Trump's Low-Risk, High-Return Political Showdown on Tariffs
Trump knows how to negotiate.
The economic stakes are minuscule if he loses. That is because all talk of a trade war is leftover academic rhetoric from the 1930's. There is zero possibility of a trade war. Those days are over. They have been over ever since 1945.
He looks as though he is negotiating with President Xi. This is an illusion. He is negotiating with the Democrats and all of the Republicans in Congress who hate his guts. He is calling their bluff. He is going to prove to his supporters that (1) he has a backbone, and (2) his opponents are wimps. This will be easy to prove. His opponents really are wimps.
There will be no trade war. But there is a political war.
THE CAUSE OF RECESSIONS
The 724-point decline in the Dow Jones Industrial Average on March 22 was immediately blamed by the media as being the result of fears of a trade war. The 424-point drop the next day was also blamed on the threat of a trade war. This explanation is a combination of Keynesian economics and hostility to Trump.
This has been the party line of the World Trade Organization all month. Here is the Newsweek headline: Donald Trump's Trade War Will Cause 'Deep' Global Recession, Says WTO Director. This is nonsense.
The Federal Open Market Committee raised the rate paid on excess reserves on Wednesday. The Dow fell on Thursday and Friday. But no one is blaming the FOMC.
It is time to review the Austrian theory of the business cycle. Depressions and recessions do not come from tariffs. They come from central bank policies.
There can be selloffs in the stock market that are reminiscent of the selloff in response to the signing of the Smoot-Hawley tariff in June 1930. But the Smoot-Hawley tariff did not cause the Great Depression. Federal Reserve monetary policy did. This was proven to my satisfaction in 1963, when I read Murray Rothbard's book, America's Great Depression. You can download it for free. Click here. In 2001, Austrian School economist, Professor Roger Garrison of Auburn University, commented on Rothbard's book and its thesis, which was unpopular when it was published. He wrote:
Blaming business cycles on government was a hard sell in the 1960s—the decade in which Keynesianism ruled supreme—both in the seats of power and in the halls of academe. Rothbard is to be credited for keeping alive (during a period when the Austrian school was almost completely in eclipse) the key ideas about how the market process goes right if left on its own and how it goes so wrong when the central bank induces more growth than savers are willing to finance.
Note: his thesis has never been popular. It goes through cycles of unpopularity, from intense to shoulder shrugging.
When the recession comes -- and it will come -- Keynesians and non-Austrian economists will go straight to Trump's tariffs as their first line of defense against Austrian economic analysis. The Federal Reserve is the central economic institution in the United States. It controls the monetary base. It sets the rate of interest paid on excess reserves held by commercial banks. The members of the Federal Open Market Committee, which sets monetary policy, are Keynesians. Other Keynesians will never blame them. They will blame Trump.
Compared to the influence of the Federal Reserve, tariffs are economically peripheral.
FOREIGN TRADE
Most of the foreign trade in the United States is in commodities. The biggest single component in the U.S. balance of trade deficit used to be for oil imports. This has shrunk because of fracking technologies. We can see the effect here. The chart begins in 2006.
https://www.census.gov/foreign-trade/statistics/graphs/PetroleumImports.html
Here is what Americans import.
Here are the nations to which we export.
We import more from China than any other nation: 22%.
But the proposed tariffs so far are only on Chinese steel and aluminum. There is no list of other products yet. This will marginally raise prices for those segments of U.S. manufacturing that depend on steel and aluminum. How important to GDP is manufacturing? Not very. Manufacturing as a share of real -- non-inflationary -- GDP in the United States has not changed much since 1947.
Worldwide, manufacturing constitutes 17%. This is declining steadily.
Most of the world's economy is conducted domestically: no imports or exports.
The GDP of the West is dominated by services. Tariffs and import quotas do not apply to services.
Tariffs are close to irrelevant, economically speaking. They are highly relevant, politically speaking.
TRUMP VS. XI
In the USA, China's trade component is 22% of U.S. imports. These are mostly finished goods, not raw materials like steel and aluminum. We export mostly agricultural products to China. There are other markets if China places tariffs on U.S. food. Also, not all of the food purchases will end because of tariffs. In any case, only 8% of America's exports go to China.
Foreign trade constitutes about 27% of the US economy. China is a major trading partner, but no one is suggesting that trade with China will cease. There will be sales taxes placed on a few products.
The proposed tariffs on Chinese steel and aluminum will be tariffs on $50 billion of imports. Note: this is not $50 billion in total tariffs. This is tariffs on $50 billion worth of imports. The headline is misleading: Trump signs order calling for nearly $50B in tariffs on Chinese imports.
