TRUMP, THE ECONOMIST
Trump made the right decision when he decided not to study economics. He’d certainly find economics very, very boring compared to the glitzy entertainment form of mock politicking he so obviously loves. It’s an immensely complex subject to master for a man whose simplistic view of the world biases him toward accepting simple solutions to the knottiest of problems. It’s also a discipline that requires wisdom, an understanding of history, judgement and an appreciation of how trade can benefit all involved in it.
Trump has a simple model of trade. He views trade as a one-on-one fight. He has the biggest hammer in the world (America’s economic might) and he’s trying to use it to hammer any nail he comes across (all nations – friend and foe alike) into submission -ie. to get them to do things his way. Winner takes all. Winning is his goal, always.
One of the mantras Trump uses to justify his aggressive tariff wars is that other nations have long been, and still are, taking America for a ride, that they’re living off America by selling more to America than they buy from America. Trade deficits are bad, really, really bad for America. That has to be stopped, preferably reversed (says Trump).
FAIR TRADE À LA TRUMP
(the way the world ought to be)
The list of countries which offend is long. America’s two biggest trading partners (Canada and Mexico) are on the list. (The two nations Trump signed the USMCA Free Trade Agreement with in 2018; describing it then as “the best trade deal ever”). So too are most of the nations of Europe and, of course, China. So too are Japan, South Korea, (two of the nations the US needs to court to achieve its declared objective of ‘pivoting’ into South East Asia to counter China). Vietnam as well as Australia, NZ and Ireland (the latter in part (quoting Trump) because it enticed American pharmaceutical companies to manufacture in Ireland by offering tax concessions. (He didn’t mention the profits from those US owned businesses go back to America).
Trump is initiating a trade war with most of the countries of the world – all at once. Nobody, including Trump, knows how this will pan out in the long run as nations fight back and rearrange their trading patterns. Two outcomes are likely. The world economy will contract and America will become isolated. A lose-lose result. China is already grinning, Russia wryly smiling .
REAL ECONOMISTS
Economists find it difficult to critique Trumps trade tariffs. That’s largely because nobody is sure what Trump is setting out to achieve. He talks about means without being specific about ends. That makes a serious evaluation well-nigh impossible. A second reason is economists know that some tariffs work under some circumstances and are counterproductive in others, particulars matter.
Trump mainly talks about traded goods (the Balance of Trade: exports-imports), rarely about Balance of Payments (which includes exports and imports, plus capital and investment flows between nations). Many of the variables that impact on the outcomes of tariffs wars (employment/unemployment levels in both trading nations, the patterns of trade (what type of goods are exchanged), currency manipulations, whether the nations are growing, in stagflation or recession, the level of tariffs, how tariff incomes are used etc) seem unconsidered. Multiply all that complexity by the fact that the nations Trump seeks to punish will certainly alter their trading patterns with each other to defend themselves and you can see why Trump’s approach is essentially blind (or, as he’d prefer to call it, ‘intuitive’).
Britain’s most famous economist (John Maynard Keynes) vacillated, sometimes in favour of tariffs, sometimes against. America’s Milton Friedman (the monetarist ) was unambiguously negative, especially so re tit for tat tariff wars. (“We hurt them, they hurt us, we hurt them more, they hurt us more”). Economic historians readily cite how tariffs worsened the Great Depression.
On balance, international tariff wars are, economists conclude, destructive.
Those readers who want to read further on the subject can read ‘Was Keynes Right?’:Hashimoto, Miyagiwa, Ono & Schelg (Florida International University, June 2024)
WHAT TRUMP THINKS IS A SOUND ECONOMIC ARGUMENT
We often hear pundits opine that Trump has a ‘transactional’ ‘deal maker’ mindset. Trump agrees. He’s said he is really only good at one thing – making deals. And that’s not surprising given that he majored in ‘real estate’ at university. He thinks and operates like a real estate agent.
What do I mean by that?
