June 2, 2019

Trump and His Tariffs: Boys Playing with Matches

by Hal Gershowitz

Comments Below

Now, we recognize that boys who play with matches don’t always get burned—but we all know it’s a really bad idea, so responsible grown-ups invariably discourage the practice. Sometimes boys who play with matches do get badly burned…sometimes they burn the house down.

Can trump’s tariffs backfire? Of course, they can. Are they likely to backfire? Quite possibly not, but, then again, quite possibly, they very well could…big time. 

Tariffs are not new to America. Remember, until 1913, we had no income tax, so tariffs were sort of a sneaky device for taxing the people anyway. That’s all a tariff is…a tax on the people of the importing country. Earlier in our history tariffs sometimes represented well over 90% of total federal revenue. The most startling example of the US imposing protectionist tariffs would be the imbecilic Smoot-Hawley Tariff of 1930. Every country responded by imposing retaliatory tariffs. Demand withered across the globe, economies further retracted, and the entire world sank further into a horrendously deep economic decline. Most people who read understand that. Most people who don’t may never understand that.

Now, to be fair and not alarmist, President Trump has a lot of heft on his side of the trade bargaining table, because we buy more from almost every country than those countries buy from us—much more. Thus, he can push his considerable weight around with some degree of immunity. That assumes, of course, that our trading partners don’t mind getting pushed around too much. If they do, some of them may push back, and some of them, such as China, have plenty of muscle with which to push if they choose to fight.

The real shame of the growing tariff war is that it is being fought to deliver a campaign promise. Our growth in manufacturing is booming…more so than at any time in the last thirty years. Ironically, one area where manufacturing growth has been strongest has been in those areas where our international trading partners have invested heavily in the United States. For example, recently released data show that the $51 billion that Japan has invested in building auto plants in the United States during the last three decades has produced 94,000 manufacturing jobs and another 1.6 million indirect jobs at dealerships and other suppliers. Yet here we are, preparing to threaten Japan with tariffs.

Imbalance, when we speak of trade is a bit of a misnomer anyway. America sends a trading partner dollars of a certain value. The trading partner sends America merchandise of equal value. That’s not really much of an imbalance.

What is out of balance is our US manufacturing job growth. But that’s really not a trade issue. That’s a technology issue. Technology is creating a need for many new jobs, but there is a serious imbalance between the high-tech skills needed and the high-tech skills that are available. That’s something that can’t be remedied with tariffs.

We do have serious issues with China, but tariffs are a poor way to deal with those issues. We think the odds are pretty good, however, that China and the US will find common ground, but that is far from certain. China has retaliatory options such as withholding rare earth minerals vital for manufacturing a wide range of high-tech products. Also, we shouldn’t lose sight of the fact that China is our largest foreign creditor, holding more than $1trillion of US debt. Most people avoid unduly irritating their creditors. These are not attractive retaliatory options for China, but no one knows for sure just how far China is willing to get pushed around by a debtor that owes it well over $1trillion.

Trump seems so confident that the tariff matches he’s lighting with China will pay off that he’s now about to light a few big ones with Mexico—and not just over trade, but rather, over immigration. Now, that will represent a new chapter in the use of tariffs and a really bad one. It establishes an awful precedent. With the exception of White House advisor and immigration hardliner Stephen Miller, it seems that every other senior Trump advisor is aghast at Trump’s determination to expand the use of tariffs as a club to get what he wants when he wants it. Even son-in-law and senior advisor Jared Kushner reportedly implored Trump to back off of the tariff threat. He reportedly reminded the President that the new trade deal (to replace NAFTA) that the US has negotiated with Mexico and Canada could be in jeopardy, but apparently, to no avail. Trump seems perfectly willing to imperil the new trade deal with Mexico and Canada. He seems to like the big club that tariffs represent. Wherever we have a dispute with another nation there’s always the threat of imposing tariffs. You can do that, he seems to think, when you buy much more than you sell.

Tariffs as a big stick. Speak loudly and carry a big (tariff) stick. Teddy Roosevelt, who had a healthy respect for the danger tariffs represent, would turn over in his grave. The Trump Administration, it seems, likes tariffs—like some boys like matches.

