Did Trump expect countries to succumb to his tariffs?

CGTN Published: 2018-07-12 21:22:25
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By Walid Hejazi

I was at an international business and economics conference last week in Minnesota. The trade actions taken by President Trump were an affront to the theory and evidence discussed. It has been repeatedly said that economists do not agree on most things, but free trade is a subject on which they do agree.

U.S. President Donald Trump [File photo: Xinhua]

U.S. President Donald Trump [File photo: Xinhua]

The strategy taken by Western countries since World War II, led by the United States, was that of open borders and diplomacy. By all accounts, it has been a win-win scenario for most of the globe. Not only has such openness to trade delivered significantly enhanced incomes for people across the world, it has also reduced the tendency for war as countries that trade are less likely to go to war.

President Trump has opted to move away from this equilibrium of openness by unilaterally imposing tariffs on his country’s trading partners. The trade-war outcome occurs when other countries retaliate, with the cycle repeating itself. This spiral into protectionism is without a doubt a lose-lose scenario economically, and is the path on which the global economy has now embarked. A similar move to protectionism in the 1920’s was an important contributing factor to the Great Depression.

But there is also a third scenario, one where the US imposes tariffs and no other country retaliates. In this scenario, the US would benefit and all other countries would lose. Here’s the big question. Was it rational for President Trump to believe that no other country would retaliate? Did he really expect all US trading partners simply to take it? That is, did he expect this third scenario?

The US President has a view of the world that is at least 30 years outdated. He believes that countries need to have a trade relationship with the US in order to be wealthy. His administration has threatened Canada, Mexico, the European Union and China with tariffs on steel and aluminium unless these trading partners yielded to his demands on enhanced terms for US exporters. Other world leaders are most reluctant to yield to such pressure tactics, as that would be political suicide domestically. Trump may have believed the negative impact of restricted access to the US market would override such domestic political considerations. He was mistaken. US trading partners have stood their ground, and have not succumbed to pressure. This is where Trump may have miscalculated.

While it is certainly true that many exporters to the US now have the incentive to move production into the US to avoid tariffs, the same is happening to US exporters. For example, Harley Davidson has announced that it will move production out of the US to avoid tariffs that will be applied to its motorcycles. This is similarly the case for a wide array of US products. But not all production and products can be moved abroad, namely agriculture – China and other US trading partners have targeted pork, dairy and soya bean exports along with many other agricultural products. Rather than import these products from the US, foreign countries will now import from non-US suppliers, including Brazil, which are not subject to the retaliatory tariffs.

Economic analyses and history have demonstrated that the US will no doubt lose more “economically” than it gains from these trade actions. The question then becomes was President Trump rational in his actions?

Today the United States is an incredibly polarized society. While the country as a whole has benefited from the post-World War II global order, many citizens within the country have benefited to a lesser extent. In recent decades, many families suffered as factories were shuttered and manufacturing moved out of the country. In order for Trump to win from these trade actions, the US economy overall does not have to gain. Rather, to win, only those in the President’s base must win.

The retaliatory tariffs being applied against the US, soybeans, corn, dairy products, Kentucky bourbon, and Harley Davidson, among others, are being directed at Trump’s base. They will surely lose on net. But there are other policies that will mask these loses: including the massive tax cuts and deregulation taking place. As a result of these policies, the economy has added many jobs. Mixing these trade actions in with these other policies has allowed Trump to sell to his base that tax cuts and getting tough on trading partners is making America great again. And this strategy seems to be working. His support among his base and within the Republican Party is as strong as ever

In exactly the same way that the political pundits underestimated Donald Trump in his run for president, they may be underestimating him in this trade strategy. There is no doubt that these policies in the long run are harmful to the US and to the global economy. 

Walid Hejazi is the Associate Professor of International Business, at Rotman School of Management, University of Toronto. The article reflects the author's opinions, and not necessarily the views of CGTN.

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