The proposed tariffs are 25% on steel and 10% on aluminum. If imports of the two metals are 50-50 (I am using this as an example; I do not know), this means increased prices to buyers of steel of $6.2 billion, with buyers of aluminum paying an extra $2.5 billion.
Steel and aluminum imports combined from all nations, not just China, represent about 2% of total imports. This is a blip on the computer screen.
Meanwhile, China has responded with a threat of tariffs on $3 billion worth of American imports. What percentages? There may be a pork tariff of 25%. Then there may be a tariff on steel pipes: 15%. There may be a 15% tariff on fruits and wines.
The USA has a $19 trillion economy.
This is a tempest in a tiny teapot.
This has been blown all out of proportion by the anti-Trump media.
Trump will strengthen support with his base over a symbolic gesture.
There will be no trade war.
There is a political battle over tariffs. Trump is likely to win it.
TRUMP'S NO-LOSE STRATEGY
On what legal basis did Trump threaten to impose tariffs? On April 27, 2017, he announced that he would investigate unnamed nations' exports to the United States. He invoked the Trade Expansion Act of 1962. He wrote this.
By the authority vested in me as President by the Constitution and the laws of the United States of America, including the Trade Expansion Act of 1962, it is hereby directed as follows:Section 1. Policy. Core industries such as steel, aluminum, vehicles, aircraft, shipbuilding, and semiconductors are critical elements of our manufacturing and defense industrial bases, which we must defend against unfair trade practices and other abuses. In the case of aluminum, both the United States and global markets for aluminum products are distorted by large volumes of excess capacity much of which results from foreign government subsidies and other unfair practices. Efforts to work with other countries to reduce excess global overcapacity have not succeeded.
The Trade Expansion Act was intended to reduce tariffs, not hike them. Read it here.
He announced this inquiry last April. This gave him the 270 days that the law requires. By law, the Secretary of Commerce must conduct the inquiry. Secretary Wilbur Ross has completed the investigation.
Here is the White House's announcement on March 8, 2018. (I have created a PDF of this document, since it will disappear when he leaves office. It is here.)
COUNTERING TRADE PRACTICES THAT UNDERMINE NATIONAL SECURITY: President Donald J. Trump is addressing global overcapacity and unfair trade practices in the steel and aluminum industries by putting in place a 25 percent tariff on steel imports and 10 percent tariff on aluminum imports.President Trump is taking action to protect America’s critical steel and aluminum industries, which have been harmed by unfair trade practices and global excess capacity.
The President is exercising his authority to impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports in order to protect our national security.
Section 232 of the Trade Expansion Act of 1962, as amended, provides the President with authority to adjust imports being brought into the United States in quantities or under circumstances that threaten to impair national security.
He is using the Trade Expansion Act to contract trade.
It gets even more bizarre. He actually suspended tariffs temporarily on steel imports and aluminum from these countries: Argentina, Australia, Brazil, Canada, Mexico, the member countries of the European Union, and South Korea. You can read this on the White House website. He will begin negotiations on May 1. This press release is not mentioned in the media's coverage of his announcement. It is here. Because this page will be taken down when Trump leaves office, I have made a PDF of it. It is here.
Congress can overturn this executive order by a two-thirds vote.
If the Democrats vote as a bloc, and they are joined by pro-trade Republicans -- there are few Republicans who are not verbal fans of free trade -- Congress can easily overturn it. But if the Democrats do this, they will lose votes from labor in November. On the other hand, if they remain silent, they let Trump get away with it. Republicans in the House will be able to grin and bear it in their districts. Democrats will not be able to blame Trump this summer and fall if Pelosi's minions remain mute.
He will have won the negotiation -- not with China, but with the Democrats and the pro-trade Republicans. If Congress vetoes it, then he wins with his voter base. It's a no-lose deal for him.
This is all about national politics, not national security. There is no national security threat from cheap Chinese steel and aluminum. In any case, how will America be saved by a 10% increase in tariffs on aluminum? The whole charade is ludicrous economically. It makes good sense politically for Trump. It looks as though Trump will win this deal. I don't see how he can lose.
He is the master of the art of the deal.
It's Trump vs. Congress. It's the New England Patriots vs. Hawthorne Country Day School.
CONCLUSION
All talk about a worldwide recession coming as a result of minor blips upward of domestic prices of a few goods imported from China is utter nonsense.
There will surely be a recession. It will not be the result of Trump's mini-tariffs. It will be the result of the Federal Open Market Committee's policies since 2008.
If Democrats blame the tariffs for the recession, Trump can say: "Then why didn't Democrats in Congress call for a vote to override my executive order? Congress can override my vetoes. They never even tried. Why not?"
It's a no-lose deal for Trump.