In the wake of the recent “trade agreement” between President Trump and EU Commission President Jean Claude Juncker, we have seen a surfeit of commentary heaping praise on the U.S. president for his strategic trade policy vision and tactical brilliance. Much of that praise has come from people who share the president’s flat-earth view that trade is a zero-sum game played by national governments where the objective is to promote exports, block imports, and secure a trade surplus. Trump throwing U.S. weight around to assert the rule of power over the rule of law is music to this crowd’s ears.
But then there are the apologists who know better; the enablers. They are the bigger problem. In their obsequious tones, they explain how our brilliant president is blazing his own path toward free trade and that the evidence of his success is all around us. If we just disregarded Trump’s nationalist rhetoric, ignored his belief that the trade deficit means the United States is getting ripped off, shoveled away his mounting pile of destructive, protectionist actions, and stopped believing our own lying eyes, we too would rejoice in the greatness of a man who is committed—above all else and above all others—to free trade.
Engaging in such extreme mental contortions is no easy task, but that’s exactly what an op-ed by tax reform luminaries Steve Moore, Art Laffer, and Steve Forbes in the New York Times last week expects readers to do.
Moore, Laffer, and Forbes (MLF) portray Trump’s “gunboat diplomacy” (you open your markets fully or I’ll close ours!) as strategic genius, akin to Reagan’s nuclear arms race, which broke the Soviets’ backs. They conclude: “Just as no one ever thought Mr. Reagan would stem nuclear proliferation, if Mr. Trump aggressively pursues this policy, he could build a legacy as the president who expanded world commerce and economic freedom by ending trade barriers rather than erecting them.” Well, yeah, maybe he could. But so far Trump has only increased trade barriers, more are coming, and there are no negotiations underway—with anyone—aimed at lowering tariffs or other barriers to trade. But just close your eyes and imagine.
MLF make the following claim:
President Trump won a victory for freer trade last week when he and the president of the European Commission, Jean-Claude Juncker, agreed to find ways to lower tariffs and other barriers to each other’s exports. The outlines of the deal are still sketchy, but it calls for the Europeans to buy more American petroleum, soybeans and manufactured goods and for Mr. Trump to reduce his auto and steel tariffs. We were particularly heartened that Mr. Trump and the Europeans now have a handshake agreement to aim for zero tariffs on both sides of the Atlantic.
The only accurate part of this paragraph is that “the outlines of the deal are still sketchy.” As I described last week, nothing was agreed at that meeting except that new tariffs would not be imposed for the time being. In his Rose Garden statement after meeting with Juncker, Trump said they had agreed to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods (my emphasis).” But there is no timetable and if there were, those discussions would exclude agricultural products, natural resources, services, and—well—automobiles and parts, which together constitute a big chunk of transatlantic trade.
Instead of moving us in the direction of lower tariffs and broader trade liberalization, a more accurate interpretation of the meeting is that Trump made clear that he is digging in for a trade war of attrition with China and that he fully expects Juncker to have his back. The plan includes such banana republic tactics as buying the quiet of Trump’s trade war casualties ($12 billion for farmers and likely more to come for manufacturers) and compelling the EU (and other trade partners) to purchase more U.S. soy, natural gas, and other products previously destined for China, lest the steel and aluminum tariffs remain in place, and auto tariffs follow—perhaps as early as October. Considering that the EU will have a tough time absorbing much of the U.S. supply rendered “excess” by Trump’s tariffs and the retaliation they incited, it is only a matter of time before Trump loses patience and transatlantic discord starts boiling again.
This was Mr. Trump’s idea. The night before the agreement, he proposed in a tweet that “Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies! That would finally be called Free Market and Fair Trade!” Amen.
Of course, zero trade barriers would be great. But Trump’s idea? Hardly. In 2002, in the Doha Round, the Bush administration put forward a far more ambitious proposal for zero tariffs on industrial goods for all countries by 2015. More recently, the Transatlantic Trade and Investment Partnership (TTIP) negotiations included proposals to eliminate tariffs, non-tariff barriers, and subsidies. Neither of those efforts was successful, but the idea has been in play since well before Trump came to town and is not especially radical.
This is a winning strategy that we’ve long endorsed with our friends at the White House because it is fully consistent with what Mr. Trump has often told us: his threat of tariffs is a negotiating tactic to get to lower trade barriers and a “level playing field.”
I’m not sure where MLF have been lately, but they seem to have overlooked the fact that the president is not only “threatening” tariffs. He has already imposed them on $100 billion of imports from Europe, Canada, Mexico, Japan, China, and most of the rest of the world. In the next week or so, another $16 billion of imports from China are likely to be hit, and another $200 billion could be subject to 25 percent duties by as early as September.
