The Stupidest Trade War
Trump’s trade war comprehensively demonstrates the follies of protectionism
A trade war is one of those policies that tends to poll well with the general public but is almost universally rejected by economists. At least, it polls well at the beginning—but not at the end. As the current trade war is being fully implemented, the public is rapidly figuring out what the economists already knew.
We’re learning our lesson the hard way, through economic hardship. And it’s only the beginning, because we’re not just getting a trade war. We’re getting the stupidest possible version of a trade war. The Trump administration seems determined to show us everything that is wrong with protectionism.
Trade War With Penguins
One of the evils of a trade war is that it creates uncertainty. Because trade restrictions have no rational economic basis, they are usually imposed for purely political reasons that are arbitrary and shifting.
The Trump administration has taken this feature and ramped it up to high drama. As one aide told Politico last month, “It’s the greatest show on Earth. We’ll put tariffs on tonight, but tomorrow we’ll tell you we may negotiate and take them off. But stay tuned, because you never know what tomorrow’s gonna bring.”
Prior to Trump’s big April 2 tariff announcement, administration insiders mentioned multiple possible scenarios, but it was clear that up until the last moment, Trump had not decided between them—and what he unveiled was different from what anyone had previewed. Trump seemed to delight in keeping everyone waiting so he could reveal the nation’s economic future with great pageantry.
In keeping with a policy designed more for theatricality than for rational calculation, the results are all arbitrary. Tariff rates were decided using idiosyncratic calculations of trade deficits made up just for this announcement. But the most eye-catching aspect of the announcement is the way tariffs have been applied randomly to places with which the United States currently does not trade.
This is how we ended up in a trade war with penguins. Among the tariffs on Trump’s list is a 10% tax on imports from the Heard and McDonald Islands—territories of Australia that are remote, rugged and completely uninhabited, except for flightless Antarctic birds. This demonstrates, in the form of farce, the fact that trade wars are always an excuse for the arbitrary abuse of political power.
Since the beginning, tariffs have been used by one region or industry to enrich itself at the expense of others. In Trump’s first term, steel tariffs were celebrated by steelmakers—while they led to a decrease in domestic manufacturing because of the cost they imposed on every company that uses steel as a raw material.
In Trump’s second term, tariffs have been employed in a series of senseless conflicts like his attack on Canada, in which our trading partners have no idea what Trump is seeking or trying to accomplish. His goal seems less economic than psychological: the thrill of one man exercising the unchecked power to disrupt everyone else’s lives.
How To Make Smoot-Hawley Worse
What makes this exercise of arbitrary power possible is that Congress has given the president unilateral power over trade. The last bill in which Congress dictated tariff levels was Smoot-Hawley in 1930. The resulting downward economical spiral was so catastrophic that Congress sloughed off its tariff power to the executive branch, hoping that the president would be less inclined to use it—which was largely true, until now.
This history highlights one of the central follies of all trade wars. They always consist of an elite group of politicians—or in this case, one man—overriding the individual decisions of businesses and consumers. A trade war is central planning, but for conservatives. It involves the same conceit as all central planning: that the politicians or bureaucrats have some special knowledge that overrides everyone else’s judgment. Yet they cannot possibly understand how to balance the millions of choices made by millions of people, each in their individual circumstances.
The tragicomic incompetence with which Trump has implemented his tariffs lays bare the emptiness of that conceit. Supposedly he is charging retaliatory tariffs that are half the tariff rates other countries charge against us. But that’s not what he’s actually doing. In his announcement, the “tariff rates” Trump listed for other countries do not correspond to any actual tariffs they charge. So where do those numbers come from? It did not take long for people to figure out that he had merely taken the trade deficit every country has with the U.S. and divided it by the quantity of that country’s exports to us—and set this, for no reason at all, as the “tariff rate” against which we are retaliating.
Hence all the crazy results. As Andy Craig points out, “The two highest tariff rates under the gibberish formula are Lesotho [in South Africa] and St. Pierre et Miquelon, both at 50%. Population of the tiny French islands off the coast of Newfoundland: 5,819.”
