Credit President Trump with a trade war. The risk is that he may be unable to reverse it.
The Peterson Institute warns that anxious foreign investors are beginning to shun the United States. Beyond that, retaliatory tariffs make our exports uncompetitive. We’re losing markets, some permanently.
Trump says tariffs protect American jobs. That’s only partly true. Tariffs protect some jobs, such as steel worker jobs.
That’s small comfort, however, for manufacturers of steel sheds. They’ll end up buying costlier American steel rather than pay the tariff on foreign steel. To compensate, they may lay off workers. And they’ll charge more for steel sheds.
In other words, a tariff is a tax on consumer goods. By one estimate, if the trade war intensifies, a family of four might have to pay $2,300 per year more for products they commonly buy. Ironically, Trump’s tariffs may wipe out much of the benefit of the 2017 tax reform act.
Tariff cheerleaders say we need tariffs to reduce the trade deficit. According to Nobel economist Milton Friedman, however, we shouldn’t worry about trade deficits.
To paraphrase Friedman: As our trade deficit increases, the dollar’s value decreases, making our exports more affordable. Foreigners will then buy more of our products and the deficit will decrease. Over time, the flow of dollars into the US will equal the flow of dollars out.
Here’s Friedman in his own words: “The best thing in the world is for all countries to engage in free trade. But even if other countries don’t, then the sensible, rational thing for us to do, all by ourselves, would be to unilaterally get rid of trade restrictions and say to the world, ‘Come and sell your goods here.’”
Friedman’s approach integrates nations through trade and promotes peace. Trump’s way depresses the global economy and alienates everyone.
Regrettably, a long overdue recession will soon collide with Trump’s trade war. When that happens, expect hard times.