Last week, Commerce Secretary Wilbur Ross wondered why there was so much handwringing over the matter of assessing 25 percent tariffs on another $200 billion of Chinese goods: “Fifty billion dollars a year on an $18 trillion or so economy is three-tenths of one percent. It’s not something that’s going to be cataclysmic.” Well, it might not be immediately cataclysmic, but a more relevant comparison is that the total value of all duties collected by U.S. Customs in 2017 was just $33 billion. Only in a George Orwell novel could this beefing up of duty collection be called free trade.
The next step should be to extend this zero tariff offer to other key allies, including Britain, Canada, Mexico and South Korea.
Again, this is willful ignorance, right? Anyone who writes about trade in the New York Times has to know that nearly all tariffs between the United States and Canada and between the United States and Mexico are already zero today under the NAFTA, and that the Korea-U.S. free trade agreement includes a roadmap to get us almost all the way there in a decade. One major exception is Trump’s insistence on preserving the 25 percent U.S. tariff on pick-up trucks until the year 2041.
If Mr. Trump’s goal is more jobs and higher wages, America comes out the big winner under the zero tariff scenario. Most of our major trading partners have higher tariffs than we do. A study by the president’s Council of Economic Advisers calculates that the average American tariff is 3.5 percent, while the average European Union rate is 5 percent, China’s is nearly 10 percent and the world average is around 10 percent. On a level playing field, American companies can compete with anyone, and our exporters will gain advantage if trade barriers are abolished.
Actually, what this tells us is that the U.S. government has been better to American businesses and households than the governments of China and the EU have been to their own domestic entities. Trump’s tack amounts to his threatening to reduce the freedoms of Americans unless and until the other governments allow their citizens to be freer. So much for America first.
Moreover, jobs and wages are linked to the performance of businesses. American workers benefit, generally, when their employers are profitable. Profits are maximized by maximizing revenues and minimizing costs.
Generally speaking, U.S. export revenues could be higher if U.S. exporters faced lower barriers abroad. But import tariffs don’t compensate for those foreign barriers. They exacerbate the problem because half of the value of U.S. imports are inputs to U.S. production and tariffs raise their costs. Threatening to raise the cost of production on U.S. businesses (and the cost of living for U.S. households) unless foreign governments reduce their own tariffs makes no economic or business sense. Higher tariffs abroad and higher tariffs at home conspire to squeeze profits from both ends, and that’s not good for U.S. employment or compensation. This back of the envelope analysis shows how Trump’s tariffs imperil the expected benefits to U.S. manufacturers from the tax reforms, which MLF were instrumental in advancing.
The optimal response to higher foreign tariffs, which work to reduce U.S. business revenues, is to lower our own tariffs, which would reduce U.S. production costs. So not only is the economics wrong, but the strategy hasn’t produced the results that MLF are celebrating. So far China and nearly every country hit with steel and aluminum tariffs has refused to negotiate under duress. What if these governments continue to remain unwilling to submit to Trump’s gunboat diplomacy? Even if they were inclined to, why would they have any reason to believe that Trump wouldn’t use the same tactics to get more concessions next time? This is a dubious and very dangerous “strategy.”
In any case, the fact that the United States has lower average tariffs than most countries helps explain the relative success of the U.S. economy over the years. The United States remains the world’s top destination for foreign direct investment, and lower tariffs give us an advantage in the competition to attract and retain that investment. One of the arguments for corporate tax reform with which MLF presumably agree is that lower rates would free up profits to be reinvested in the U.S. economy. Lower taxes on imports have the same effect. We didn’t need agreement from Beijing or Brussels to reduce U.S. corporate rates and we certainly don’t need their consent to do the same for tariffs.
The alternative is higher tariffs on steel, aluminum, autos and hundreds of products imported from other countries, particularly China. Those actions have led to retaliatory tariffs imposed on products grown or manufactured in America. This has hurt farmers, the stock market and economic growth.
It’s difficult to fathom that MLF consider higher U.S. tariffs on these inputs and consumer goods to be leverage. Those U.S. tariffs are hurting the economy and threatening to negate the benefits of the tax reform they helped achieve. Those enduring costs, as well as the retaliation impacting U.S. farmers and others are what Trump’s trade policies have wrought.
A no-tariffs trade strategy would also allow the United States to seize the moral high ground in the debate. Mr. Trump would be transformed from the evil disrupter of international commerce to a potential savior — just as 30 years ago Mr. Reagan’s international image changed from superhawk to peacemaker almost overnight.
After insulting and bullying U.S. trade partners, imposing enormous costs on the global economy, fomenting profound business uncertainty and diplomatic angst, and snuffing out any remaining fumes of good will toward his administration, it is unlikely that President Trump would ever be considered anything more sparing than an evil disrupter. But in the final analysis, it is apparent that the intended audience for the MLF op-ed is none other than President Trump himself.
The last few paragraphs make clear that the authors—all Trump advisors—are trying to encourage the president to end up on the right side of history. For that they deserve some credit. But they still lose more points for excusing the president’s numerous transgressions, giving intellectual cover to mercantilists and nationalists who believe the United States shouldn’t be constrained by the trade rules, and for supposing that Trump would ever read the New York Times.