Oh, What a Stupid Trade War (Very Slightly Wonkish)
S E E D E D C O N T E N T
So, the trade war is on . And what a stupid trade war it is.
Steel pipes being uploaded for transport in Sassnitz, Germany. Stefan Sauer/DPA, via Associated Press
My regular column for tomorrow is about health care, but I felt I needed to weigh in on this idiocy, and not just on Twitter.
The official – and legal – justification for the steel and aluminum tariffs is national security. That’s an obviously fraudulent rationale, given that the main direct victims are democratic allies. But Trump and co. presumably don’t care about telling lies with regard to economic policy, since that’s what they do about everything. They would see it as all fair game if the policy delivered job gains Trump could trumpet. Will it?
OK, here’s the point where being a card-carrying economist gets me into a bit of trouble. The proper answer about the job-creation or -destruction effect of a trade policy – any trade policy, no matter how well or badly conceived – is basically zero.
Why? The Fed is currently on a path of gradually raising interest rates, because it believes we’re more or less at full employment. Even if tariffs were expansionary, that would just make the Fed raise rates faster, which would in turn crowd out jobs in other industries: construction would be hurt by rising rates, the dollar would get stronger making U.S. manufacturing less competitive, and so on. So all my professional training wants me to dismiss the jobs question as off-base.
But I think this is a case where macroeconomics, even though I believe it’s right, gets in the way of useful discussion. We do want to know whether the Trump trade war is going to be directly expansionary or contractionary – that is, whether it would add or subtract jobs holding monetary policy constant, even though we know monetary policy won’t be constant.
And the answer, almost surely, is that this trade war will actually be a job-killer, not a job-creator, for two reasons.
First, Trump is putting tariffs on intermediate goods – goods that are used as inputs into the production of other things, some of which themselves have to compete on world markets. Most obviously, cars and other durable manufactured goods will become more expensive to produce, which means that we’ll sell less of them; and whatever gains there are in primary metals employment will be offset by job losses in downstream industries.
Playing with the numbers, it seems highly likely that even this direct effect is a net negative for employment.
Second, other countries will retaliate against U.S. exports, costing jobs in everything from motorcycles to sausages.
In some ways this situation reminds me of George W. Bush’s steel tariffs, which were motivated in part by hubris: the Bush administration thought of America as the world’s unchallengeable superpower, which we were in military terms; they failed to recognize that we were by no means equally dominant in economics and trade, and had a lot to lose from trade conflict. They quickly got schooled by an angry European Union, and backed down.
In Trump’s case I think it’s a different kind of illusion: he imagines that because we run trade deficits, importing more from other countries than they sell to us, we have little to lose, and the rest of the world will soon submit to his will. But he’s wrong, for at least four reasons.
First, while we export less than we import, we still export a lot; tit-for-tat trade retaliation will hurt a lot of American workers (and especially farmers), quite a few of whom voted for Trump and will now find themselves feeling betrayed.
Second, modern trade is complicated – it’s not just countries selling final goods to each other, it’s a matter of complex value chains, which the Trump trade war will disrupt. This will produce a lot of American losers, even if they aren’t directly employed producing exported goods.
Third, if it spirals further, a trade war will raise consumer prices. At a time when Trump is desperately trying to convince ordinary families that they got something from his tax cut, it wouldn’t take much to swamp whatever tiny gains they received.
Finally – and I think this is really important – we’re dealing with real countries here, mainly democracies. Real countries have real politics; they have pride; and their electorates really, really don’t like Trump. This means that even if their leaders might want to make concessions, their voters probably won’t allow it.
Consider the case of Canada, a small, mild-mannered neighbor that could be badly hurt by a trade war with its giant neighbor. You might think this would make the Canadians much more easily intimidated than the EU, which is just as much an economic superpower as we are. But even if the Trudeau government were inclined to give in (so far, top officials like Chrystia Freeland sound angrier than I’ve ever heard them), they’d face a huge backlash from Canadian voters for anything that looked like a surrender to the vile bully next door.
