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GELFAND’S WORLD - What the Republicans called Liberation Day will turn out to be anything but.
Due to Donald Trump's new tariffs, we will be going into a recession that could be avoided. There will be increased unemployment and increased inflation. None of it should happen.
Even now, much of it can be avoided if only the congress would act. But to do so, both houses would have to pass a law undoing the new tariffs, and they would have to pass it by a two-thirds vote.
Seems unlikely.
But it's on them now. Which means that it is on the Republican Party as to whether this nation suffers economically or continues in its recovery from the Covid years.
As of this writing, stock markets have been in free fall, but this is just one indication of the damage. All over this country, people are guesstimating what the economic damage will be to them personally, whether it's the price of appliances from Korea or clothing made in China. A substantial part of our expenses go to imported items.
It gets worse. It turns out that Trump's reasoning is irrational, the unschooled product of a troubled mind. Let's consider:
Did you notice that the foreign "tariff" numbers Donald Trump was presenting were totally bogus? For example, China is accused of charging a 67% tariff on American goods. Multiple sources are now reporting that the Trump administration used a completely different way of calculating what ought to be a simple reporting task. I mean, if you want to know what tariff some country applies to California grapes, you should be able to look on the published list and find it. A tariff is just a tax that a country charges on some imported item.
Instead, Trump based his tariff estimate on something that isn't a tariff at all. The following description for what the White House actually did will make "Voodoo Economics (George H. W. Bush's description of supply side economics) seem like the height of rationality. Basically, the White House looked at our imports from each country and then looked at our trade imbalance with that country (how much less we exported to them). It divided the latter by the former, to come up with a percentage value for the trade imbalance. They called it a tariff, even though it has nothing whatsoever to do with a tariff.
You could sense that there was something weird when Trump held up a chart during his speech and described the "tariff" number for each country as being the sum of the actual tariff along with something called "currency manipulation" and a third number for what economists would refer to as non-tariff trade barriers. Notice that the latter two numbers are not numbers at all, but just vaguely formulated concepts.
But Trump held up that poster and represented those numbers as mathematical certainty.
If you would like a full description, you can read one here or here. In essence, Trump views the balance of trade deficit as some sort of "tariff" and this is the number he was using in his address on Wednesday, April 2.
It didn't take long for the reality to surface. By Thursday morning, you could hear the details (told by David Lazarus) on Channel 5. As he explained, it will be hard for foreign countries to negotiate with the United States when the American position is phony. Where could the negotiations start?
There is actually a believable explanation for Trump's thought process from the conservative site the National Review. In brief, Trump seems to have adopted mercantilist nonsense a long time ago and doesn't understand enough to change his mind.
The president's address on tariffs was convincing if you don't know anything about economics, don't remember anything going back to the '70s, and share Donald Trump's angry, cynical, and paranoid view towards the rest of the world. That having been said, it's unfortunate that Trump got to take credit for pointing out issues like non-tariff trade barriers since they do exist, at least in some places.
As for the argument about currency manipulation, I'll leave that to the economists to judge, but you should also notice that there is an open market in most western currencies. Just go to Xe to see how the exchange rate for the Dollar vs the Euro varies from day to day as a function of all kinds of things. For example, the dollar weakened a couple of percent between Wednesday and Thursday due to the Trump tariff announcement.
There is one more thing we might think about. According to the above linked article on Trump's way of thinking, he views the trade imbalance as foreign countries stealing from us. Unless you are stuck in some 15th century mercantilist mentality, you should realize that Trump is exactly wrong. One example should suffice:
Let's consider the fact that we buy oil from overseas, and used to buy even more. Let's also suppose that we pay for that oil by printing money and using it to pay Saudi Arabia and Kuwait. We could continue to import oil and print money forever, as long as Saudi Arabia and Kuwait allow it to happen. As numerous conservative economists have pointed out, under that scenario we get the oil to use and they get paper. If they don't redeem that paper for real goods and services, then in effect, we are stealing from them. We took oil and they gave it.
On the other hand, if you were a Spanish monarch in the year 1500, you might think of wealth as being equal to accumulated stocks of gold rather than wheat and wine and horses. The idea of mercantilism has been obsolete for ages, certainly since the days of Adam Smith and David Ricardo. For some reason, Donald Trump seems to hew more to the mercantilist idea than to modern economic thought.
One more issue: Let's suppose that we could be sure that the tariffs would remain in place for the next 12 years or more. In that case, American companies might very well develop new manufacturing capabilities. It takes a long time to develop manufacturing capacity. You have to decide to build it, do the design and engineering, get the land, and do the construction. Then there is the issue of training the workforce. Of course, prices would double or triple, and the world would be poorer.
It's curious that American conservatives love to speak lovingly of "free markets," but have supported Trump over the past 8 years. I can also remember conservative talk show hosts speaking patronizingly of people needing to learn Econ 101. Let's remember that the world has been inching towards freer trade and lower tariffs for the past century. To use that most appropriate word, it's weird that Donald Trump is now attempting to reverse that trend.
(Bob Gelfand writes on science, culture, and politics for CityWatch. He can be reached at [email protected])
