Trade Wars

In the wake of Donald Trump’s decision to impose tariffs on “foreign” aluminum and steel products, Gary Cohn decided to resign his post as head of the National Economic Council. In that position, he was nominally the President’s top economic advisor. Reportedly Cohn, a Democrat and free-trader, had argued strenuously against the tariffs. Opposite Cohn was Peter Navarro, also a Democrat, who staunchly opposes free trade. In the end Trump decided to make the lunge toward protectionism that he promised during the campaign.

With the exit of Cohn, Peter Navarro is the undisputed architect of Administration trade policy. By way of background, Navarro is a professor emeritus of economics and public policy at the University of California, Irvine. Navarro, who earned his PhD from Harvard, has called for increasing the size of the U.S. manufacturing sector, setting high tariffs and repatriating global supply chains. Most importantly, he doesn’t want you to buy anything from China. Ever.

In 2006, he wrote the “Coming China Wars” which Donald Trump lists as one of the most important books he has read on China. (Permit me to be skeptical about a Trump claim to have read anything more advanced than a Marvel comic book, let alone a policy book without pictures). In 2012 Navarro published the next installment of his anti-China series with “Death by China”. He is considered by mainstream economists to be “heterodox”, which is a polite way in academia to call someone a crank. Which indeed he is, making him perfectly qualified to be a Trump economic advisor.

Economists across the political spectrum understand the power of trade to improve peoples’ lives through efficiencies gained from comparative advantage. That idea was first developed by the English economist David Riccardo in 1817. Basically, the law of comparative advantage posits that in international trade countries should produce and export goods in which they have an efficiency (comparative) advantage. Further, they should import goods from other countries where those countries have a comparative advantage. Doing so makes both countries winners because land, labor and capital are used to their best advantage. As a result, each country produces and consumes more than it ordinarily would have had each chosen to go it alone.

Time and again international trade has been shown to be a powerful force for improving peoples’ lives by expanding markets and opportunities. And time and again, politicians and demagogues have railed against free trade, believing, or professing to believe, that it is a zero-sum game. Some politicians may actually believe this for some reason or other. More likely, they have been bought off by constituent groups and other special interests looking to be protected from market competition.

It is true that Mr. Trump campaigned as a trade restrictionist, so no one should be surprised at his tariff announcement. Then again, he promised to do a lot of stupid things and this is just one of the lot. On that score, it is worth taking note that Mr. Trump’s trade policies are indistinguishable from those espoused by Bernie Sanders (D. VT), Sherrod Brown (D. OH), and Hillary Clinton (D. who won’t leave). It is also at odds with 30 plus years of Republican orthodoxy.

It is always dangerous to assume that underlying a Trump policy pronouncement there is some coherent set of beliefs. This time Trump may have convinced himself that it is possible to simultaneously (1) de-regulate the domestic economy, (2) re-regulate international trade, (3) run large budget deficits and (4) keep inflation under control without sending interest rates soaring, the dollar reeling, (5) all the while maintaining solid  economic growth. Unfortunately for Mr. Trump, it is not even remotely possible to do this. We already tried it once. It didn’t turn out well.

The attempt was made to do something like this in the aftermath of World War 2 with the adoption of the Breton Woods agreement. But for the system to work, it had to have a guarantor. That guarantor was the U.S. But the whole system came crashing down in August of 1971, weighed down by its own contradictions, when the U.S. slammed the gold window shut and refused to continue on as the system guarantor. The net result of this gargantuan policy failure was a decade of very high interest rates, soaring inflation, sagging stock prices, a collapsing dollar, long lines at the gas pump, wage and price controls, and high rates of unemployment, just to name a few of the less than charming events of the era.

Donald Trump is flirting with creating the same conditions that led to the disaster of the 1970s. Except that last time, we didn’t have the huge budget deficits and accumulated debt we have now. Nor did entitlements and debt service consume 70% of federal spending. Perhaps now the Congress will awaken from is slumber and assert itself before it is too late. It could start by restricting Presidential power to impose tariffs without a vote by Congress.


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