So this is a remarkably stupid economic conflict to get into. And the situation in this trade war is likely to develop not necessarily to Trump’s advantage.
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It's all perfectly logical.
Having been elected thanks to Russian interference in the election, Trump is now making peace with dictators, and making war on democratic allies.
It makes perfect sense....
Paul Krugman as a legitimate source. Shirley you jest!
Just how should the trade deficits be turned around?
Quit calling him Shirley!
By the thankless and difficult work on trade pacts. But working "hard" on something is not anywhere close to TrumptyScumpty's wheel house. That Rage Toddler couldn't even keep from going bankrupt when he was, in effect, a real dictator of his own organization. He's taking his formula for failure in the private sector and now inflicting it on the entire country. And people like you are to blame for being cucked by that POS.
That is the crux of the matter.
I'm against the tariffs myself and realize he's just throwing a bone to his union supporters. He surrounded himself with union goons when he signed the steel tariffs.
Union supporters? That's the most absurd thing I've ever heard.
C'mon, Steevie!
That's our Dean you're talking about. Of course his reasoning is sideways. That's who he is.
Complaining about Dean's illogic is sillier than complaining about the weather.
Canada just announced tariffs on $12.8 billion dollars of US goods.
These tariffs are just meant to level the playing field.
I'm sure that they are. You might want to tell that to the US workers that will be affected by them.
I agree, Canada just effectively zeroed out any 'positive' effect of Trump's tariff against them, which Trump KNEW they would do. So why did Trump institute tariffs that he KNEW would be ineffective?
I read a lot of economics. I haven't seen anything saying that these tariffs make any sense.
Did you know that under ordinary circumstances, tariffs must be voted by Congress? The President may act alone if there is a national security motive. He has invoked a national security threat against the United States, coming from: Canada, Mexico, the UK, France, Germany, Italy, Spain, ... from America's closest allies.
Sure.........
To show that he won't let America be pushed around by Canada any more!
Well it's about time someone put those bullies in their place. /s
Do you really think they care?
Go Canada....and EU!! Screw that MoFo.
The problem is that trade is a win-win, but a trade war is a lose-lose. So Trump won't be the victim of this war. Ordinary people will be.
Trump is doing what both he and Bannon planned, tear it all down, tear it all apart, destroy, destroy, destroy.
I want to see a video of Bannon singing the National Anthem, we already saw the several times Trump doesn't know the actual words on video and the times Trump failed to put his hand over his heart.
These two did not seek the power of the Presidency because of good intentions or because of things they love, but they are jaded old men with a lot of hate and resentment in their hearts thinking they can tear it all down and build a new Third Reich.
There is no genuine patriotism in either of them.
They do not care when all this chaos and destruction starts hitting the wallets of the average American. And it has already started to happen.
Trump has no idea what he is doing and the swamp Wall Street appointees don't care as long as they line their own pockets and the pockets of their cronies.
Once again, you are totally, absolutely, completely off-topic. Once again, congratulations!
Well it seems the chickens are enroute to the roost as Canada sets retaliatory tariffs and they appear to hit the Midwest states the hardest, Ohio, Indiana, Pennsylvania etc.
As well as the eggs. The only thing that will be left here in the US are the empty nests and egg cartons.
Shit! China didn't even have to retaliate, they just bought Soy Beans and Sorghum from everyone BUT the USA. Farmers are in a panic because 1/2 of US production is grown for China.
Watch the set-up...you know where the Sy Beans and Sorghum are going to go?
I have odds Trump will be shipping it very quietly to Kim after he gets through fucking Trump like a prison toy. He's getting played and his ego won't listen, all it hears is Nobel.
I can see our excess food going to the starving people of NK. IDK if would actually make it all the way to them or not (Ethiopia stands out to me as an example of how NOT to do humanitarian aid). Giving it to them in exchange for full access to their country though would be a win win win though I think. We could deliver it ourselves, see what's really happening in country, and the people would receive the aid they need. Hopefully that is more of the direction it would go in.
So who foots the bill? Or are farmers just going to donate their crop for the cause?