J.D. Tuccille: Trump protects Americans from low prices

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U.S. President Donald Trump vowed to have an impact on the economy, and he’s certainly living up to his promises. With a double whammy of high tariffs and uncertainty about the administration’s policies and intentions, the Trump administration is hammering trade relations between the U.S. and its neighbours to the north and south, as well as across the world. Recently imposed 25 per cent tariffs on steel and aluminum are bound to make everybody a little poorer. The only good that could possibly come out of it is a reminder that we all benefit from free trade, even if it’s unilateral.

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As I write Wednesday afternoon, The Wall Street Journal reports that Canada and the European Union put retaliatory tariffs on American goods in response to long-threatened 25 per cent tariffs on steel and aluminum. Canada struck back with 25 per cent levies on such goods as steel, aluminum, computers, and sports equipment. The EU is placing 50 per cent tariffs on imports including whiskey and motorcycles.

“The United States of America is going to take back a lot of what was stolen from it by other countries and, frankly, by incompetent U.S. leadership,” Trump commented on Wednesday, invoking what seems to be a mercantilist understanding of how trade functions. “We’re going to take back our wealth, and we’re going to take back a lot of the companies that left.”

From Trump’s comments, it’s obvious that he sees trade as a zero-sum game rather than as mutually beneficial interactions of millions of individuals and businesses. He counts victory in accumulated manufacturing jobs and export figures the way old-school mercantilists tallied gold coins without regard to real prosperity in terms of standards of living, innovation, and growth.

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It’s not clear that anything will be reclaimed in this ridiculous trade war other than impoverishment by all involved. Tariffs, economists emphasize, are largely paid by people in the countries that impose them. Foreign firms sometimes eat part of the cost by lowering prices so not all the burden is borne by businesses and consumers in protectionist countries. But, as the Tax Foundation’s Alex Durante pointed out regarding trade barriers during the president’s first term, “recent studies have found the Trump tariffs were passed almost entirely through to U.S. firms or final consumers.”

There’s no reason the same thing won’t happen with the retaliatory tariffs imposed by Canada and the EU. It’s as if the world’s political leaders are standing in a circle with loaded guns pointed at their own people’s heads as they engage in the stupidest possible hostage negotiation.

As the Nobel Prize-winning economist Milton Friedman commented in 1978, “We call a tariff a protective measure. It does protect; it protects the consumer very well against one thing. It protects the consumer against low prices.”

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In this case, the U.S. government is the instigator, and the costs of its economically illiterate protectionism will fall heavily on Americans if they remain in place. The Tax Foundation’s Erica York estimates that the 25 per cent tariffs on goods from Canada and Mexico will “reduce long-run GDP by 0.2 per cent, reduce hours worked by 223,000 full-time equivalent jobs, and reduce after-tax incomes by an average of 0.6 per cent.” Including tariffs on China and emphasizing that the costs are largely shouldered by consumers, York foresees an average tax increase of US$1,072 (C$1,540) per American household. That projected pain doesn’t take into account the effects of retaliatory trade barriers which are likely to hurt Americans as well as consumers in the countries that impose them.

Pointing out that “tariffs and escalating trade tensions are a form of economic self-harm” with costs paid by consumers, Australia’s Prime Minister Anthony Albanese wisely refrained from joining the trade war.

Trump and his supporters argue that these tariffs are just responses to trade barriers erected by other countries. They’re right that other countries are often protectionist, but they’re wrong in their assumption as to who suffers from such policies.

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In a Newsweek column written when Japan was the trade bogeyman for neo-mercantilists, Milton Friedman conceded that Japan had protectionist barriers. “We only increase the hurt to us — and also to them — by imposing additional restrictions in our turn,” he observed. He urged the U.S. “to move unilaterally toward free trade” to minimize harm caused by tariffs and to maximize gains from trade.

Above, I hedged my comments by noting “as I write” about Trump’s tariffs and the damage that will be incurred “if they remain in place.” That’s because matters may have changed by the time you read this column. Trump isn’t just a protectionist; he’s also mercurial. The stock market tanked and Goldman Sachs lowered its forecast for the S&P 500 largely because of uncertainty around Trump’s tariffs after the president repeatedly threatened, delayed, and carved out exceptions regarding tariffs. The problem here is what’s referred to as “policy uncertainty” or “regime uncertainty” and it can be a killer.

In a 1997 paper, the economist Robert Higgs blamed the long duration of the Great Depression in the United States to “a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns” under Franklin Delano Roosevelt’s anti-market administration. Investment resumed only once a new and less hostile president was in place. Trying to guess whether Trump will indulge his protectionist instincts, abandon them, or make concessions keeps investors on edge and inflicts a chill on the overall economy. Even a certainty of bad policy would allow investors, consumers, and business owners to plan.

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If there are hopeful signs as this trade war heats up, it’s that Americans are largely being conscripted into the conflict against their will. According to YouGov polling from the beginning of the month, more Americans oppose than support tariffs on goods from Canada, the European Union, and Mexico, as well as on steel and aluminum imports. Only tariffs on goods from China draw support from a plurality. Another recent poll from Navigator Research found that “two in three Americans believe that new tariffs would cause costs to increase (67 per cent), including 82 per cent of Democrats, 64 per cent of independents, and 51 per cent of Republicans.”

Those numbers aren’t likely to turn more favourable for protectionism as pain from the trade war sets in on American businesses and consumers. Despite himself, President Trump may be educating an entire generation on the foolishness of protectionism and the benefits of free trade. The question is how much pain businesses and consumers in multiple countries will suffer as the lesson settles in.

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