Here we go again.
On August 7th, the United States placed new tariff rates on dozens of countries. These tariff rates are punishing. Mexico, China, and Canada, our three largest trade partners, will have tariffs of 25 percent, 30 percent, and 35 percent, respectively. Poor Brazil, a country with which we have a trade surplus, has a tariff rate of 50 percent. Across our top ten trading partners, who are responsible for more than half of US imports, the trade-weighted average tariff is roughly 26 percent. This is higher than any living American has witnessed. The last time tariffs were this high Archduke Franz Ferdinand was still the heir presumptive of the Austro-Hungarian Empire. If these rates hold we will see in real time what protectionism does to an economy.
The good news is the US is relatively self-sufficient. It may seem like nothing is made in the US, but this is a myth. The US only imports goods worth about 11 percent of GDP, far less than many countries. Because the vast majority of American goods are American made, at least when weighted by value, some industries will be relatively protected. Others will suffer.
There is a sense among some that this is more of the same. That these tariffs already happened in April and the sky didn’t fall, so we will be fine. This is false. Most economists were not predicting the “sky would fall”. Most were in agreement with my assessment that “At best, the tariffs will significantly decrease economic growth and contribute modestly to inflation. At worst, they will cause a global recession and increase inflation to Covid levels. It could be the worst year for the American economy in half a century.” One could reasonably argue this leaves a lot of wriggle-room, but given the president’s claim that tariffs will grow the economy, and the uncharted waters we are now in, I think it’s a fair assessment. It’s important to note that the entire range of possible consequences is negative. I don’t think there’s any way the tariffs help the economy or are even neutral.
Those who are claiming economists predicted disaster in April and were wrong then, so their fears shouldn’t be listened to now, are missing two important points. First, the economy doesn’t change overnight. It’s going to take time for the tariffs do harm the economy. I like to compare the US economy to a giant container ship, a behemoth that moves slowly but surely through the ocean. No one, not the captain or anyone else, can stop the ship quickly. It can slowly be turned, sped up, or slowed down, but this takes time. Spin the helm and the ship won’t change course immediately. Turn the engines to full stop and the ship will continue going forward. This is true of all large market economies, but doubly so of one as dynamic and resilient as the economy of the US. Remember, this is an economy that finished 2020, you know, that year the world ended, only two percent smaller than it started.
Second, and something even good economists like Jason Furman missed, the Liberation Day Tariffs never went into effect. With a few notable exceptions, almost every country saw the tariffs decreased or never put into effect in April. Most of the predictions being made, including mine, were contingent on the tariffs proposed by the Trump administration actually happening
With these new tariffs, and look to be more permanent barring judicial review, or Congress beginning to do its job, we can put a few rumors to rest. First, Trump does want tariffs. He does like tariffs. This is not a negotiating ploy or technique to try to put American exporters in a better position. As Trump has said many times and has believed since the 1980s, if a country exports more to the US than the US exports to them, then the US has been cheated. It has been taken advantage of. This is complete nonsense. The US has a trade deficit with tiny Lesotho, not because those dastardly Basotho1 are taking advantage of Americans. It’s because Lesotho is abjectly poor and can’t afford to buy much from America. They do have a lot of diamonds, which Americans like. Thus, the US buys more from Lesotho than Lesotho buys from the US.
It’s stupid to say that a trade deficit means one nation is taking advantage of another. It is also the underlying logic for how these tariffs are being determined for many countries. It stands to reason that if the proper tariff for the EU is 15 percent, then the proper tariff for Switzerland is also 15 percent. Unfortunately for the Swiss, however, they refine a lot of gold in their foundries, and thus have racked up a large trade surplus with the US. In yet another level of stupidity, that gold will not be subject to the new tariffs, so even with the massive 39 percent levy the US has placed on Switzerland, the main industry responsible isn’t going to pay a dime.
We see this capriciousness again and again. Even if the underlying logic was sound (it isn’t), targeting countries by a consistent set of rules would be one thing. But we see loopholes pop up again and again. A can of beer from Belgium, for example, would have a 10 percent tariff on it. Except that the aluminum can the beer is in has a 50 percent tariff on it. Except that if the location where the aluminum is “smelted and cast” isn’t known, then the tariff is 200 percent.
Some of these ifs, ands, or buts are going to hurt the very industries they are designed to help. I think Trump would love to give a boost to American auto manufacturers. Under the new tariff regime, cars that are made in Japan will now face a 15 percent tariff if they are exported to the US. This, all else equal, would help US auto manufacturers. We are not in an all else world, however. Remember, there is a 50 percent steel and aluminum tariff as well. So if a Chinese factory produces steel, the largest component by weight of a car, that steel can be exported to the Japanese car company tariff-free. Meanwhile, an American car company has to pay a massive 50 percent tax. Thus, cars made in Japan are now relatively cheaper than their American counterparts were before the tariffs. This is not good, and hurts the very manufacturers tariffs are supposed to help.
We now live in a world of tariffs. It will likely take a few months, but the pinch is coming. I repeat my statement from April. At best, the tariffs will be a drag on growth and modestly increase inflation. Not the end of the world. But not what you want as a best-case scenario.
The plural demonym for people from Lesotho - who knew?