One of the first lessons in any microeconomics 101 class is the difference between comparative advantage and absolute advantage. The point of the lesson is that even though some countries may be better at producing multiple products, its best for them to specialize and trade with other countries. The basis of free trade, therefore, is instilled in the minds of generations of economics students. Tariffs and duties on goods are seen as generally harmful to all parties. These are the fundamental lessons of economics and these assumptions are what the remainder of the study of economics are largely built on. Enter U.S. President Donald Trump.
Trump recently announced his administration's intent to levy tariffs on steel and aluminum imports. Last Thursday, Trump kicked off what has been exaggeratedly called a trade war with this tweet: "Our Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world. We must not let our country, companies and workers be taken advantage of any longer. We want free, fair and SMART TRADE!"
He followed it up with several tweets in the following days, including these gems: "We must protect our country and our workers. Our steel industry is in bad shape. IF YOU DON'T HAVE STEEL, YOU DON'T HAVE A COUNTRY!" as well as: "When a country Taxes our products coming in at, say, 50%, and we Tax the same product coming into our country at ZERO, not fair or smart. We will soon be starting RECIPROCAL TAXES so that we will charge the same thing as they charge us. $800 Billion Trade Deficit-have no choice!" The final tweet is the coup de gras on free trade, "When a country (US) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don't trade anymore-we win big. It's easy!"
In short Trump is pretending to implement the trade war he promised he would during the campaign. Throughout his campaign, he specifically named China as the chief culprit in cheating the United States and that his policies would "level the playing field." The two tariffs that are about to be implemented, 25 percent on steel and 10 percent on aluminum, while substantial, are ironically not aimed at China. China's not even in the top-10 exporters of steel and aluminum to the United States. The main target here is Brazil, the chief exporter of steel to the United States, followed by Mexico and Canada.
If Mexico and Canada are a surprise, they should not be. The Trump administration is in the midst of renegotiating NAFTA, and these new tariffs will be a shot across their respective bows. Last week, talks were suspended and are scheduled to continue in April. NAFTA is too much a part of North American trade to be repealed altogether, but it may be modified. Trump's presidential win came via Ohio and Pennsylvania, both major steel manufacturing states. Trump needs to hold on to these states in the 2018 midterm elections that are coming up to help push his agenda in the final two years of his term to guarantee a second term.
In other words, everything Trump does is aimed at securing that second term. The ultimate equalizer, the second term will give him bragging rights and his ego that all important cap to what has been a successful, if controversial, business and political career.
The trade war is a huge bluff. The EU has threatened retaliatory tariffs and the U.S. has ramped up exports to China in recent years. Angering China is not an option, and Trump knows it. The trade war tweets are, however, great for the cameras. Trump will be tough on trade going into November and the Democrats will either have to agree with him and lose their base or oppose his tough stance and lose independent voters. Well played by Trump. If nothing else, he is a brilliant strategist.
Trump's National Economic Council Director Gary Cohn announced his resignation Tuesday and will step down as Trump's go-to economic advisor. It is a win-win all around, as Cohn looks good for resigning and Trump looks good for standing his ground. Politics as usual.