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7 responses to “Trump and His Tariffs: Boys Playing with Matches”

  1. Peggy Jacobs says:

    Thank you for addressing “tariffs”in layman’s language. I admire the effort you put into your essays. Always thoughtful. He is gambling that his bluff will work. I hope the bad will he is creating with our allies will not be lasting.

  2. susan duman says:

    Ditto to Peggy Jacob’s comments.

  3. Roberta Conner says:

    The authors apparently enjoy the enviable position and privilege of criticizing our President in a most derogatory and inflammatory manner without offering a single alternative strategy to the problems under discussion – whether it be the grossly unfair trade issues or our seriously broken immigration system.

    Unlike every past administration – democrat or republican – this President is at least making a serious effort to improve our country’s position in these two important areas. He has the courage to actually spend his political capital.

    China has been eating our lunch for many years by their continued and unrelenting imposition of unfair and immoral trade practices of which the authors – and other relevant observers – are clearly aware.

    So what are we to do? Wring our hands in frustration and merely hope for the best as the authors seem to suggest? No, we have tried that – without success.

    This President has more experienced and capable American business people in his administration than any other in our history. Let the President play his hand in these critical matters and let the American voters reward or punish him for his ultimate success or failure at the polls.

    • Response to Roberta Conner: So, where to begin. We think Ms. Conner makes a valid point regarding our need to comment on alternatives to the use of tariffs in our trade dispute with China. The US suit against Huawei Technologies is an appropriate response to what the United States considers to be the greatest abuse in which China engages, theft of artificial intelligence developed by American firms. The fiscal 2019 Defense Authorization Law prohibits federal agencies from buying or contracting with companies that use, certain Huawei equipment and services. Likewise, the US struck at the heart of China’s tech ambitions when it restricted American companies from selling crucial software and technology to Fujian Integrated Circuit Company because it “poses a significant risk of becoming involved in activities that are contrary to the national security interests of the United States.” No One is suggesting that the US should just wring its hands in frustration, nor should we do foolish things in frustration, like taxing Americans through tariffs. Finally, China has, in fact, passed laws to deal with AI theft by Chinese companies, and American firms have done surprisingly well in adjudicating their claims in Chinese courts. As we have written in the past, the US Chamber of Commerce now rates China at the midpoint among 50 nations in enforcing AI protection rules. Our point is that taxing Americans through tariffs is a poor and clumsy way to address our trade issues with China. We do not think President Trump is using his political capital to fight China. We think President Trump thinks he is bolstering his political capital with his base…and he is.

      C

  4. Roberta Conner says:

    Thank you for enumerating the Trump administration’s actions taken or underway to combat China’s national strategy of abusing its trading partners.
    I wish those actions were sufficient. One thing for sure – forcing China to abide by Western norms of trade behavior will benefit all Americans in the long run – regardless of whose political base they represent.

  5. Robert borns says:

    Trump seems to be the sole politician who doesn’t want to keep kicking the proverbial can down the road. I only hope it’s not to late to protect our interests. Also I have bought 4 Toyota highlanders in the last few years because they are made in my state of Indiana. There are dozens of Japanese parts makers around Columbus Indiana. Tariffs encourage that. Trump is encouraging that. What makes you think he is against foreign company’s manufacturing here. Also buying Shmates with borrowed money is something stupid. I was told that when I was a kid.

    • We can’t quite fathom why Mr. Borns believes we think President Trump is against foreign companies manufacturing in the United States. We assume President Trump is all for it. Indiana has a thriving foreign auto manufacturing industry as Mr. Borns observes, nearly all of which predates President Trump and his tariffs. We would observe that Indiana’s economy, however, is not immune to the international turmoil currently underway as a result of President Trump’s tariffs. According to the U.S. Chamber of Commerce, $2.0 billion annually in Indiana exports have been targeted for retaliation by Canada, Mexico, the European Union, and China. But then, again, that’s what tariffs do. We agree with Mr. Borns that buying Shmattes (garments, especially cheap, poorly made garments) with borrowed money would be foolish. Most of the money the United States borrows, however, isn’t used to buy Shmattes, but rather used to help pay for the defense of the nation and a growing variety of entitlements.

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