Michael Strain writes for the Financial Times about the impact of the president’s approach toward tariffs.
“Liberation day” has arrived. Unfortunately, it threatens to liberate Americans from robust real wage growth, low unemployment and a good chunk of their retirement savings.
Trump’s tariffs are an economic emergency. If implemented, the US’s average tariff rate would be higher than under Smoot-Hawley. They would constitute the largest tax increase since the 1968 levies to fund the Vietnam war. Our trade partners would retaliate. By raising taxes and prices, they would erode household income and spending. Business investment spending and US exports would be hit hard. If sustained, this trade war would be likely to cause a recession.
And for what? Around half of US imports are intermediate goods used domestically to produce final ones. High tariffs raise the costs of production for US companies, hurting competitiveness. Take steel. For every one job in US steel production, there are 80 that use steel in production. Trump’s tariffs might indeed help that one steel producer, but they will hurt the 80 others by reducing the competitiveness of their employers.
The economists Aaron Flaaen and Justin Pierce estimate that during Trump’s first-term trade war, the manufacturing employment losses from higher input prices were five times as large as the gains from import protection. In addition, the losses from retaliation were nearly three times as large as gains from import protection.
Already, prominent companies are responding to economic reality. Ohio-based steelmaker Cleveland-Cliffs announced last week that it was laying off 600 workers in Michigan and 630 in Minnesota in order to mitigate falling demand due to Trump’s tariffs. Over the week ending April 1, the company’s share price dropped by 11 per cent.
Vice-president JD Vance argues that Trump “believes in economic self-sufficiency”. Well, to see the benefits of economic self-sufficiency, look to North Korea. Still, Vance is right. Trump is a true mercantilist who views trade deficits with hostility.
