The Economist: Trump irrational tariffs will cause economic damage

While the world tries to contain the damage, the US president bets on an irrational trade war that threatens the global economy

If you have not noticed the United States being “looted, pilgrims, violated and spoiled by nearby and distant nations” or being cruelly denied in your “time to thrive”, congratulations: you have more notion of reality than the US President. It is hard to say what is most disturbing: the fact that the free world leader speaks nonsense about the most successful and admired economy of the planet or that, on April 2, driven by his illusions, Donald Trump announced the greatest rupture in American trade policy in more than a century-committing the deepest, harmful and unnecessary economic error of the modern age.

In the White House Rose Garden, the president announced new “reciprocal” fares about almost all US business partners. It will be 34% tax on China, 27% on India, 24% of Japan and 20% over the European Union. Many lower economies will face exorbitant rates, and all targets will have at least 10%rates. Including existing taxes, the total about China will reach 65%. Canada and Mexico have been spared, and the new rates will not add to sectoral measures, such as the 25% tax on cars or the promised tariff for semiconductors. But the general rate of US tariffs will rise above the level of the large depression, returning to the level of the nineteenth century.

Trump called it “one of the most important days in American history.” He almost got it right. Its “Liberation Day” marks the total abandonment of the global commercial order and the adoption of protectionism. The issue for countries affected by this meaningless vandalism is how to limit damage.

Almost everything Trump said this week – about history, economy and the details of trade – was completely delusional. Your reading of the story is reversed. He has always glorified the era of high rates and low income taxes from the late nineteenth century. In fact, studies show that tariffs disrupted the economy at that time. Now he has absurdly stated that the reduction of tariffs caused the great depression of the 1930s and that the Smoot-Hawley tariffs have arrived late to save the situation. The reality is that taxes have worsened the crisis, as will hurt all economies today. It was the meticulous commercial negotiations of the last eight decades that have reduced tariffs and boosted prosperity.

In economics, Trump’s statements are complete absurdity. He says rates are necessary to reduce the commercial deficit, which he sees as a “transfer of wealth to foreigners.” But any economist could have explained to him that this deficit exists because Americans save less than the country invests – and crucially this has not prevented the US economy from overcoming others from G7 for over three decades. There is no reason to believe that extra tariffs will eliminate the deficit. Insisting on commercial balance with each partner individually is insanity – how to say that Texas would be richer if it required trade balance with the other 49 states or that a company should ensure that each supplier is also a customer.

And its understanding of the details was pathetic. He suggested that the new rates were based on an assessment of each country’s rates against the US, as well as currency manipulation and other “distortions” such as VAT. But it seems that employees have used a formula that catches the US bilateral deficit as a proportion of imports from each country and shares in half – something as random as taxing someone by the number of vowels in the name.

This list of foolishness will bring unnecessary damage to the US. Consumers will pay more and have fewer options. Increase the price of parts for US manufacturers, while protecting them from foreign competition, will make them less competitive. While the futures on the market plummeted, Nike shares, which have factories in Vietnam (tariff: 46%), fell 7%. Do you really think the Americans would be more prosperous if they sewed their own sneakers?

The rest of the world will share the disaster – and you will need to decide how to react. One question is to retaliate. Politicians should be cautious. Contrary to what Trump thinks, commercial barriers hurt those who impose them. As it is more likely that they make Trump radicalize instead of retreating, the risk is to get everything worse – possibly catastrophically, as in the 1930s.

Instead, governments should focus on increasing trade among themselves, especially in services, which move the 21st century economy. With only 15% of global imports from imports, the US does not dominate world trade as they dominate finance or military spending. According to Global Trade AlertEven if the US stopped totally imported, in five years 100 of their partners would have already recovered the lost exports. The EU, the 12 members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), South Korea and open economies like Norway represent 34% of global imports for imports.

Should this effort include China? Many in the West believe that Chinese state -owned companies violate the rules of global trade and that the country has already used exports to absorb excess capacity. These concerns will get worse if more Chinese products are diverted from the US. Building a commercial system with China is desirable, but it will only work if the country rebalances its economy for internal demand, reducing the risk of dumping. In addition, China could be forced to transfer technology and invest in Europe in exchange for smaller tariffs. The EU should centralize its investment rules to close comprehensive agreements and overcome its aversion to large commercial pacts, entering CPTPP, which has mechanisms to resolve disputes.

The madness of King Donald

If this seems slow and difficult, it is because integration is always. Raising barriers is easier and faster. There is no way to avoid chaos that Trump created, but that does not mean that his foolishness is bound to triumph.

Via The Economist*