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Trade Wars–The Epitome of the Circular Firing Squad

06 Jul 2018

Mr. Trump is apparently going to get his trade war, and I predict a colossal failure.  But this is one war I’ll be glad for the U.S. to lose.  Just as there is really no victor in war (in the sense that the lives that were lost are forever gone), so too will whatever trade distribution that results on the other side be a reduction in the gains from trade that free markets would have created.  Further, this is the one thing that will sink Mr. Trump’s presidency.  Above all, he needs to have the U.S. economy winning REALLY BIG when the next election comes around.  Thanks in large part to his support of markets with tax changes and deregulatory emphasis, the economy is smoking right now.  But this trade war has the likelihood of derailing all of the gains we’ve made.  It’s really hard for entrepreneurs and firms to plan when the President attacks allies for aluminum and steel tariffs and increases input costs for industries using those commodities 30-40%.  The most frustrating part for me as an economist is nobody thinks that is a good policy.  The best Mr. Trump’s defenders can say is that on the other side, after we kill China and they kill us, we’ll have a level playing field and then we’ll be better off.  I just ask those defenders, can you point to any trade war in all of economic history that leads to this beneficial outcome?  But Mr. Trump could care little for that, since “I want Tariffs.”

As just yet another example of his economic misunderstanding on this issue, consider Mr. Trump’s triumphant celebration for FoxConn bringing billions in foreign investment to Wisconson.

“That’s why this is so beautiful,” Trump said. “I’m pleased to report that Foxconn Intends to build 100 percent of the factory with beautiful American concrete and beautiful American steel, made right here.”

Yet Mr. Trump fails to understand the most basic of international economic accounting:  when China invests in the U.S., this leads to an increase in our capital account, which necessarily means that our current account will decrease.*  Translation:  we just got $10B in investment which means our trade deficit is going up by $10B!  For China to get $10B in dollars to invest here, they must sell us $10B of goods and services.  But Mr. Trump thinks trade deficits are bad, so I guess we lost by this Chinese investment–instead of cheering about these jobs, he should have been crying-if he consistently followed his own false logic.

So what is it about a person who wants to show how much tougher they are than their predecessors, and they spurn wise counsel and listen to those that tell them what they want to hear?  If Mr. Trump continues this folly, I predict he’ll suffer the same result as Rehoboam:

12 Then Rehoboam went to Shechem, for all Israel had come to Shechem to make him king. Now when Jeroboam the son of Nebat heard of it, he was living in Egypt (for he was yet in Egypt, where he had fled from the presence of King Solomon). Then they sent and called him, and Jeroboam and all the assembly of Israel came and spoke to Rehoboam, saying, “Your father made our yoke hard; now therefore lighten the hard service of your father and his heavy yoke which he put on us, and we will serve you.” Then he said to them, “Depart for three days, then return to me.” So the people departed.  King Rehoboam consulted with the elders who had [c]served his father Solomon while he was still alive, saying, “How do you counsel me to answer this people?”Then they spoke to him, saying, “If you will be a servant to this people today, and will serve them and grant them their petition, and speak good words to them, then they will be your servants forever.” But he forsook the counsel of the elders which they had given him, and consulted with the young men who grew up with him and served him. So he said to them, “What counsel do you give that we may answer this people who have spoken to me, saying, ‘Lighten the yoke which your father put on us’?” 10 The young men who grew up with him spoke to him, saying, “Thus you shall say to this people who spoke to you, saying, ‘Your father made our yoke heavy, now you make it lighter for us!’ But you shall speak to them, ‘My little finger is thicker than my father’s loins! 11 Whereas my father loaded you with a heavy yoke, I will add to your yoke; my father disciplined you with whips, but I will discipline you with scorpions.’” 12 Then Jeroboam and all the people came to Rehoboam on the third day as the king had directed, saying, “Return to me on the third day.” 13 The king answered the people harshly, for he forsook the advice of the elders which they had given him, 14 and he spoke to them according to the advice of the young men, saying, “My father made your yoke heavy, but I will add to your yoke; my father disciplined you with whips, but I will discipline you with scorpions.”

Mr. Trump is forsaking wisdom for folly, and we’re going to reap the whirlwind.


* Yes, there are adjustments that could take place either with either the exchange rate or international reserves, but those will not negate this broader reality–the capital account is generally the reverse of the current account, since the balance of payments must balance.