National Conservatives and MAGA supporters have been crowing about how successful the Trump trade deals have been. “Are you tired of winning yet?” they ask. Look at all the tariff revenue. And the economy hasn’t crashed. And these countries have agreed to put hundreds of billions of dollars into the economy. What do the economists really know anyway?
Well, economists know that we live in a world of constraints and tradeoffs. We know that the economy is big and complex. We know that policy nearly always creates unintended consequences — sometimes very large and very negative consequences. And we tend to pay attention to incentives and interests. With that in mind, what could possibly be wrong with Trump’s tariffs and trade deals?
How would the economy be doing without all of President Trump’s other pro-growth policies — deregulation, increased energy production, and extending tax cuts?
We would do well to consider a hypothetical world without the tariffs. We might have seen 4-5 percent GDP growth last quarter rather than 3 percent if there had been no tariffs. Or to frame it another way, how would the economy be doing without all of President Trump’s other pro-growth policies — deregulation, increased energy production, and extending tax cuts? The economy would almost certainly be in a recession without these other policies. And this is where many critics of the tariffs, such as Larry Summers, took a big misstep.
They predicted that the sky would fall and another Great Depression would come with Trump’s tariffs. That doesn’t seem to be happening. Yet we are also in the early innings of the new tariff regime and have yet to see all of its effects on growth, employment, and productivity. Although last Friday’s dismal jobs report and significant downward revision in job creation in May and June suggest this cheering may have been premature.
Comments about how much tariffs benefit American “producers,” “workers,” or “companies,” are gross overgeneralizations. Many American companies — including companies building and producing stuff — suffer from higher tariffs. There is also the question of how the tariffs will reshuffle the global order. Trump may have gotten the terms he wanted for now, but what about in two years? Or what about for the next administration?
Companies and countries that seem to be cozying up to this administration are no doubt thinking through how to make their supply chains more robust in the face of unpredictable policy out of Washington — just as U.S. companies had to rethink their supply chains post-COVID with the unpredictability of the CCP’s trade policies.
And of course, these trade deals have the enormous gimmicks — I mean commitments — of foreign spending and investment in the United States. Japan has “committed” to paying $550 billion in investment in the U. S. for the federal government to direct towards “America’s strategic industrial base.” And the European Union has committed to buying $750 billion in energy from the U. S. and investing $600 billion in the U.S. President Trump loves to tout these commitments, but what will we get at the end of the day?
But these commitments are not legally binding. Nor do countries buy and invest in the U. S. — companies do. Can the European Union government really force its private companies to purchase quotas of U.S. energy or meet quotas of investment in the U.S.? That doesn’t seem likely… In Japan’s case, the investment money will primarily come from additional borrowing by government and quasi-government entities. What if they have a hard time raising that much capital?
Then there is the question of whether these commitments represent any significant change from before. If a company, such as Johnson and Johnson, already invests tens of billions of dollars annually, then “commits” to investing $55 billion over the next three years under pressure from Trump, has the president really generated $55 billion in new investment for America? Hardly.
The same holds true with these trade agreements. Companies in these countries already do a tremendous amount of business and investing in the U.S. The headline numbers are not nearly as impressive when we recognize this.
Finally, talk is cheap. It was easy for OpenAI and Softbank to announce a $500 billion “Stargate” investment project. Standing up data centers and deploying billions in capital has been much harder. And this big project has already been walked back only six months later. Trump probably won’t point this out — he got his political gain from it already.
These trade deals will likely follow the same pattern. Trump gets attention, accolades, and credit for being a master negotiator and for defying the laws of economics. The American people get so many empty commitments that will likely never materialize.
Trump has gotten better terms for U.S. exporters, but only at the steep price of massively higher tariffs on imports for everyone else. Like with any policy or tax, we know that consumers will ultimately lose more than the winners (including the federal government) gain. If the July jobs report is a precursor of what’s to come, consumers could potentially lose a lot more.
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