Comment: Real dangers loom with Trump’s incoherent trade policy

By Robert Burgess / Bloomberg Opinion

Last week we learned that the reason it’s hard to define the goal of the Trump administration’s trade policy is because there really isn’t a coherent goal.

Is it about reducing the U.S. trade deficit? Is it about raising revenue to pay for an extension of the Tax Cuts and Jobs Act of 2017 that expires later this year? Is it about gaining diplomatic leverage in other negotiations such as border security?

Whatever the policy objective is, it’s unlikely to benefit either U.S. debt and deficits or the bond market.

Here’s what President Trump wrote in a social media post as he prepared to impose 25 percent tariffs on goods coming into the U.S. from Mexico and Canada at midnight last Tuesday: “MAKE YOUR PRODUCT IN THE USA AND THERE ARE NO TARIFFS! Why should the United States lose TRILLIONS OF DOLLARS IN SUBSIDIZING OTHER COUNTRIES. …”

So, it’s clear that the use of tariffs is about fixing whatever perceived trade imbalance the U.S. has with Mexico and Canada, its two largest trading partners. Makes sense. But Kevin Hassett, director of the White House’s National Economic Council, said no, that’s not it at all. “This is not a trade war, this is a drug war,” he told CNBC. Maybe he’s right? Because Mexico and Canada made some token concessions regarding security at their borders with the U.S. on Monday and Trump promptly put the tariffs on hold. Talk of tariffs as a revenue generator barely came up.

There are two takeaways here. The first is that White House trade advisers surely realize the contradictory nature of Trump’s tariff talk and should be giving him an earful on the matter. Trump has said such levies on foreign goods — paid for by U.S. citizens — would raise the funds necessary to pay for an extension of the Trump 1.0 tax cuts, which the Congressional Budget Office estimates would cost $4.6 trillion over the next decade.

The flip side is that tariffs make imported goods more expensive. In the midst of Monday’s mayhem, major grocery wholesaler Associated Wholesale Grocers Inc. sent a warning to the 1,100 U.S. retailers who are its customers to get ready to pay 25 percent more for goods from Mexico and Canada. It’s also estimated that the average price of a car could shoot up by some $3,000. Given that U.S. consumers have been complaining about the high prices of food and other goods due to the elevated inflation coming out of the pandemic, this would give them even more incentive to cut back or seek out cheaper alternatives (assuming that price gains aren’t tempered by foreign-exchange adjustments such as the dollar getting stronger and the currencies of the targeted countries weakening).

If U.S. consumers do cut back, the tariffs won’t raise nearly as much as envisioned by Trump to pay for an extension of the Tax Cuts and Jobs Act. The upshot is more debt and wider budget deficits at a time when U.S. borrowing already tops $36 trillion and government spending exceeds revenue by $1.8 trillion annually, or almost 6.4 percent of gross domestic product.

Here’s how David Kelly, chief global strategist at JPMorgan Asset Management, put it in a recent note to clients:

“Based on data through November, total U.S. goods imports last year were roughly $3.3 trillion, suggesting a crude first pass of $330 billion in annual revenue from an additional 10% universal tariff on all imported goods. However, this figure would be significantly reduced to (1) account for reductions in the volume of imports due to higher prices, (2) the negative impact on GDP from retaliatory tariffs on exports and (3) the potential for tariffs to increase inflation and thus interest rates. In addition, if the federal government were to try to compensate exporters for the impact of retaliatory tariffs, as was the case under the first Trump administration, the net budget savings would be further reduced.”

If that isn’t enough to rouse bond vigilantes, then consider that Trump’s bullying of our closest trade partners and allies surely has nations around the world figuring out how to diversify away from the U.S. in case they become the next target of tariffs; further shrinking Trump’s hoped-for tariff revenue. Canada is already looking for ways to decouple its oil business from the U.S. and send more crude to Asia, according to Bloomberg News. And the European Union, which may be Trump’s next target for tariffs, struck a deal with four South American countries in December to create one of the world’s largest trading blocs.

Add to this mix the fact that exporters to the U.S. will also look for ways to evade the duties; much as they did in Trump’s first term. Trump’s “threats and executive orders so far suggest the emphasis right now is more on negotiating leverage,” Bloomberg Economics wrote in a report Tuesday. “This approach is less suited to raising fiscal revenue, as it allows imports to be directed away from tariffed routes, eroding the revenue gain from the increase in the rates.”

What few seem to be talking about is how trade plays a key role in allowing the U.S. to carry so much debt and wide budget deficits. Trump’s media posts show that he equates U.S. trade deficits with somehow subsidizing other economies. But the opposite is true. As Nobel laureate Paul Krugman has described in his Substack, America buys goods and services at cheap prices that can’t be replicated in the U.S., and, in return, our trading partners get an IOU in the form of U.S. Treasury securities. So it’s really America’s trading partners that provide a subsidy via cheap imports and lower borrowing costs.

“In the end, Trump’s tariffs are about generating revenue at the risk of upsetting the global capital flows necessary to fund the U.S. economy,” TS Lombard Chief U.S. Economist Steven Blitz wrote in a research note dated Feb. 4. “The current stable system of global capital flows that runs alongside goods flows may yet be challenged if Trump’s tariffs break the ordered flow of goods.”

Or as Krugman explains, both running trade surpluses and attracting vast sums of foreign capital is arithmetically impossible, since a nation’s trade balance plus net inflows of capital broadly always equal zero. That’s why it’s called the balance of payments; it always balances. Plus, as Krugman notes, there’s no evidence that a trade deficit eats into economic growth. He points to the period between the mid-1990s and around 2005, when the trade deficit blew out and yet GDP averaged a strong 3.4 percent even when including the recession that followed the bursting of the dot-com bubble.

Running a trade surplus may sound appealing and suggest economic success, but that can be misleading given the balance of payments equation. So when nations go from a trade deficit to a trade surplus, it can often be for bad reasons. As Krugman has noted, when some southern European countries faced a debt crisis just over a dozen years ago, they flipped from a trade deficit to a surplus. But that wasn’t because they suddenly started exporting more than they imported, but because capital stopped flowing in, forcing a sharp pullback from imports.

The reality is that the U.S. relies on foreign money to finance its expanding debt pile and bulging budget deficit. Granted, both need to be addressed, but entering into trade wars isn’t the answer. Framing trade as either good or bad depending on whether America is running a surplus or a shortfall with its allies risks turning an increasingly perilous fiscal situation into a true crisis.

Robert Burgess is the executive editor of Bloomberg Opinion. Previously, he was the global executive editor in charge of financial markets for Bloomberg News.