Trump’s tariffs are what he says they are: weapons of blunt-force, wrong-headed protectionism

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As always, Donald Trump defeats the imagination. You thought you knew just how crazy his trade policy was. You were bracing for those hefty global reciprocal tariffs Mr. Trump had vowed to bring in – on top of the auto tariffs, on top of the steel tariffs, on top of the special punitive tariffs applied to Mexico and Canada for the crime of being America’s neighbours.

But you’d no idea, did you? You didn’t anticipate how enormous they would be, for starters: more than US$400-billion annually, the largest tax increase in U.S. history, guaranteed to blow up world trade and very likely to drive the world economy into recession, if not depression.

And you certainly didn’t anticipate how those “reciprocal” tariffs would be calculated: not on the basis of any factual assessment of the tariffs each country imposes on U.S. goods, nor even by monkeying around with estimated values of non-tariff barriers or currency “manipulation,” but simply by calculating the ratio of the surplus on trade each country has with the U.S. to its total exports to the U.S.: as if the entire bilateral trade surplus (or U.S. trade deficit) were accounted for by unfair trade practices.

Yet even in the face of this insanity, the mind rebels. It still wants there to be some rational basis for it. Surely in the fullness of time it will be revealed to have been some grand strategy to force other countries to lower their trade barriers, the “madman theory” as applied to trade negotiations, as some of Mr. Trump’s retainers continue to maintain.

Maybe, as some other Trump supporters claim, it’s an instance of “optimal tariff theory,” a canny attempt to exploit U.S. market power to extract “rents” from other countries’ producers.

Or maybe it’s even grander, part of some complicated game of three-dimensional geopolitical chess designed to reset global trade, reorient global military alliances and realign global currencies at the same time.

Yeah, no.

If you actually take the time to listen to Mr. Trump, and to his closest advisers, what looks on the surface like crude protectionism turns out to be crude protectionism all the way down. Of course, to say that a policy is protectionist is only a description, not an explanation. Why are Mr. Trump, and his advisers, so entranced by tariffs? There are several strands to it, each one cruder than the last.

Trade deficits. It’s clear that Mr. Trump’s officials, notably his trade adviser Peter Navarro, subscribe to a theory of economics in which trade deficits are regarded as losses to a country, and trade surpluses as gains. That theory, students of economic history will recall, is known as mercantilism, and while it hasn’t been in vogue for about three centuries, it obviously still has the power to bewitch.

Some of that is a result of a misreading of the national accounts. Elementary economics textbooks will tell you that GDP is made of C+I+G+(X-M): consumption plus investment plus government spending plus exports minus imports. Other things being equal, it might seem that a trade surplus would add to GDP, and a trade deficit subtract from it. But other things are not equal. Change one variable in that equation, and you change others.

The reason the U.S. has a trade deficit has nothing to do with other countries’ trade barriers, real or alleged, or with U.S. trade policy being “too free” (in fact U.S. trade policy is not particularly free: one recent ranking put it 68th among the world’s countries on that score).

Neither are Mr. Trump’s tariffs likely to close it. So far as they succeed in restricting imports to the U.S., the effect is likely to be an appreciation in the value of the dollar – making imports relatively cheaper and offsetting in whole or in part the impact of the tariff.

But so long as the other deficit – the federal budget deficit, now at 6.4 per cent of GDP and projected to grow even larger – remains unclosed, the U.S. will continue to run large trade deficits. Why? Because U.S. domestic savings are insufficient to finance these large deficits on their own, or not if they are also to fund private investment. So they have to be supplemented by other countries’ savings.

The U.S. trade deficit is simply the flipside of that capital surplus. In fact, they are exactly equal to each other, as they must be: not as a matter of theory, or coincidence, but an accounting identity. As economists like to say, “the balance of payments must balance.” Americans can only buy surplus foreign goods with the money foreigners lend them. Foreigners can only lend Americans the dollars they make from them on trade.

A trade deficit, then, is not necessarily a bad thing; neither is a capital surplus necessarily a good thing. It depends. The current federal deficit, and associated trade deficit, is largely driven by consumption, rather than investment: that’s bad.

But for much of America’s early history, when it was enjoying its greatest boom years, it ran trade deficits, as investment flooded into the country. Conversely, during the Depression the United States ran enormous trade surpluses. No kidding: nobody in America had any money to spend. Was that a good thing? Of course not.

So: the trade balance, positive or negative, doesn’t matter, and to the extent it matters, tariffs have nothing to do with it. Other countries’ tariffs don’t cause it, and U.S. tariffs won’t “fix” it.

