I have written quite a few pieces about President Trump and his approach to tariffs. I wrote one this week for the Hindu titled Trumponomics deserves to be taken seriously.
Mr Trump's approach to economic policy-making is intuitive. It's the intuition of a businessman who can latch on to things that academics may not be readily aware of. It's also the intuition of a mass leader who can see how polices are playing out at the grassroots, again in a way that intellectuals cannot readily discern.
The establishment, which includes influential sections of the media (such as the NYT, FT and the Economist), likes to portray Mr Trump as a giant wrecking ball that will leave the US and the world and in ruins. They like to portray him as an ignoramus who will act according to his whims and fancies and without regard for basic principles of economics.
What Mr Trump is attempting is a fundamental reset of the US economy. It's impossible to predict how exactly his initiatives will play out. But I'm reasonably clear that Trumponomics is more carefully thought through than Mr Trump's detractors imagine. Scott Bessent, the Treasury Secretary, who is one of Mr Trump's leading economic advisers, is not the sort of person who will embark on economic policies without a careful evaluation of their implications. He's a financial markets person, somebody who understands very well the interplay between macro-policies and the financial markets. It is important not to rush to judgement on Mr Trump's initiatives based on short-term movements in the stock markets or bond markets.
Trumponomics deserves
to be taken seriously
While Donald Trump’s detractors believe that he has
embarked on the impossible, the fact is that this is a mission that the world
will need to adjust to
T.T.
Ram Mohan is a former Professor at IIM Ahmedabad
“To
me,” United States President Donald Trump has famously said, “tariff is the
most beautiful word in the dictionary”. Mr Trump has shown that he means it. By
imposing tariffs of varying degrees on a wide range of countries, he has
initiated a trade war, the likes of which the world has not seen since the
Second World War.
Following
turbulence in the American bond market, Mr. Trump has announced a 90-day pause
on tariffs on all countries except China. Hardly anybody thinks that Mr Trump
will back off from tariffs for fear of visiting serious dislocation on the U.S.
economy and the world at large. Trumponomics is a mission to fundamentally
remake the American economy. It deserves to be taken seriously if only because
the world will need to adjust to it.
First,
the propositions
Trumponomics
rests on a few key propositions. The first is that America needs to bring back
manufacturing, lost to China and other economies over the past several decades.
It needs to do so for several reasons.
Globalisation
and the offshoring of manufacturing in the U.S. have meant the loss of millions
of jobs. Estimates of jobs losses in manufacturing vary. Stephen Miran, Chair,
Council of Economic Advisers, The White House, cites a study that estimates
jobs lost in manufacturing between 2000 and 2011 at two million (Stephen Miran,
A User’s Guide to Restructuring the Global Trading System). Robert E.
Lighthizer, who was the U.S. Trade Representative in Mr. Trump’s first term,
says five million manufacturing jobs were lost in the period 2000-09.
Job
losses have been concentrated in particular areas. Thriving industrial centres
have been reduced to ghost towns and whole communities hollowed out. There are
other social costs: homelessness, rising crime, drug abuse, and broken
families. America’s services sector has absorbed a portion of those who lost
jobs in manufacturing. But these are low-wage jobs. For the vast majority of
American adults, manufacturing remains the sole route to a high-wage job.
Trumponomics
argues that America also needs manufacturing for the purpose of national
security. It cannot afford to have its defence sector rely heavily on imports
of steel, aluminium, and semi-conductors. In a crisis, American military
capabilities could be seriously compromised. As Mr. Trump puts it, “If you
don’t have steel, you don’t have a country”.
A
second key proposition of Trumponomics is that free trade is not necessarily
fair trade. Imports from China are cheaper because China provides subsidies to
its firms in various forms, uses slave labour to drive down costs, invests
funds in state-owned technology companies, and indulges in industrial espionage
and theft of intellectual property. It makes no sense to have American
companies wiped out by competitors that do not adhere to the rules of a free
market economy.
The
third proposition is that America’s chronic trade deficits are unaffordable as
the flip side is foreigners using their trade surpluses to acquire more and
more American assets. In recent years, trade deficits have been of the order of
$500 billion to $1 trillion a year.
Trade
deficits are said to be self-correcting. When a country runs a trade deficit,
the exchange rate of its currency is expected to depreciate. Exports will then
rise and imports will fall, leading to a reduction in the trade deficit. Mr.
Miran argues that the principle does not apply to the U.S. economy because the
dollar happens to be the world’s reserve currency. Nations park much of their
foreign exchange reserves in U.S. government securities. This results in an
overvalued dollar.
An
overvalued dollar means more imports, less exports and hence a persistent trade
deficit. As Mr. Miran puts it, America runs a trade deficit not because it
imports more; it imports more because it is the provider of reserve currency to
the world.
Impetus
for domestic manufacturing
How
to restore manufacturing to the U.S. and reduce America’s trade deficit when
faced with “unfair” trade and an overvalued dollar? Enter tariffs on imports.
Tariffs will raise the cost of imports and cause imports to fall, thereby
reducing the trade deficit. They will spur domestic manufacturing by protecting
American manufacturers from import competition.
Economists
fret that tariffs run counter to the principle of economic efficiency. Tariffs,
they say, will spell higher costs for American consumers, an increase in the
inflation rate and an inefficient manufacturing sector. Trumponomics says these
concerns are based on first-round effects. Look farther and the outcomes
change.
By
raising the cost of imports, tariffs will result in fewer imports. A fall in
imports will result in an appreciation of the dollar. If the “currency offset”
to tariffs is perfect — say, a 10% tariff is offset by a 10% appreciation in
the dollar — the dollar price of imports after tariffs will remain unchanged.
The American consumer does not pay anything extra. Since the exporting
country’s currency has weakened, it earns fewer dollars than it did earlier.
Mr.
Trump has been ridiculed widely for saying that the exporting nation, and not
the American consumer, will pay for U.S. tariffs. Once you take into account
the currency offset to tariffs, Mr. Trump’s statement makes terrific sense.
To
be sure, if the currency offset is not perfect, there will be costs to the
American consumer and an increase in the inflation rate. Mr. Miran estimates a
one-time impact on the inflation rate of about 0.3-0.6 percentage points, an
impact that is eminently bearable. This assumes there are no retaliatory
tariffs.
Tariffs
can lead on to other favourable second-round effects. As input costs rise,
American manufacturers will look for ways to enhance efficiency and lower
costs. Tariffs will compel American and foreign companies to move operations to
the U.S. and this will enhance efficiency and output in the U.S. economy. There
are signs that major U.S. companies are already making such a move.
The
other ‘Trump cards’
More
importantly, tariffs are but one of four elements in Trumponomics. There are
three other elements: tax cuts, deregulation and more drilling of oil. Tax
cuts, made possible by tariff revenues, will compensate companies for the
higher costs of imports. Deregulation will drastically reduce compliance and
operational costs. More drilling of oil will help lower oil prices and counter
the inflationary effects of tariffs. Taken together, the four elements
constitute a plausible alternative to the current economic model.
Trumponomics
is driven by the principle that efficiency cannot be the sole or even overriding consideration in
economic policy-making, a principle that India’s policymakers had wisely
embraced decades ago. Mr. Trump’s detractors believe that he has embarked on
Mission Impossible. Well, Mr. Trump does not think so. He is determined to
pursue his vision of MAGA (Make America Great Again) regardless of the
short-term cost to the U.S.. As for the rest of the world, Mr. Trump does not
give a damn.
