Barely two weeks into Donald Trump’s second term, of one thing one can be certain about US trade policy. It is being made by Mr. Trump on the fly without consistency as to its objectives or coherence as to its execution.
This does not bode well for the US and world economies, which do not function well in economic policy uncertainty. It also does not bode well for America’s reputation as a country that can be trusted to stick to its agreements.
Donald Trump’s Tariff War Strategy?
Start with Mr. Trump’s trade policy objectives. On the campaign trail he argued that tariffs would be used to reduce the trade deficit, to increase tax receipts, and to level the trade playing field. Yet once in office, it appears that a principal objective of trade policy is to stop the flow of illegal immigrants and fentanyl from Canada and Mexico into the United States.
Mr. Trump also appears to want to use tariff policy as a negotiating lever to get countries like Colombia and Venezuela to accept the return of deported immigrants to their countries or to get a country like South Africa to change its land policy.
At a very basic level, while Donald Trump keeps stressing that we must get rid of our trade deficit, he proposes a budget policy that would do precisely the opposite. At the same time that he is championing increased tariffs and the creation of an External Revenue Service, he is proposing radical tax cuts that according to the Committee for a Responsible Budget would increase the budget deficit over the next decade by nearly $8 trillion.
The basic point that Mr. Trump fails to grasp is that by reducing the country’s saving rate through his budget policy largesse, he would be increasing rather than reducing our trade deficit. This is all the more lamentable considering that during Mr. Trump’s first term in office, the trade deficit increased by 40 percent from $480 billion in 2016 to $680 billion in 2019 largely as a result of the ballooning budget deficit that followed in the wake of the 2017 Tax Cut and Jobs Act.
Donald Trump: Does He Know What He Is Doing on Tariffs?
Consistency in trade policy implementation is not one of Mr. Trump’s strong suits. On the campaign trail, he kept repeating that on day one he would impose a 60 percent import tariff on China and one of 10-20 percent on the rest of our trade partners.
Yet once in office, the first thing that he did was to impose a 25 percent import tariff on Canada and Mexico as well as one of 10 percent on China. He did so in flagrant violation of the rules of the World Trade Organization and of the United State-Mexico-Canada trade agreement.
As if to underline the unpredictable nature of his trade policy, three days after announcing that a 25 percent import tariff on Mexico would take effect within a few days, Mr. Trump announced that he was delaying those tariffs for a month. He did so in order to give Mexico time to satisfy his demands that Mexico would do more to stop the flow of illegal immigrants and drugs into the United States.
We have to hope that Mr. Trump’s decision to delay the imposition of tariffs on Mexico is the first step in his backing down from his aggressive tariff policy that would otherwise be destructive to US and world economic prosperity. However, even if he does back down, he will have done considerable damage to the world economy by engendering a great degree of policy uncertainty in the world’s largest economy. Such uncertainty is anathema to the investor community.
Donald Trump Is Hurting America’s Global Standing
By having acted in flagrant violation of international treaties to which he himself was a signatory, Mr. Trump will also have done considerable damage to the United States reputation as a country whose word could be trusted.
Donald Trump. Image Credit: Gage Skidmore.
By treating close friends like Canada and Mexico more harshly than arch-rivals like China, Mr. Trump is giving ample reason for America’s friends to seek alternative trade agreements that do not include the United States.
About the Author: Dr. Desmond Lahman
American Enterprise Institute senior fellow Desmond Lachman was a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging-market economic strategist at Salomon Smith Barney.