Manufacturing. Another major part of the Trumpian lament is the decline of manufacturing. Here again, the theory suffers from the absence of either a body or a murder weapon.

The notion that the only “real” economic activity is in manufacturing, to which services are at best an accoutrement, is one of the oldest of economic fallacies. It is doubtful, to say the least, that the United States would be better off if it had more pyjama factories and fewer software developers.

For all the caterwauling about its demise, manufacturing remains a mainstay of the U.S. economy. It has declined only in relative terms, that is, as a share of total output and, especially, employment. In absolute terms, adjusting for increases in prices, the U.S. is turning out more manufactured goods than ever. There has been no “hollowing out” of the manufacturing sector as a whole, even if particular industries or firms have vanished.

So far as it has declined in relative terms, it has had little to do with free trade. Chart manufacturing’s share of total employment and you find a steady, unbroken descent, undisturbed by the North American Free Trade Agreement, even the vaunted “China shock.” The larger villain, if that is the right word, is automation.

And while manufacturing’s share of GDP may have shrunk, GDP has not: fading manufacturing sectors were replaced by fast-growing service industries, just as decades earlier manufacturing had taken up where agriculture left off. This is especially true of late, the moment of maximum Trumpian gloom: over the last four years, the U.S. economy grew three times as fast as the average of the other G7 countries.

Workers vs consumers. This argument, long a favourite of the left, has been picked up by the populist right. Sure, free trade might mean a few dollars off a toaster or a flat-screen TV, but how can such low, material concerns be compared to the impact on workers, families, and communities?

We’ll pause briefly to note the irony of self-styled anti-elitists casually mocking concerns for the prices ordinary consumers must pay for household items. But it’s the false opposition this constructs, between the interests of consumers and workers, that is the real problem with this argument.

Workers are also consumers, for starters, as consumers are workers. So it’s hard to disentangle their interests in that sense. More fundamentally, the interests of consumers are also the interests of workers, even where they are not the same people.

When a tariff drives up the prices of imported goods – and, let us not forget, of the domestically produced goods in competition with them – it isn’t only consumers who are affected. The extra money they must spend buying Good A because of the tariff is money they do not have left to spend on Goods B, C, and D. The jobs and output the tariff saves in the former are simply the jobs and output destroyed in the latter. Protectionism ultimately isn’t about saving jobs, but about trading some jobs for others.

Imports bad. This really is what it all boils down to. It isn’t a lot more complicated than that. Trump officials constantly talk as if they were personally offended that anything Americans consume is not made in America. Vice-President JD Vance has explicitly stated that the administration’s goal is “self-sufficiency.” The President talks glowingly of all the offshore factories that are supposedly relocating to the United States in order to avoid the tariffs (there’s no evidence of this).

Again, this is not a particularly new theory. In centuries past, it was called autarky. As practiced by Third World countries in the last century, it was known as “import substitution.” It amounts to a rejection not just of free trade, but trade; not just the doctrine of comparative advantage, but the division of labour.

Trump officials really do seem to have persuaded themselves that the United States would be better off if, instead of concentrating on the things it can do best at least cost, and trading for the things that other countries can do better at lower cost, it tried to make everything itself.

It isn’t only imports this would restrict. To make goods for the domestic market, in place of the imports the tariffs are intended to keep out, productive resources will have to be diverted from making goods for export. And that’s without taking into account whatever retaliatory measures other countries see fit to invoke.

So not only would the United States give up the gains from specialization, but also of scale: instead of manufacturing a relatively small number of goods for a world market on long production runs, they would make a much larger variety of goods for the domestic market on accordingly shorter runs.

Of course, in order to achieve this end of protecting domestic manufacturers, the tariffs would have to raise prices above the level prevailing under free trade – something Mr. Trump has denied. But so far as the tariff does prevent imports from entering the country, it cannot also raise the revenues Mr. Trump claims for it.

It is a rare combination: a policy that raises taxes but does not raise revenue; that raises prices while depressing employment; that seeks to limit imports but succeeds in limiting exports. Mr. Trump, like all protectionists, believes that imports are the price we pay for exports. He does not understand that it is the other way around: we export only so that we may be able to buy imports.

Trade is, in the end, not so much about competition as it is about co-operation, each country contributing what it can to a global enterprise in wealth creation. That is a concept that is plainly alien to the President. As Mr. Trump does not believe in co-operating with others, he cannot imagine how others might co-operate with him.