Donald J Trump, certified stable genius, has launched his trade war. He has done so to protect America from the clear and present danger posed by foreign made washing machines and solar panels. To this end he has decided to impose added taxes on their purchase. The result is that the prices of washing machines and solar panels will be higher than they would otherwise be, thus reducing the quantity sold. Effectively, the tax will be paid by consumers in the form of higher prices and by workers who lose their jobs as a result of reduced consumption.
What is fascinating about this particular piece of policy idiocy is that it runs exactly opposite the (correct) economic reasoning that went into the recently passed reduction in the corporate tax rate. Which is to say that corporations do not pay taxes; they merely collect them. Consequently, a reduction corporate taxes benefits the corporation’s owners (stockholders), workers and customers in the forms of higher returns to capital, increased wages and lower prices. About this there is little dispute among economists; the only question is the distribution of the benefits.
In the process of making America great again by saving us from the scourge of foreign washing machines the Trump Administration has apparently forgotten the logic of its own tax bill. Increasing taxes on washing machines and solar panels will simply raise prices and costs while reducing consumption, thus punishing workers, consumers and stockholders.
The Trump Administration has barreled ahead with this because it views trade as a zero-sum game (which it manifestly is not). Trade is a plus-sum gain in which each side benefits. After all these are voluntary transactions. People and firms do not continue to engage in transactions that make them worse off. Only governments do that. Moreover there are positive spillovers from trade in the form of faster economic growth coming from increased efficiency in the allocation of capital.
What is especially striking is Republican silence in the face of this. In the very recent past Republicans were ardent free traders. That apparently has gone by the boards, as has the Republican insistence that character matters. Perhaps the Republican Party is reverting to its prior preference from the 19th century for tariffs designed to protect domestic businesses from foreign competition. Back then it was the Democratic Party that had adopted the more hands-off approach, at least until FDR and the New Deal arrived on the scene.
And to boot, Treasury Secretary Steve Mnuchin has now decided to start talking down the dollar in FX markets. This is simply the beginning of an attempt to lower the prices of American goods in foreign markets, at the cost of raising prices for American consumers. To pull a stunt like this at a time when the U.S. government owes trillions of dollars to foreign investors, including foreign governments, simply mixes ignorance with incompetence.
That said it seems unlikely that free-traders are going to make a serious appearance in the Democratic Party of 2018. That is a shame because such a development would at least slow down the gallop toward more central planning and bureaucratic control over the U.S. economy. (Apparently the Trump Administration suffers from the delusion that it can loosen regulations on business conducted inside the U.S., but tighten regulations on external trade coming into the U.S. and never the twain shall meet.) So, we are faced with the unappetizing prospect of a bipartisan consensus in favor of using the police power of the state to attempt to impose higher prices on consumers and lower returns on investors. All at a time of enormous budget deficits and accumulated public debt.
Tired of winning yet?