Hangover Part II

In 2016 Donald Trump campaigned principally on a policy of trade protectionism.  And following his election he wielded a blunt cudgel of tariffs (taxes on imported goods) on our trade partners throughout the world.  Not just on bad actors such as China – but our immediate neighbors and allies as well. 

Gary Varvel - Indianapolis Star

This was rationalized on what I describe as a three-legged stool analogy:  Trump claimed his tariff policies would protect the jobs of American workers, provide needed leverage to extract concessions from other countries and shore-up our domestic security.  I take no exception to these goals.

Recently I singled-out the folly and failure of connecting exported American bourbon whiskey with imported steel and aluminum.  Trump policy failed in this effort and resulted in lost treasure, jobs and business that are permanently shuttered.  Rumors in the blogosphere sphere suggest my own blunt exposure of this hurt some feelings. 

Today’s post is not designed to assuage anyone's feelings - instead it is a deeper dive and ponders the success and failure of Trump’s trade policy of tariffs. 

Some basics.  Tariffs are another word for a tax on imported goods.  For hundreds of years our government relied-upon tariffs as a significant source of tax revenue.  This evolved over time and with the globalization of trade and supply chains tariffs nowadays are to a lesser extent a revenue source and instead are selectively applied to protect certain industries from competition.  This is called picking winners and losers. 

Who pays the tariffs?   It can be a messy analysis but economic consensus concludes that manufacturers and consumers pay the freight.  Under Trump American steel manufacturers simply raised their steel prices to match the cost of imported steel and passed the increase along to the consumer.  Several years ago we purchased a new Kawasaki Mule. The impact of steel tariffs increased the final cost by $900 give or take. Takeaway: as a general rule manufacturers pass-along the increased cost of the tax to the consumer.  Incidentally, roughly three months into the current administration there hasn't been any change in trade policy - so we continue to shoulder the financial burden of any added costs.

How about the notion of protecting American jobs?   As I noted several paragraphs above this is much about picking winners and losers.  And as a consequence it all depends.  In the example of the steel industry jobs were not only protected but grew in number.  At first blush an expansion of jobs is a good thing.  But at what cost?  It is estimated that for every single new job created in the steel industry American consumers paid an additional $900,000 in added costs.  That's a pricey ticket to admission and I would submit that there are smarter, more effective and less costly tools to create jobs. 

Consider the flip side of the equation.  What if you work for a manufacturer that depends-upon imported raw materials or parts to produce a product here?  The tariff increases manufacturing costs which can lead to domestic job losses.  And in the example I previously blogged-about, the imposition of retaliatory tariffs can lead to collateral damage. This is the Law of Unintended Consequences.  In my view government should not be picking the winners and losers or instigating unintended consequences.

What about the Art of the Deal?  Did the imposition of tariffs lead to concessions from our trade partners?  

Trump negotiated two deals over four years - the US Mexico Canada Agreement (USMCA) which replaced the North American Free Trade Agreement (NAFTA).  Not much changed as this ‘deal’ is quite similar to the former NAFTA. This is largely because our friendly neighbors to the north and south (not China) remain our two largest global trading partners.  The second 'deal' was the China deal.  Phase One of this deal consisted largely of purchase agreements for American agricultural goods.  Alas, with Covid, all of the bad blood over the China Virus complicated by Trump’s election loss Phase Two will not happen and Phase One is now at risk. 

To be fair, the Tariffs got the attention of Canada, Mexico and China which brought them to the table.  This implies they were useful as leverage.  Regrettably, the results of these ‘deals’ has been disappointing. 

Trump's 'America First' policies pushed a number of our traditional allies away.  They concluded that the United States was an unpredictable and unreliable trading partner. It is Biden’s job now to mend fences.  Time will tell.

Last but not least – what about our security?  There is little if anything to fear from Canada, Mexico and the rest of our traditional allies with regard to our national security concerns.  On the other hand, China is an altogether different animal. 

In my view it seems that engaging and using our collective alliances to challenge China, protect our intellectual capital and impose our will-upon China to engage in free and fair trade practices is more efficient than blunt-force tariffs.  Whether or not China represents a direct threat to our national security is a military question.  Time will tell.

In conclusion, the Trump trade wars in the case of USMCA changed very little and when the dust settled were unsuccessful with China.  Antagonizing our allies and the collateral damage of retaliatory tariffs caused more harm than good.  A self-inflicted wound.  

Sure, I know that some of my readers will dismiss much and possibly all of the forgoing as nonsense or disloyalty and insufficient fealty to Donald Trump. To which I would remind these gentle readers that I may have been retired a couple of years – but have forgotten little of fundamental economic truth.  If Donald Trump is central to your belief system I’m OK with that.  Don't take that as a put-down.  Everyone is entitled to their own point of view.  Tolerance is what Made America Great.  Free and fair trade is fundamentally good economic policy.

We continue to be a great country and I would be the last person on earth to bet against the USA.