I have been thinking about writing a post on the discourse surrounding President Trump’s tariffs for some time. After considering it I have decided that would be simplified by defining some terms, particularly regarding things like “free trade”, “comparative advantage”, etc. This post is an attempt at those definitions.

I’m going to use the word “trade” in the sense of imports and exports to/from other countries.

There are, basically, three styles of trade:

1. Free trade
2. Managed trade
3. Autarky

The term “free trade” is used pretty loosely. To the best of my knowledge no country on the planet has truly free trade. Genuinely free trade means

• It applies both to trade in goods and trade in services.
• No tariffs or quotas
• No occupational licensing, intellectual property law, or the like

I don’t advocate truly free trade but that’s what it means possibly because that’s what it means.

“Autarky” means self-sufficiency, i.e. no foreign trade. There are only a few countries that might succeed at being autarkies, e.g. the U. S., Russia, China, and India. However, autarky practically by definition makes the country that is an autarky poorer than it otherwise might be and, indeed, that has been the experience of countries that practiced it.

That’s why I advocate managed trade but our present managed trade is perverse. We protect some goods and services while subsidizing imports. We subsidize imports by imposing regulations (health, labor, safety, environmental, etc.) on the goods we produce (which increases their costs) but not limiting our imports to countries that have regulations on goods production as strict (or stricter) than our own. I should point out that that’s why it makes sense (from their point of view) for EU countries to impose tariffs on goods imported from the U. S. since their regulations are stricter than ours.

The net effect of that is to benefit protected service-providers. That many of those protected service-providers, e.g. physicians, lawyers, etc., are in the top 10% of income earners while many of those in the goods-producing sectors of the economy that compete with imports are in the bottom 10% of income earners is why I see our system of managed trade as perverse.

The short version of “comparative advantage” is the countries should produce the goods and service they are able to produce better and cheaper than other countries are. The longer version of comparative advantage enunciated by David Ricardo more than 200 years ago is that trade between Country A and Country B makes sense even when everything produced by Country A is more expense than the same good or service produced by Country B so long as there is a relative difference between the prices of the competitive products or services. The additional complication is that although I doubt that 1% of Americans understand that argument I suspect that nearly 100% of Americans understand buying what’s cheaper.

It should be noted that comparative advantage only applies when the means of production are not portable from one country to another. The portability of the most significant factors of production, i.e. capital and labor, today makes comparative advantage a lot less important than it was 200 years ago. And, of course, our system of managed trade subverts comparative advantage.

What do you think of the three recent SCOTUS “emergency docket” actions? The editors of the Wall Street Journal remark on the decisions.

The three cases are:

• Donald J. Trump v. J. G. G. et al (5-4): an application to vacate the lower court ruling on removal of non-citizens to El Salvador
• Pause of an order by a lower court judge to reinstate fired federal employees (7-2)
• Administrative stay on decision by lower court judge to return a man erroneously deported

The editors conclude:

This will reduce cases that come before the Court on its so-called emergency docket and give different lower courts an opportunity to consider the merits before Justices do. The resounding and useful message to lower courts is to stay in your lane.

Unmentioned is that the first two actions were not taken along partisan/ideological lines.

At the Wall Street Journal Matt Grossman, Anthony DeBarros, and Konrad Putzier have an informative piece on the peculiar way in which the Trump Administration is calculating “reciprocal tariffs”:

A White House handout called these costs a tariff charged to the U.S., “Including Current Manipulation and Trade Barriers.” From there, in nearly all cases, the Trump administration imposed new “Discounted Reciprocal Tariffs” of roughly half that result.

“Drop your trade barriers…and start buying tens of billions of dollars of American goods,” Trump said Wednesday.

Several economists said that basing tariffs off of bilateral goods deficits is confusing and illogical.

and

Data sleuths on social media soon reverse-engineered the formula behind the White House’s calculations, zeroing in on the trade-related math. Dividing the U.S.’s 2024 goods-trade deficit with China—$295 billion—by the amount the U.S. imported from China resulted in the White House’s 67%.

The Wall Street Journal followed calculations highlighted in postings on social media, including by journalist James Surowiecki, a former business columnist for the New Yorker. The Journal found the calculations explained the costs attributed to nearly 100 countries, including all of the European Union, which the White House treated as a single bloc.

Read the whole thing.

Other commentators have pointed to the complexity of administering and enforcing such tariffs. I’ve already expressed my opinion—that China’s actions are in a class by themselves, were it up to me I would only impose tariffs on goods imported from China, and my tariffs on Chinese goods would be much, much higher.

The graph above illustrates the values of the S&P 500 stocks over the last year. Pretty clearly the market does not love President Trump’s tariffs. Here’s a sampling of opinion from across the spectrum.

New York Times

Tom Friedman, David Brooks, and Steve Rattner all have pieces against the tariffs.

Most critically, Trump might learn from the fallout of previous attacks on the global trading system. Trade today amounts to a much larger share of economic output than it did in the 1930s, when the Smoot-Hawley Tariff Act exacerbated the economic losses of the Great Depression. Yet Trump’s new levies bring the average U.S. tariff back to where it was in 1933.