And it gets worse: The Washington Post reports that Trump was offered a menu of more sophisticated options that his aides had been researching for months. He then deliberately chose the simplest, stupidest option. But this stupidity just reflects the fundamental premise of the anti-trade viewpoint: that trade as such is bad for us.
The most revealing defense of Trump’s tariffs is what an unnamed White House official told the New York Post: “The model they use is based on the concept that the trade deficit that we have with any given country is the sum of all unfair trade practices, the sum of all cheating.” This, put in crudely simple form, is the basic idea: Trade is cheating. The only question is whether you’re cheating the other fellow or he’s cheating you.
Trump’s assumption is that trade is always a zero-sum game, in which one player’s gain is always another player’s loss. All the evidence indicates that this is how Trump has habitually run his businesses, stiffing contractors, deceiving lenders and trying to browbeat partners into overpaying for his properties.
But this is not how trade works. Trade is a mutually beneficial exchange, in which each person gives up something that is of less value to him but of more value to the other person. This is literally among the earliest and most basic principles of economics. In 1817, British economist David Ricardo famously compared Britain and Portugal as makers of two products: cloth and wine. At the time, Britain was a leader in mechanizing the textile industry and produced cheap and abundant cloth. It was, shall we say, not so renowned for its wines. It made obvious sense for British businesses to devote more of their effort to textiles, while the Portuguese devoted more effort to wine. This is how each side benefits from trade.
Artificial Lines on a Map
But what about the trade deficit, which Trump takes as a sign that other countries are ripping us off?
The overall trade deficit the U.S. has with the rest of the world is not a sign of American weakness but a sign of our strength—or at least, our former strength. We have a trade deficit because other nations sell us goods, and then they take the money from those sales and invest it in the United States. They buy shares in American companies and Treasury bonds to finance our government. That’s the imbalance: The money isn’t going out in the form of exported goods. It’s staying here in the form of investments.
The trade deficit is a measure of the rest of the world’s investment in America. And this is an investment we should want foreign investors to make—and we should be terrified that they won’t want to do it any longer.
If you want a symbol of the folly of this obsession with the trade deficit, look at our trade war with Canada. Of all the world’s economies, Canada is the most integrated with the United States, particularly in two big industries: automobiles and oil.
The Canadian auto industry has been intertwined with ours from the very beginning. Ford of Canada was founded just one year after the Ford Motor Company. In 1965, the Canada-US Auto Pact specifically allowed a free flow of parts for the auto industry, and the bridge between Detroit and Windsor, Ontario, became the busiest international border crossing in North America.
Canada is also the world’s largest market for our exports, so much so that the only reason we have a trade deficit with them is because we buy so much of their oil. Canada is an irreplaceable source of the heavy crude oil needed for American refineries, especially in the Midwest. So in exchange for all the money we pay them, what do we get in return? We get energy to fuel our economy. And if we didn’t get it from them, the next-best options would be Venezuela and Russia.
In short, the U.S. has long prospered by drawing on Canada’s oil, timber and other natural resources, as well as its far more important resources of labor and talent.
Donald Trump does not even have a coherent argument for why this is somehow bad. Notice that he claims that Canadian trade is bad for us—so long as Canada is still a separate nation. But then he demands that it become our “51st state” and imagines that suddenly the exact same trade would be good for us, if we simply erased the national border.
Trump is right about one thing. The border between the U.S. and Canada is just an artificial line on a map. It has no economic significance. Yet he imagines trade would go from being bad to good if we simply did away with the imaginary line.
The World’s Greatest Evangelist for Free Trade
The trade war with Canada contains the essence of Trump’s whole approach. He is blowing up our largest and most beneficial trade relationship for literally no reason, all on the basis of a theory that is absurd and contradictory.
But in so doing, Trump has drawn out the inherent absurdity of trade wars: their disruptive political theater, their undeserved confidence in the genius of central planners, the arbitrariness of their rules and their belief in the destructiveness of trade as such—as if the sealed-off and impoverished “hermit kingdom” of North Korea were the economic ideal.
In a perverse way, Donald Trump might end up being the world’s greatest evangelist for free trade, simply by showing us what not to do. By piling all of these follies on top of one another, he just might discredit trade wars the way Smoot and Hawley did and save our children and grandchildren from reliving this disaster for another 95 years.
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