Trump and tariffs: have no illusions

If death and taxes are the two certainties of life, there is a third when Trump is around: tariffs. Trump is committed to using tariffs to further American economic interests. He may be willing to be flexible on the level of tariffs after discussions with America's trading partners but nobody should have any illusions about his not using them.

I was convinced on this issue after reading Robert Lighthizer's book, No Free Trade. Lighthizer was the US Trade Representative on Trump's earlier presidency and was a contended for the Treasury Secretary's job this time around.

The central theme of the book is that tariffs are necessary for America, will work for America and they are part of Trump's vision of how America needs to be remade.

My article in BS on this subject is reproduced below:

Never in recent memory has the fate of the world at the approach of a New Year hinged on one person as it does today. In recent weeks, it has seemed that key political and economic decisions in the world’s political capitals are on hold until Donald Trump’s assumption of office as President of the United States next January.  

The US is, by a wide margin, the world’s pre-eminent power. The actions of its President are bound to impact the rest of the world. However, Mr Trump is not just another US President. In respect of both foreign policy and economic policy, he represents a sharp discontinuity, one that is  potentially  disruptive for the US as well as the rest of the world. That is why the world watches with bated breath. 

In the realm of geopolitics, the world awaits Mr Trump’s moves in respect of two hot spots, West Asia and Ukraine.  Economic policy makers are bracing for Mr Trump’s moves  on two of   his key promises: Higher tariffs on imports into the US and a crackdown on illegal immigration. 

The demonisation of Mr Trump is so common   in the Western mainstream media that he isn’t being given credit for swearing by something that few would disagree with: The world could do with fewer wars. It is worth quoting from a speech Mr Trump made in March 2023:

“We need PEACE without delay. In addition, there must also be a complete commitment to dismantling the entire globalist neo-con establishment that is perpetually dragging us into endless wars, pretending to fight for freedom and democracy abroad, while they turn us into a third-world country and a third-world dictatorship right here at home. The State Department, the defence bureaucracy, the intelligence services, and all the rest need to be completely overhauled and reconstituted to fire the Deep Staters and put America First.”

If that is not radical thinking, one knows not what is. The big question is whether the Deep State will let Mr Trump get on with the agenda he has in mind.  

In West Asia, Mr Trump has been presented with a fait accompli of sorts with the overthrow of the Assad regime in Syria.  The issue is not whether Mr Trump can extricate the US from Syria.  It is how he intends to deal with plans for the creation of a Greater Israel and the neo-con project to deal with other hostile regimes, notably Iran. There is the power of the Israel lobby in the US. Mr Trump himself has been hawkish on Iran. For Mr Trump to put his vision of peace into practice where West Asia is concerned will be quite a challenge.

On Ukraine, there is scope for greater optimism. Mr Trump has been emphatic that Ukraine must negotiate an end to the conflict with Russia. The Biden administration attempted to queer the pitch for Mr Trump there too by allowing Ukraine to fire long-range missiles into Russian territory. Russia responded with a new missile to which NATO apparently has no counter-measure. After a two week break, Ukraine has again fired long-range missiles into Russia. A strong retaliation from Russia is on the cards  

Russia has made it clear that it is not willing to freeze the status quo and that any settlement will now have to be pretty much on Russia’s terms. We should not be surprised if Mr Trump   decides to end America’s involvement in Ukraine by forcing President Volodymyr Zelensky’s hand.

On the US home front, there is no ambiguity whatsoever. An increase in tariffs and the deportation of illegal immigrants are both certainties. The only question is how far and how quickly Mr Trump will go in implementing these measures.

Tariffs are an article of faith with Mr Trump. He deeply and genuinely believes that tariffs are needed to realise his vision of a prosperous United States. His commitment to tariffs dates back to the late 1980s- in 1989, he had called for tariffs of 15 to 20 per cent on Japanese imports to curb the trade deficit.

Those in doubt may want to read Robert Lighthizer’s No Trade is Free. Mr Lighthizer was US Trade Representative in the previous Trump administration and had Mr Trump’s enthusiastic backing for his ideas. He was a contender for the post of Treasury Secretary or Commerce Secretary this time around but didn’t make the cut.  It would be a mistake to think that the case against free trade arises from ignorance of basic economic precepts. It is a carefully thought through position. Mr Lighthizer’s main points are as follows. 

First, the efficiency argument for free trade is flawed because the benefits accrue to a few, while the losers are more numerous. And no, the losers aren’t compensated through the gains from trade. For example, manufacturing workers cannot be easily retrained to do skilled work in services. The relocation of whole communities is not a simple matter either. Secondly, the services sector does not create jobs on the same scale as manufacturing. Only manufacturing can provide well-paying jobs for the vast majority of Americans. 

Thirdly, the US needs manufacturing because it is not in the interest of national security to be dependent fully on others for goods such as steel and pharmaceuticals. Manufacturing exports are nine times bigger than services exports and hence are vital to containing the US trade deficit. Manufacturing is a big source of innovation and has driven innovation in services, so it is not that services can be delinked from manufacturing. 

Fourthly, it is incorrect to suppose that the US trade deficit is self-correcting through a fall in the value of the dollar. The US has been running trade deficits for decades – and these keep growing. The US is the world’s reserve currency, so the dollar attracts capital inflows, which comes in the way of dollar depreciation. America’s leading trade partners, notably China, tend to manipulate their currencies to keep their exchange rates low. They also indulge in “unfair trade”- subsidising domestic companies and erecting non-tariff barriers. 

Mr Lighthizher’s punchline: All the great economies of the world were built behind a wall of protection and often with government money. The NDA government’s initiatives to boost segments of manufacturing through a combination of subsidies and tariffs are in line with Mr Lighthizer’s thinking and that of Mr Trump. 

Economists may ridicule Mr Trump’s belief in tariffs as an instrument for remaking the US. However, as his convincing win in the recent presidential elections shows, his anti-globalisation stance captures the mood of the majority of the American electorate. In the New Year, the world has little choice but  to adjust to Mr Trump’s way of thinking.