. Nothing about Trump’s tariff plan is unique – we’ve played this game before, and, if my memory serves me right, we lost.