What Trump doesn’t understand about trade and tariffs

what trump doesnt understand about trade and tariffs
Photo: iStock/Getty Images

Ever since Donald Trump launched his 2016 presidential campaign on a platform of sinking free trade deals and slapping tariffs on imports to reduce the trade deficit, economists have warned that he doesn’t quite understand fundamental concepts of international trade.

As president, Trump has pursued a course that bucks the advice of the vast majority of economic experts, including his own former chief economic adviser, Gary Cohn. On Tuesday, the administration announced that it would collect tariffs on an additional $16 billion in Chinese goods, expanding the list of products that the U.S. will hit with a 25 percent tax. China will levy retaliatory tariffs to match, yet figures released yesterday show that the trade war hasn’t much hurt Beijing. In July, China’s exports to the U.S. rose by 13.3 percent.

In a series of tweets posted over the weekend, as well as campaign rallies held over the past week, Trump has continued to claim that the tariffs his administration has levied against Chinese-made goods in July are already bearing fruit for American citizens.

As the trade war unfolds, most economists remain baffled by the president’s insistence that trade wars are “easy to win.”

Yahoo Finance columnist Rick Newman, in an interview with Yahoo News, took issue with Trump’s philosophy on trade and tariffs. The following is an edited transcript of our discussion, punctuated with the president’s recent statements on Twitter and at rallies:


David Knowles: Trump is citing the drop in the trade deficit in the second quarter as proof that his policies are working. Does he have a point?

Rick Newman: Most economists will tell you that while the trade deficit shrank temporarily, it’s not going to stay that way and it really had nothing to do with the tariffs. It was kind of a perverse, unintended consequence of the tariffs — which is that a lot of exporters were hurrying to get stuff out of the country before retaliatory tariffs went into effect. So in that way, Trump’s right, except for a totally different reason than he claims. What most economists are saying is that Trump’s tariffs, plus other factors, are actually going to strengthen the dollar, which is going to cut into exports and raise imports. So this is almost certainly going to turn around in the next couple of months. The opposite effect is going to happen. Trump is just fixated on the trade deficit, as if some numbers are good and some numbers are bad and there’s some threshold at which you pass from good into bad — and that’s just not true. He’s created a straw-man argument, which is that our goal is to get the trade deficit down and that’s how we will measure success. But that won’t have any impact at all on the economy.

DK: Trump likes to conflate the notion of trade deficits and stock market performance. What’s wrong with that line of thinking?

RN: It’s not even clear what he’s talking about. The stock market doesn’t care about trade deficits. It really doesn’t. It cares about profitability. When we talk about the stock market, that represents all publicly traded stocks, but usually what we’re mostly talking about are the big companies, the S&P 500, which derives around 40 percent of its revenue from foreign sales, not U.S. sales. The stock market doesn’t care where those sales come from. If they’re from big companies, made in America, exporting them to other countries, that’s fine. In many cases that’s not what it is. It’s multinational companies that are based in the United States with operations all over the world. Here’s the thing that would make the trade deficit go in the direction Trump wants: If Americans bought less stuff and saved more money, the trade deficit would go down. That’s the No. 1 way to reduce the trade deficit. The reason we have a trade deficit is that we buy more than we produce in the United States. That’s nobody’s fault. That’s the way it is. This is why most people don’t care about the trade deficit as a number. What you should care about is jobs, and you should come up with some policy to fix that, which no administration has. Tariffs won’t do that. They’ll just drive up costs for everybody. When the price of something goes up, people will spend less.


DK: Let’s take Trump’s claim at face value, that steel plants are reopening across the country thanks to his policies. But will those duties end up filling the coffers at the U.S. Treasury considering the lost economic output and $12 billion in promised financial assistance to farmers hurt by retaliatory tariffs?

RN: Money is actually flowing out of the Treasury. Less money is flowing into the Treasury than at any time since the middle of the last recession. On that point he’s just completely wrong if what he means is we’re getting more in the way of corporate tax revenue. That’s going way down this year.

DK: Because of the Republican tax reform bill?

RN: Yeah. The Treasury, on a monthly basis — there’s actually a fairly short lag — releases tax receipts for the prior month, and they’re way down this year. That is one area where we did see an almost immediate change, and that’s because it was an overnight change in the amount of tax withheld and which companies and individuals were paying.

DK: I suppose Trump’s logic on the debt is that he’ll use the revenue from tariffs on Chinese goods to pay it down. Should Americans be optimistic that this will work?

RN: He’s basically saying we are now going to be collecting this additional money. I mean, he’s right about that. Tariffs are taxes, at least on imports. It’s true that the federal government is going to be collecting more money, but it’s really a nonsensical idea that you would raise taxes at that level because you’ll crimp other economic activity. The tariffs will have a .1 to .2 percentage point decline in GDP, so they will cause less economic activity, which will mean less revenue and less income. The argument is kind of beyond ridiculous. The second argument, which is what Kevin Hassett, who is the chair of the Council of Economic Advisers at the White House, is making is that over time — and this will be a four- to five-year time frame at a minimum — the tax cuts and Trump’s deregulatory agenda will boost economic growth to levels that are higher than they otherwise would be. And because we’re going to have more economic activity, that will mean more tax revenue because we’ll have more people working and companies will be earning more. That’s a prediction. There are almost no other economists that buy that. There’s Hassett and Peter Navarro, and that’s about it.

DK: It seems like you’re saying there’s an actual problem at the root of the trade deficit with China but that Trump’s prescription for it is based on a faulty conception of it.

RN: All this doesn’t mean that everything in regard to trade is working out just fine. China is the real issue and there is widely accepted research showing that there have been American workers harmed by manufacturing jobs moving to China, and to a lesser extent the move of some manufacturing to Mexico. There has been some damage from this, but there are better ways to handle it. Focusing on the trade deficit doesn’t tell you anything else that’s happening in the economy. Whereas at the same time, all the manufacturing in China, that’s the reason we haven’t had any kind of worrisome inflation in, what, 20 years. Inflation is just not a thing anymore. People can buy stuff that’s inexpensive, and that’s good for lower-income people especially. The exceptions are a college education and health care — two things we can’t import from China — that are breaking family budgets. No one has come up with a good solution as to what to do for the workers who have been hurt by all the manufacturing in China. The mainstream view is that you don’t just stand in the way of progress and say, we’re not going to allow this to happen. You accept change, and you certainly accept that you want to encourage innovation and efficiency, and you have to have better safety nets than we have. We could have a trade surplus with the world and still have a recession. You could put up protective barriers so that we’d be ‘winning’ by Trump’s numbers, but everybody would be worse off.



Read more from Yahoo News:



Read on Yahoo! News

Author: HEDGE

Hedge Accordingly was founded ahead of the global financial crisis in January of 2008, with the goal of providing our readers our unique take on The Latest News on Wall Street, Stocks, #Politics and Business news. Hedge Accordingly produces both original, and aggregated #Wallst news content from top publishers around the world. We curate aggregated content covering the latest news on politics, stocks, wall street, and the tech industry. We also provide free stock charting, quotes and a bitcoin, forex and currency exchange. Learn More About HEDGEaccordingly.com