Biden and Trump on Trade

The trade policies of U.S. presidential candidates Joseph R. Biden and Donald J. Trump differ in tone more than in substance. Both would like to reduce U.S. economic interaction with the rest of the world. The largely negative impact of their policies are analyzed below, but unfortunately such analyses will play little to no role in the election this November because not one voter in one hundred understands them. Even if most Americans read and grasp this article, U.S. presidential elections turn on payments to voters, not the impact of potential policies. As usual, foreigners will suffer due to the vagaries of American electoral politics.

Before introduction of the Australian or secret ballot around the turn of the twentieth century, politicians for high office in America often paid for votes with cash or rum punch. The destruction of the secret ballot in 2020 via mass mail-in voting has revivified the direct approach in some states, under the euphemism of “ballot harvesting.” Buying the votes of most swing voters, those not blinded by partisan rage or unbendable ideological convictions, however, remains an indirect process. Politicians promise payments to broad groups and are judged during the next election in part based on how well they fulfilled those obligations.

President Biden, for example, pledged to reduce student loans, the debts that many Americans accumulate to attend, and sometimes graduate, from the nation’s many fine, overpriced institutions of “higher learning.” Although thwarted by the Supreme Court in his first attempt, Biden has taken a new tack so that he can fulfill his promise and garner millions more votes.

Similarly, former president Trump promised to erect a wall along America’s long border with Mexico. Only portions of the promised wall were completed during his administration, however, purportedly because he wanted to leverage the immigration issue during his 2020 re-election campaign. Were it not for the Covid catastrophe and his acquiescence to disastrous lockdown policies, the tactic may have worked because the wall’s implicit promise of higher wages and employment levels for low-skilled workers was in fact being fulfilled in the final two years of his term.

This time around, Trump’s promised trade policies also promote the interests of tens of millions of relatively uneducated and unskilled Americans, who have been killing themselves with alcohol, drugs, and guns in prodigious numbers for more than a decade. “Deaths of despair” they have come to be called. Trump’s high tariffs, the forlorn and forgotten imagine, will create high-paying manufacturing jobs for Americans with at best a so-so high school education.

To the extent that high tariffs increase employment for America’s relatively most unproductive workers, the prices of everyday items will increase, roughly by the amount of the tariff, like the 100 percent Trump called for on Chinese cars made in Mexico, the 60 percent he has floated for all Chinese goods, or the 10 percent he has suggested slapping on all imports.

America has imposed tariffs over 50 percent only twice in its history, a century apart. Both times it spawned retaliation, the first time by one of its own states, setting off the Nullification Crisis of 1832-33, which nearly led to civil war, and the second time by much of the rest of the world, further deepening the downturn we now call the Great Depression. A recently released movie has raised the specter of a new American civil war (though without delving into its causes, other than a hated POTUS), and further increases in the price level could institutionalize inflation and stagflation, as it almost did in the 1970s. Yet, Trump claims not to care about retaliation. An American autarky, after all, would certainly raise employment, his stated goal.

Tariffs and other trade barriers might not lead to as many jobs, or as many “good” jobs, as Trump and nationalist conservative pundits purport. If cut off from foreign workers by trade walls and border walls, U.S. manufacturers might choose AI-enabled robots over America’s unskilled masses, who have lost their former reputation as honest, hardworking folk. That will especially be the case in states with binding, high minimum wage laws.

At one time, states set their own minimum wages at, or below, the national minimum wage. As inflation whittled away the purchasing power of the national minimum wage, states and even municipalities began to pass their own, higher minimum wage laws. Such policies remain popular in some places even though, or perhaps because, wage price floors hurt the poorest and least skilled workers by reducing the number that employers want to hire. Employers subject to higher minimum wages work the people they do hire harder, or replace them with cheaper undocumented workers or machines perfectly capable of cleaning floors, taking food orders, and even doing inventory.

If protected by high tariffs or low quotas, U.S. manufacturers will begin operations in, or relocate to, areas with the lowest minimum wages and sufficient workforces. That will help those who already own land or service businesses in those states, but no more than it will hurt landlords and business owners in the high wage states that are already experiencing relative, and even absolute, population loss.

In fact, to a large extent tariffs, quotas, and nontariff barriers, like regulatory mandates, simply redistribute wealth away from American consumers and towards U.S. manufacturers and the national government. In the process, trade restrictions also reduce overall wealth by creating what are called “Harberger triangles,” or deadweight losses.

