I’ve Seen the Horror of Trump’s Tariffs Before, with Reagan’s Terrible Trade Policies

Like many of the president’s pronouncements, the details were nowhere to be found. But apparently the president’s authority will be drawn from the Trade Expansion Act of 1962. This act gives the president the authority to restrict imports and impose tariffs if the current reliance on particular imports poses a security threat.

Well, Commerce Secretary Wilber Ross, an arch‐​protectionist, has already given President Trump the “green light.” And if that isn’t enough, Secretary of Defense Jim Mattis has joined the economic policy debate, for which he has no qualifications. Mattis, of course, is playing the national security card.

And then there are Trump’s trade specialists, notably Robert Lighthizer, the U.S. Trade Representative, and Peter Navarro, who was recently elevated to Director of Trade and Industrial Policy and Director of the White House National Trade Council. Both Lighthizer and Navarro are dyed‐​in‐​the‐​wool protectionists and have never seen a tariff or quota that they didn’t fall in love with.

Perhaps the most shocking stance to me is the one being taken by my old friend David Malpass, the Undersecretary of the Treasury for International Affairs. Last week at a Washington forum on global economic growth, which was hosted by the Kemp Foundation’s Project on Exchange Rates and the Dollar, I introduced Malpass and led a question‐​and‐​answer session after his address. In that session, Malpass was unambiguous: The Trump administration is going to lower the boom on China and its so‐​called unfair trade practices. So even the U.S. Treasury, which is almost always on the side of free trade, has turned protectionist.

President Trump must be given credit for matching his rhetoric with reality. That said, the president and his advisers claim that tariffs and tough talk will close the United States’ long‐​running trade deficit. But that is little more than wishful thinking. Indeed, it is nothing more than a display of profound economic ignorance.

Our deficit will not be reduced by enforcing trade rules, renegotiating existing trade pacts, or forming new ones. While these policies might shuffle the deck and alter the bilateral trade balances the U.S. has with other countries, they will not alter the overall U.S. trade balance. Indeed, policies aimed at eliminating so‐​called “unfair trade practices” — while attractive to many businessmen, trade unionists, most progressive activists and all who harbor mercantilist sentiments — are wrongheaded and futile.

Why? The simple analytics of the trade deficit prove the utter futility of the Trump administration’s trade policies. In economics, identities play an important role. These identities are obtained by equating two different breakdowns of a single aggregate. Identities are interesting, and usually important, by definition. In national income accounting, the following identity can be derived. It is the key to understanding the trade deficit:

(Imports — Exports) ≡ (Private Investment — Private Savings) + (Government Spending — Taxes)

Given this identity, which must hold, the trade deficit is equal to the excess of private sector investment over savings, plus the excess of government spending over tax revenue. So the counterpart of the trade deficit is the sum of the private sector deficit and the government deficit (federal + state and local). Therefore, the U.S. trade deficit is just the mirror image of what is happening in the U.S. domestic economy. If expenditures in the U.S. exceed the incomes produced in the U.S., which they do, the excess expenditures will be met by an excess of imports over exports (read: a trade deficit). The data I have reported in my previous Forbes columns support this important trade identity.

Alas, I have seen this horror show before, when I was a Senior Economist on President Reagan’s Council of Economic Advisers. Reagan’s rhetoric on free trade was flawless — a free trader to the core. However, the reality was quite different. Longtime colleague and close friend Bill Niskanen, who was a member of Reagan’s Council of Economic Advisers, summarized it all in his definitive book: Reaganomics: An Insider’s Account of the Policies and the People (Oxford University Press, 1988):

For those who want even more detail and a confirmation of that provided by Nisknanen, there is nothing better than the magisterial treatise by Douglas Irwin, Clashing Over Commerce: A History of U.S. Trade Policy (University of Chicago Press, 2017).

Just what was it like trying to defend Reagan and his free trade rhetoric against the protectionists within the administration? It was a battle royale. The Council of Economic Advisers led the charge against the protectionists. We were joined by the Treasury and State Departments and the Office of Management and Budget.

I was in the trenches with Bill Niskanen at the Council of Economic Advisers. Bill and I had worked together for many years: at the Office of Management and Budget, when Bill was the assistant director for evaluation during the Nixon years, and at the University of California at Berkeley, where we were professors. Bill was a most knowledgeable, capable and principled economist. After receiving his doctorate from the University of Chicago, he started his professional career at the RAND Corporation. He then moved to the Office of the Secretary of Defense, Robert McNamara. Bill was one of McNamara’s “Whiz Kids.” At the ripe old age of 29, Bill’s civilian rank was equivalent to that of a brigadier‐​general.

As for principles on trade, recall that Bill was fired from his position as Director of Economics at Ford Motor Company in 1980 for his outspoken opposition to government quotas, tariffs, and restrictions on Japanese auto exports to the U.S. As Bill told the Wall Street Journal, “In the meeting in which I was informed that I was released, I was told, ‘Bill, in general, people who do well in this company wait until they hear their superiors express their view and then contribute something in support of that view.’ That wasn’t and isn’t my style.” Well, it’s not my style either.

Even though we had the firepower, we lost the battle on trade within the Reagan administration. Remember the infamous “voluntary restraint agreement,” in which the Japanese agreed to restrict car exports to the U.S.? It was all a total horror show, one that Reagan supporters like to sweep under the rug. But as Douglas Irwin suggests, that’s hard to do. Indeed, the share of American imports covered by some sort of trade restriction soared under “free‐​trader” Reagan, moving from only 8% in 1975 to 21% by 1984.

Today, with a protectionist president who is surrounded by a trade‐​illiterate cabinet, we can anticipate stormy seas ahead — read: increased regime uncertainty and a loss of confidence.