A vendor pays an estate agent to sell their property for a good price, as high a price as possible. The agent has the same objective because the higher the price the higher their commission. There’s another reason an agent pushes for a high price. Sellers spread the word that this is the agent to go to if you want top dollar. An agent with lots of properties to sell attracts more potential buyers – and that not only grows their business, it enables them to cross sell within their ‘list’, thereby minimising their chances of ‘losing’ a buyer to another agent.
To satisfy both parties an agent needs to be a good negotiator. He has to tell one story to buyers to tease up their offers (‘don’t risk missing out’, ‘it seems to be exactly what you’re looking for’, ‘this type of property doesn’t come up very often’) and another story to vendors to reassure them they’re doing well (‘look it’s really a good offer, why take the risk of losing a cashed-up buyer’, ‘the market is pretty soft at the moment’). Getting a deal done is the agent’s primary goal.
That’s essentially how Trump operated in the New York property market, one of the toughest in the word. His deal making was more flamboyant, nearly always litigious and involved much bigger deals (in the hundreds of millions) and sometimes successful. Trump’s success in building viable businesses is far less impressive. He’s been involved in six bankruptcies – but that’s another story.
Trump, nonetheless, is a good salesman and a good deal maker. But those skills don’t make him any better at economic policy making than your average Joe. Here’s why.
Negotiators like Trump are said to have a zero-sum mindset. They act as if they believe the competition for limited resources means that one party can only win at the expense of another. That’s why Trump always claims to be a winner (even when he loses). What real estate agents essentially do is transfer wealth from one party (the buyer) to another (the seller), they don’t add to the stock of houses. They play a zero-sum game.
Trump repeatedly exhibits a deep scepticism (if not ignorance) of the idea that free trade can lead to making a larger cake that enables both sides to enjoy a bigger slice than if they had no such relationship. He seems to dismiss the alternative idea that specialisation and cooperation can lead to win-win outcomes, value adding relationships. That’s why Trump feels almost obliged to use tough man’s bullying tactics. He maintains this stance in spite of the historical evidence that more and freer trade is a tide that lifts all ships in the harbour. His blindness to this reality highlights his unsuitability to lead the free world…..and the huge threat he is to American democracy.
Trump just can’t countenance the fact that an economy can be both strong and run a trade deficit at the same time. They can. They have in the past, will in the future. Running a trade deficit can be a good thing. It all depends on particulars. Trump will never accept that.
WHAT TRUMP SAYS WILL HAPPEN
(A Tale of Two Cities)
Rather than talk about theory let’s turn to looking at what Trump actually says. His messaging has two different streams aimed at two very different target audiences – one is his voter base (A) the other big business (B).
Part A : Selling A Populist Message To Voters.
(What he says at rallies, on TV and the internet)
To paraphrase,
–‘Workers of America, you, the backbone of this wonderful and beautiful country, have been sold down the river by a self-serving elite of left wing do gooders, the lying media, bureaucrats, out of touch Democrats – and the unfair trade practices of other nations.
All those great manufacturing jobs you once had have gone overseas. The industries that made America great-autos, steel, white goods, electronics – the great quality products you produced – are now a poor shadow of what they once were. As the factories closed, the once thriving American communities you lived in, the heartland of America, became a rust belt… it should never have happened, but it did. You know that.
Your chances of living the American Dream …… no, your right to live the American Dream …..has been taken away from you. That’s a betrayal…..it’s unfair. You worked hard in those jobs. Your jobs have been stolen from you by cheap overseas labour, illegal immigrants and Chinese businesses (subsidised by a Communist, war mongering government). Even our biggest trading partners, and so-called allies, have joined the long line of countries ripping us off.
Mexico takes advantage of us. Canada takes advantage of us. Europe takes advantage of us. They’re all reducing the living standards of working Americans, and that’s disrespecting you…….I’ll stop all that …I’ll bring back those jobs to where they belong, here in America. Promise.
I’ll get rid of those illegal criminals, drug traffickers, sex offenders and losers who are “poisoning the blood of America’’ (Trump, Dec 17 2023), ruining our cities. I’ll also use tariffs to force businesses make things in America again. It will be a new Golden Age for you.
