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Short-Term Politics, Bad Economics

Alas, dear readers, it is time for me to discuss a subject that everyone has been hearing about yet virtually no one understands. Yes, I’m talking about tariffs.

When I was a high school social studies teacher, I eagerly glided past this topic without getting into too many details. It was something archaic, a policy a stolid 19th century president might attempt. Didn’t tariffs end with President Grover Cleveland?

In fact, during the time of Grover Cleveland, Americans didn’t understand tariffs any better than they do now. Cleveland lost his 1888 re-election bid to Benjamin Harrison, in part because voters in the industrial states of the Northeast saw their jobs threatened by lower tariffs. Then, four years later, Cleveland ran again and defeated Harrison, as many voters had changed their minds about the issue.

Of course, as every US history teacher really knows, there have been many ensuing tariff policies, including the disastrous 1930 Smoot Hawley Tariff Act, which raised import duties to protect American businesses and farmers and arguably exacerbated the effects of the Great Depression.

Now that tariffs are in the news again, with the current president engaged in trade fights with China, Mexico, Canada, and the European Union, one of my dedicated readers, Howard Kamin, has done some research on trade policy. I thank him for helping me see this issue more clearly. He explains:

The president has claimed that the US trade deficit (currently $500 billion) is the result of unfair trade practices by countries like Canada, Mexico, the European Union, and China. His solution is to renegotiate or drop trade agreements like the North American Free Trade Agreement (NAFTA) and the Trans Pacific Partnership (TPP). The president wants to correct and protect US trade with the rest of the world by applying tariffs on imports. Imposing tariffs is part of his America First philosophy which seeks to protect US industry from tariffs applied by foreign countries that limit US export potential.

You see, Grover Cleveland and Smoot-Hawley fans? The tariff issue is alive and well in 2018.

Kamin continues:

The president’s electoral base of farmers, industrial workers, and Rust Belt laborers has complained that the trade agreements negotiated by past presidents have caused unemployment and hindered trade. While some economists support this position, the majority of economists and business leaders do not.

International trade policy has been in place since 1948 and was renegotiated by the World Trade Organization (WTO) in 1994) and signed by 124 nations. While developing nations may use protective tariffs, the fact is that the world’s economies have functioned rather well under this managed approach.

Wait? Could our current president be wrong? Is his understanding about as deep as that of Grover Cleveland, as well as Senator Smoot and Representative Hawley?

Indeed, Kamin notes that

The economic effect of trade policy as it affects employment, currency value, and interest rates can best be summarized by conservative economist (and Nobel Prize winner) Milton Friedman—“Trade deficits are not harmful.”

In sum, while some economic theory holds that imposing tariffs and increasing the trade surplus may positively affect employment, this is not the case. Even with a trade imbalance, the US has maintained a low unemployment rate. Similarly, our ongoing trade deficit has not had a negative impact on the country’s inflation rate, which has also remained low. Finally, as we learned from the Great Depression, imposing tariffs to protect domestic trade may lead to tariff wars, less trade, and economic instability.

With many thanks to Howard Kamin for researching and explaining this issue, I now turn to the policy question: Why are tariffs being sought at this time? Why are we fighting a trade war, not just with global rivals such as China but also long-time allies such as Canada, Mexico, and the EU? I would venture to say that the answer is: Politics. As Kamin explains, the president’s hard line on this issue is designed to appeal to those voters who were loyal to him in the 2016 election and whose votes he needs in 2020. So this issue is driven not by economics, but by politics—and narrow-focused politics at that.

It seems pretty safe to assume that the base of dependable voters in key electoral states will stick with the current president in the next election. He has been quite successful at weaving a narrative that connects with their hopes and fears. But at the same time, remember that this president has shown limited loyalty throughout his life. In his business, he failed to pay laborers, contractors, and attorneys. He participated in a venture to provide bogus education to thousands of students, finally settling a lawsuit for $25 million. These individuals are first-hand testimony that this film-flam man will turn on those who rely on him.

Same with economic policy. As The Guardian points out, “Once trade tariffs begin to bite and exports to the US falter, world growth will slow further, in turn harming US exporters. Even if the US continues to import as much as it did before, rising import costs will jack up inflation and hit workers’ living standards.” So these loyal voters may find that the longer-term impact of the trade war will hit them well after the next election is over.

The current president’s trade stance may be good short-term politics, but it is lousy economics. It is bait-and-switch on his most loyal supporters. Like Smoot-Hawley, it will take another administration (preferably Democratic) to fix this mess. And when this happens, expect the flim-flam man to play his usual tune and make sure to fix the blame on someone else.

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