The other day President Donald Trump tweeted, “The United States has an $800 billion Dollar Yearly Trade Deficit because of our ‘very stupid’ trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more.”
If it is the case that we have been fools to engage in “one-sided” free trade with other countries, then Trump personally entered into a “very stupid” deal resulting in a huge personal trade deficit. He bought a couple of golf courses in Scotland and, get this, the Scots didn’t buy any golf courses or anything else from him. He has poured more than $220 million into buying and operating them all for the benefit of Scottish workers. His balance of payments1 deficit with Scotland is $220 million! What a sap. Just so you know, “countries” don’t have trade or payments deficits, businesses and individuals do because they are the ones buying foreign goods, not the “United States of America”.
You would think that he wouldn’t do such a foolish thing: buy foreign golf courses when there are so many needy golf courses here in America. He’s giving American jobs and wealth away. Just think what $220 million invested in American courses would do for American golf pros, caddies, and greens keepers. If President Trump had any compassion for the American golf industry, he would have bought American. The proper thing for him to do to stop this carnage would be to tax Americans who own foreign golf courses in order to encourage people like himself to invest in America and save American jobs.
This is the exact logic of Trump’s call for tariffs (taxes) on cheaper imported goods. Of course, it ignores the fact that he got something for his money (money losing golf courses).
Trump is now calling for steep tariffs on imported steel (25%) and aluminum (10%). He tweeted, “We must protect our country and our workers. Our steel industry is in bad shape. IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY.”
It’s a fact that consumers would rather save money by buying cheaper versions of products than more expensive ones. If they are made by foreign producers, jobs are lost by Americans who work for less efficient producers. It’s the same when Americans invest in assets in other countries: U.S. producers are deprived of capital investment and thus jobs are also lost.
But protectionists like Trump only see the harm to American workers who lose jobs. What they ignore is the harm tariffs do to the rest of Americans by making consumer products more expensive. Tariffs are essentially a tax on American consumers. The reason politicians ignore consumers is that steel worker unions and producers have lobbyists who threaten politicians with loss of support, and, as we all know, politicians can count votes. But consumers don’t have lobbyists.
This belief that trade protectionism benefits an economy has been disproven by economists going back for centuries. Adam Smith in his Wealth of Nations (1776) refuted protectionism and demonstrated that free trade among nations would create greater wealth for an entire nation. History has proven him right. There are very few economists today who defend protectionism. Those who do are usually associated with politicians who seek votes by pledging to protect union workers from foreign competition. Despite evidence to the contrary, politicians keep proposing tariffs for two reasons: they either wish to “buy” votes or they are ignorant of trade economics. Trump suffers from both failings.
But here is the weird thing: at about the same time as he proposed steel and aluminum import tariffs, Trump tweeted, “Manufacturing growing at the fastest pace in two decades!”; and “Jobless claims at a 49 year low!” Trump on the one hand claims that imports harm America while boasting that manufacturing and employment are at almost historic highs. This is called doublethink, a word coined by George Orwell in his brilliant novel Nineteen Eighty-Four about a dystopian totalitarian society. It means the ability to believe as correct two contradictory ideas at the same time. It makes one wonder about our president.
Trump’s doublethink doesn’t stand up to analysis. If employment is high and manufacturing is doing well, then the economy is doing well. While, say, foreign steel imports may be harming some less efficient steel producers, they are not hurting the rest of us. In fact, one could argue that lower cost steel imports are helping the economy on its road to prosperity. Instead of being forced to buy steel from inefficient U.S. producers, manufacturers can buy steel from more efficient producers anywhere in the world. This lower cost of production translates into lower cost products that benefit consumers—ultimately, you and me. As a result of having to spend less on products, we have more money available to buy more stuff, or to add to our savings, or to invest. The whole economy benefits.
There is a huge downside to protectionism. If imported steel costs 25% more as a result of Trump’s proposed tariff, then, all things being equal, consumer products will ultimately cost more. Because of that, consumers will have less to spend on other goods, and the economy will slow down. Even worse, if we impose tariffs on imported steel it is likely that other steel producing countries will impose retaliatory tariffs on U.S. exports to their country. This will slow exports which is a significant 12% of GDP and accounts for almost 11 million U.S. jobs. These are the kinds of things that cause economic decline. Even worse, Trump’s misguided policies could start a trade war which was one of the major causes of the Great Depression.
President Trump is on the verge of plunging us into a devastating global trade war which will shatter the U.S. economy. He tweeted that, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win…” That is reckless talk borne of ignorance. It reveals the danger of an all-powerful presidency—too much power in one man leads to disaster. Congress needs to act immediately to curtail this presidential power over tariffs.
1 “Balance of payments” refers to payment outflows made by people in the U.S. to foreigners (such as from imports and foreign investments made by Americans) versus payment inflows by foreigners to Americans (i.e., our exports and investments by foreigners in the U.S.). Included in this accounting are payment inflows and outflows in goods and services (i.e., the balance of trade). It doesn’t matter if you buy something abroad and don’t import it (like golf courses) or buy foreign imports, the economic impacts are the same.