You, the people who made America great, have been sidelined….you’re the victims of a corrupt system….I’ll fix that. Promise. You and I can MAGA, together.’–
B : Selling The Second Trump Presidency to Big Business.
(In private at Mar-a-Lago, in boardrooms etc.)
Again, to paraphrase,
–‘To help you guys I have to win the election first. Let me do that.
| –“POLITICS (N). A strife of interests masquerading as a conflict of principles, – the conduct of public affairs for private advantage”– Ambrose Pierce: The Devil’s Dictionary (1911) |
Then, well you know what I’ll do.…lower taxes for the super wealthy, sure.
I’ll make it easier for big business to get on with its job by getting rid
of the rules and bureaucracies that seek to hold you back
…..You know that.
I’ll use tariffs to help protect your businesses. I’ll give you guys
corporate tax breaks….and, maybe, increase taxes on foreign
investors. Whatever.
You know you’ve never had a more pro-business President than me.
Support me and I’ll support you…. OK?’–
WHAT TRUMP TOLD VOTERS ABOUT TARIFFS
Businesses sending goods to the US will have to pay a tariff. Let’s say 20%. So what once cost an importer $100 will now cost them$120. ($100 for the product and $20 paid to the US government). Millions if not billions of $20 will help reduce the Country’s deficit, (says Trump). And that’s a good thing, a very good thing (says Trump).
Trump also talks as if the importer will absorb the tariff cost. Which would make it less attractive for importers to try and sell foreign goods in America.
So far, many voters would like what they’ve heard their man say.
The trouble is the assertion that importers will absorb tariffs is not a very plausible one. Few importers have profit margins that would enable them to fully absorb a 20%, (yet alone 50%) tariff without increasing their prices to stay in business. They will, at least in part, pass on tariff costs to consumers over time … or go out of business.
Time and time again History has shown tariffs lead to higher consumer prices in the tariff imposing country. There is no doubt whatsoever that applying big tariffs across the board would lead to American consumers paying higher prices.
Initially, higher import prices may make American made goods (say cars) more attractive in terms of their ticketed prices than highly tariffed, imported autos. If that advantage leads to greater sales for US made cars it will, however, likely trigger auto-worker demands in the US for higher wages – which in turn often triggers an inflationary spiral that then tends to spread throughout an economy.
Even US car makers have warned Trump of the dangers inherent in his proposal. The world is not as simple as The President imagines
WHY TRUMP’S TARIFF WARS WILL COME UNSTUCK
Let’s stick with the auto industry to further illustrate how reality trumps The President’s logic on tariffs.
Trump’s strategy might work if every car brand made its cars completely within US national borders by companies, using locally sourced components. That just doesn’t happen in the real world anymore.
American cars are made from parts sourced world-wide. These parts cross many borders, sometimes more than once (for modification and component assembly) before being installed in the finished product that sits on the showroom floor. Different steels are sourced from different countries, ditto electronics, batteries and hundreds of other components. Under Trump’s universal tax proposal those parts would attract a tariff each time they cross the American border. That’s going to make so called ‘American cars’ a lot more expensive than they are today, several thousand dollars more per car. They’re certainly not going to get cheaper if Trump proceeds with his blunt tariffs.
Trump also doesn’t seem to take into account that American car companies don’t only make cars in America. Just on half of Tesla cars, for example, are made, yes made, in China. All Teslas sold in Australia are made in China.
Over thirty five percent of Tesla cars are bought by Chinese residents. If Trump initiates a trade war against Chinese EVs in America (a threat he’s made many, many times) what’s going to happen to his co-president’s (Musk’s) business?
China is unlikely to do anything but hit back with equal force. China is not a country to quietly submit to Trump’s bluster. They’ll hit America where the US is most vulnerable, even in industries like farming (remember Chinese bans on US soybeans?).
Trump overly focuses on trying to reduce America’s trade deficits by implementing policies aimed to reduce imports. Rarely does he discuss the likelihood that if he blocks imports from other nations they’ll hit back by cutting their imports from America.
He seems to forget that a country’s BOT (Balance of Trade) is, roughly, the sum of exports minus imports. It’s just as important for America to have an export boosting policy as it is to have an import reducing policy. That’s a dangerous blind spot in The President’s intuiting.
