People exercise with The port of Melbourne in the background, in Melbourne, Australia on April 4.Asanka Ratnayake/Getty Images
For months, Canada has grappled with how to respond to a U.S. President who has broken trade agreements based on a deeply questionable premise. Donald Trump accused Canada of flooding the U.S. with fentanyl, contrary to all available evidence.
Now, the rest of the world has been thrust into the same quandary – how to respond to a White House whose actions are based on what economist Ricardo Hausmann called a “cockamamie calculation.”
The tariffs Mr. Trump announced this week constitute the most protectionist action taken by a U.S. president in at least a century, raising the country’s import taxes to levels not seen since the First World War.
In the hours after announcing the new course he is setting for the U.S., Mr. Trump celebrated.
“I think it’s going very well – The MARKETS are going to BOOM…” Mr. Trump wrote Thursday on social media, on a day when global shares experienced their worst day in years. He likened his tariffs, which will cut deeply into trade with some of the country’s most important partners, to surgery, writing in upper-case text: “The operation is over! The patient lived, and is healing.“
But the White House is reaching for “the wrong medicine for the wrong diagnosis,” said Prof. Hausmann, a respected scholar who is founder and director of Harvard’s Growth Lab.
Why the White House’s math on country tariffs doesn’t add up
The Trump administration’s arguments amount to a “post-truth” rationalization, he said, one that defies historical precedent and bedrock economic principles.
“It’s all based on this fiction,” Prof. Hausmann said.
Take one of Mr. Trump’s core arguments, that free trade has weakened his country.
The President has long argued that the U.S. is the victim of a yawning trade imbalance. But that view is based on a narrow reading of U.S. international commerce, factoring in merely the value of goods exchanged. It ignores the value of U.S. services exported abroad, and of the many trillions of dollars in foreign assets that U.S. companies have been able to accrue over decades of relatively free trade.
Factor those things together, he said, and the U.S. enjoys balanced international trade.
”The world is taking advantage of the U.S.? Seriously?” Prof. Hausmann asked.
But Mr. Trump has been serious in stating exactly that, as he sets to remake systems of international trade, promising Americans that his efforts will deliver them new prosperity by reinvigorating U.S. manufacturing and swelling government coffers with tariff revenue.
For Canada and now for the rest of the globe, the tariffs underscore how relations with the world’s pre-eminent economic power can no longer be expected to rest on logical argument or an appeal to the rules of international trade, which Washington helped to author – but which it is now breaking.
“The tariffs are not just the U.S. shooting itself in the head, they’ve shot themselves in the head and the heart,” said Harold James, a Princeton economic historian.
“The best response may not be an immediate reaction but to wait until the torrent of ridicule – and fear as the U.S. markets crumble – have their effect, and Washington is obliged to reconsider,” he said.
But any country seeking quicker relief may have to find a way to reach an understanding with Mr. Trump, who places little stock in historical ties or even the strength of defence relationships as he pursues his economic ambitions.
Carney hits back at U.S. with Canadian tariffs on autos
Such a perspective is ”hard to negotiate with,” said Betsey Stevenson, a former chief economist of the United States Department of Labour who was on the Council of Economic Advisers to president Barack Obama.
“We’re dealing with psychological negotiation, not real rational discussion,” she said.
That means the future of global trade now rests in part on the ability of the world’s leaders to navigate the personality of the U.S. President.
“A lot of countries are going to need to figure out how to help him look like he won something. That’s incredibly important,” said Ms. Stevenson, a professor of economics at the University of Michigan.
Mr. Trump “has to be able to declare victory. He’s also very mercurial so you can’t just anger him, because he’s vindictive,” she said.
When he announced the tariffs on Wednesday, Mr. Trump said he was acting in defence of fairness. “Reciprocal,” he said. “That means they do it to us and we do it to them. Very simple.”
But the U.S. numbers were based not a tabulation of foreign levies, but instead on simple math based on a partial reading of U.S. trade balances.
For economists and foreign leaders alike, the results defied logic.
Israel recently removed all tariffs on U.S. goods. Nonetheless, it was slapped with a 17-per-cent levy. Australia, which maintains a deficit in its goods trade with the U.S., was handed a 10-per-cent tariff.
Other countries who trade goods that have no U.S. equivalent received similar treatment.
Indonesia, whose climate makes it a source of rubber and coffee that won’t easily grow on North American soil, will be charged a 32-per-cent surcharge on its exports to the U.S.
Some Australian islands singled out for tariffs do not even have a permanent human population.
On Thursday, Mr. Trump’s own senior economic officials struggled to explain the rationale, deferring instead to 18th-century U.S. history.
“There’s nothing crazy about this policy,” Kevin Hassett, director of the National Economic Council, told Fox News. “In fact this is a policy that was tried and was effective in the United States for 150 years.”
But the way Mr. Trump announced the tariffs offered countries few other grounds if they hope to persuade the U.S. to alter course.
“I don’t think there’s going to be science to it,” said Sahar Hafeez, a former senior adviser in the U.S. Department of Commerce’s International Trade Administration who is now senior counsel with Pillsbury, a New York-headquartered law firm.
The stated reasoning behind the tariffs is “so esoteric. It’s so untethered to any kind of facts about foreign countries’ economic policies or trading practices,” said Julian Beach, a special counsel with Pillsbury who has also served in the International Trade Administration.
Instead, the White House appears to have simply calculated, for each individual country, “what tariff rate would be necessary over time to drive the trade deficit to zero,” he said.