Tariffs create two such deadweight losses, or reductions in wealth that no one else gains. The first are losses to consumers who cannot afford to pay the price of the imported good plus the tariff, or the equally overpriced U.S.-produced equivalent. The second are the social losses associated with the production of goods at costs higher than would be incurred in a globally competitive market.

Both deadweight losses grow in direct proportion to the size of the tariff. They were quite small during the heyday of globalization and the WTO in the 1990s and 2000s but under Trump’s plan would grow to unprecedented size. Domestic manufacturers, and their workers, would gain from 60 percent tariffs, in other words, but America would be poorer for it to the extent that goods markets are globally competitive.

Trump and his acolytes, however, argue that Americans have enough buying power to force foreign manufacturers to suffer the brunt of the taxes. In other words, they assert that America, in the lingo of international trade economists, is a “large” country that can set prices, not a “small” one that must take prices established by global supply and demand conditions. American consumers do appear to have some monopsony power in certain markets, so Trump is not entirely wrong when he claims that his agenda would “tax China to build up America.”

Moreover, the political calculus for claiming to tax foreigners is irresistible. The U.S. state governments that do not tax the income of their residents all tax out-of-state visitors to their tourist attractions (like Florida, Nevada, and South Dakota), or they tax the energy sources beneath their feet (Alaska and Texas). Politicians in those states can buy votes with increased expenditures without increasing taxes on their voters or running large deficits (which most state constitutions no longer allow).

To keep its large war machine and welfare state afloat, however, the U.S. national government needs much more money than it could possibly raise from tourists or energy or land leases. Unlike state governments, though, it can appease both taxpayers and supplicants by running budget deficits financed with Treasury bonds and U.S. currency.

Those deficits, and along with them the U.S. national debt, however, have grown to monstrous proportions, sparking legitimate fears that neither Americans nor foreigners will want to hold as many U.S. dollars or as much Treasury debt as U.S. politicians want to supply. Talk of a BRICS currency union and high yields on Treasuries portend trouble to come if the U.S. government’s voracious appetite cannot be brought to heel, and sooner rather than later.

No U.S. presidential candidate would dare discuss cutting government expenditures or raising taxes in a realistic way. (Some call for taxing the rich but numerous studies have shown that the truly wealthy are not numerous or rich enough to be of much help.) A tariff that would fall on foreigners is therefore very appealing.

Increasing revenues significantly through tariffs, however, is unrealistic, if for no other reason than that they would invite retaliation in direct proportion to their effectiveness. Claims to the contrary notwithstanding, U.S. businesses export billions of dollars of physical goods every year and the country actually runs a sizable services surplus. While tariffs would help U.S. businesses in competition with foreign imports, they would hurt U.S. exporters just as much, thus reducing the corporate taxes they pay.

Moreover, to the extent that Trump’s tariffs help American manufacturers and workers, they will hurt Chinese manufacturers and workers. That may not be a wise geopolitical strategy given that America’s real rival appears to be the Chinese Communist Party (CCP), not Chinese workers or businesses. To the extent that Chinese workers and businesses understand that their problems stem from the trade policies of the U.S. government, they will increase their adherence to the CCP. America’s foreign policy interest lies in driving a wedge between the CCP and the Chinese people, not uniting them against a common American enemy.

Biden did not increase Trump’s tariffs but he did not reverse them either. Instead, Biden has increased nontariff barriers, especially by insisting that foreign producers increase environmental regulations. Whatever the intention of such regulations, their economic effects are similar to those of tariffs except that they do not generate revenue for the U.S. government. They do, however, protect U.S. manufacturers and their employees at the expense of U.S. consumers and foreign manufacturers and their employees.

The world has experienced two periods of relatively low international trading costs and high volumes of global trade. Both were periods of peace and prosperity. The first ended with the Great War, which in turn led to the Great Depression and a second world war. The second period of globalization ended with the subprime mortgage crisis and Great Recession and could be headed toward another major international conflict.

Although international trade does not guarantee peace, it does tilt the odds in its favor. Instead of tariffs and green trade barriers, U.S. policymakers should improve the competitiveness of American manufacturers by lowering taxes and unnecessary regulatory costs and improving the efficiency of the nation’s costly yet subpar educational and healthcare sectors.

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Free the People publishes opinion-based articles from contributing writers. The opinions and ideas expressed do not always reflect the opinions and ideas that Free the People endorses. We believe in free speech, and in providing a platform for open dialog. Feel free to leave a comment!

Robert E. Wright

Robert E. Wright is the (co)author of two dozen books, including Fearless: Wilma Soss and America's Forgotten Investor Movement. All views his own.

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