Another complicating factor Trump downplays is many major car manufacturers, indeed most, have plants in several countries for a variety of reasons ranging from lower labour costs, tax concessions and state subsidies.- Audi, BMW, Ford, GM, Honda, Kia, Mazda, Toyota and Volkswagen all have plants in Mexico.
Both supply chains and ownership patterns are complex and interlocking in the auto business.
They’re equally as complex in other ‘internationalised’ businesses such as pharmaceuticals.
As already noted, little Ireland hosts American owned pharmaceutical and bio company plants including those of AbbVie, Abbott, Alexion, Amgen, Bristol Myers, Gilead, Johnson & Johnson, Eli Lilley, Pfizer and Stryker. Those American companies aren’t in Ireland because they’re being ripped off by the Irish (as Trump claimed, on camera, in his recent Oval Office talk with Martin, Ireland’s Taoiseach/PM). They’re there because Ireland’s a profitable base from which those American companies export to the rest of the world.
Big, bad Ireland? Nonsense Mr. Trump.
The latter is an example of a win-win arrangement. American companies get financial benefits, the Irish get employment for their people.
In his paranoidal view of the world Trump chooses to ignore such realities to the peril of America – and the West as a whole.
DERUSTING AMERICA’S RUST BELT -THE ULTIMATE BETRAYAL
At the moment manufacturing accounts for about 10% of American GDP. About the same as in many other ‘advanced’ service-oriented economies. Even if Trump pulls off his dream of revitalising American manufacturing by (say) a highly ambitious (and unlikely) 25%, manufacturing would still not top more than 12% to 13%of American GDP. That’s about half the level it was in 1960.
The truth is America manufacturing will never return to the halcyon days when most American workers made things, and their livings, on production lines. The future of the American economy lies elsewhere, certainly not in the past. It is cruel for Trump to tell this base – to promise – otherwise. He’s selling working Americans a pup.
The days of the blue overalled, lunch box carrying GM worker, earning an annual wage that was roughly half the cost of buying a home are over. There’s no going back.
Modern manufacturing is based on technology, robotics and AI, not hands-on-tools. Elon Musk certainly knows that. It would be reasonable to assume that any President of the USA would also be aware of that reality. If Trump knows that (and he almost certainly does) he’s consciously lying to his voting base, the vulnerable. He’s feeding them false hope.
THE OTHER SIDE OF THE EQUATION
Trump’s approach to building America’s ‘economic might’ via trade wars might be weird. But his approach to holding, yet alone winning, international friends and allies is even weirder.
How can it be to America’s long-term advantage to bully, threaten and alienate America’s closest allies while tiptoeing around nations hell bent on bringing down America and the West ?
In the world of realpolitik soft power counts. America had plenty of it. The Marshall Plan rebuilt a war-torn Europe. America put Japan back on its feet, defended Korea, was the foundation stone of NATO. America contributed disproportionately more to the coffers of the UN than any other Country, sent the Peace Corps/aid to aid those in trouble, suppressed international terrorism and, more recently, aided Ukraine in its fight for survival.
True, America also has a dark side (supporting right wing coups in South America, interfering by force of arms in Vietnam, Iraqi, Afghanistan et al.). But, on balance, America has well served the values of the democratic West. Until Trump.
Now America’s closest allies are being treated poorly and with disrespect. America’s soft power reserves are being depleted at a rapid rate. If Trump continues as he’s started America will end up distrusted and friendless, alone .
Some think Trump is playing a clever negotiating game underpinned by some grand strategy that will make for a Greater America. I think that’s nonsense. Trump doesn’t think that deeply. He is a shallow ego driven man who wants to be boss cocky along Mafia lines. He wants to be a ‘don’ like Putin and Xi.
Nothing else matters. He will bully , lie, punish, seek revenge, sacrifice friends and allies, wreck anything that stands in his way to position himself as el numero uno.
He would rather see America burn than lose control. He’s the biggest threat to American democracy ever.
What do you think?