Misconceived as Trump’s tariff barrage might appear to an economist’s eye, it hews to an underlying logic about the exercise of power. Regardless of their effects on production or employment, Trump’s tariffs will compel companies across the economy and countries across the world to seek a deal with America’s leader. This seems to be Trump’s only realistic goal.

Fareed Zakaria

The reality of America as the dominant nation in the fastest-growing and most critical spheres of the global economy today — technology and services — seems to mean nothing to him. His tariffs have been calculated using a method closer to voodoo than economics. Among many mistakes, they are based solely on U.S. trade deficits with countries in goods. That the United States runs huge surpluses in services — exporting software, software services, movies, music, law and banking to the world — somehow doesn’t count. More than 75 percent of the U.S. economy is apparently intangible fluff; steel is the real deal.

Megan McArdle

None of these theories work, and that’s because Trump doesn’t really have a theory of tariffs. What he has is a series of intuitions: that exports make you strong and imports make you weak and dependent; that America was a better place when manufacturing formed the core of our economy; and that manufacturing tended to be strong when tariffs were high. Combine those intuitions with a penchant for showmanship and a chaotic approach to administration, and what you get is, well, just ask the penguins.

George Will

Donald Trump’s economic agenda, from taxes to tariffs (which are themselves taxes), is variable because he believes in the immediate translation of whims into policy proposals, without an intervening pause for study. (His conversation with a Las Vegas waitress quickly became his proposal to end taxation on tips.) Commerce Secretary Howard Lutnick says Trump suddenly favors eliminating “taxes” on people making less than $150,000 a year — in 2022, about 93 percent of Americans 15 and over.

Mr. Trump’s tariffs are the biggest policy shock to the world trading system since Richard Nixon blew up Bretton Woods in 1971. As with that decision, Mr. Trump is acting with little understanding about the damage his tariffs will cause. The “disturbance” might not be as little as he imagines.

Joseph C. Sternberg

Europe needs a new strategy, and the best plan by far is to live well—i.e., economic growth. If the American export market no longer is as available as it once was, there are enormous opportunities to expand Europe’s domestic market. Europeans have become aware in recent years of the shocking gap that has opened between European and U.S. productivity and per-capita incomes—with Europeans some 34% poorer on average than their American peers. This implies there are enormous opportunities for the European economy to jolt itself into greater prosperity.

Ideas for how to do so aren’t hard to come by.

Peggy Noonan

We are not bringing our friends close and our enemies closer. Too bad, when the world looks more and more like a mob war every day. We won’t come away from this new time looking stronger and more commanding but dumber and weaker—less like the Don, more like Fredo.

One of the things that impressed me about the responses, other than their collective neoliberal opposition to tariffs, was how mealy-mouthed so many of them were. Yes, our enormous trade deficit has made the United States richer. By far the greatest proportion of that wealth has been realized by the ultra-wealthy while middle income people, those between one standard deviation above the median income and one standard deviation below the median income find themselves struggling. You cannot reasonably complain about “the rich” while ignoring the reasons “the rich” are so much richer than the rest of us.

Furthermore, I think it is incumbent upon those who disagree with a policy to identify alternatives and not a single opinion piece did so.

And while I’m on the subject, one thing we could do to help the Ukrainians is to bar imports of goods and services from all countries that buy oil from Russia. Big offenders: China and India.

In effect today the United States is financing Russia’s war against the Ukraine by buying Chinese products and Indian services. China and India then use the money they receive to purchase Russian oil.

Now that would be a trade war. Of course, it would make practically everything you buy scarce and expensive. That’s why we won’t do it.

I just wanted to write a brief post about the broad array of tariffs President Trump announced.

First, I think that reciprocal tariffs are long overdue. That’s one thing Mr. Trump is right about. We shouldn’t have quietly put up with the tariffs that other countries impose on our goods as we have for as long as we have.

Second, I don’t believe that tariffs are the only tactic or even the most important tactic that other countries have for reducing their imports from the United States. There are also quotas and the direct and indirect subsidies they provide for their own products. And, of course, there’s outright theft of U. S. intellectual property which is widespread all over the world.

Third, over the last ten years the S&P 500 stocks have increased in value by more than 10% per year. The capital investment that will be required to reindustrialize the United States is unlikely to produce that level of return that fast. Said another way, you’re better off putting your money into a stock index mutual fund than you are in building a factory with a lot less risk.

Fourth, inadequate domestic business investment is not the only reason we don’t build as much here as we used to. There are fifty states and thousands of local governments that all have their own regulations that increase the cost of building things in the United States.

Consequently, I think that President Trump will be disappointed by the results of his tariffs. They are likely to raise prices on a vast array of goods without reshoring much.

I’ve been pretty sad lately—things I’ve been warning about for a very long time are starting to happen.

I’ve been warning that failing to manage immigration into the United States prudently would eventually result in a reaction not unlike that in the 1920s. The reaction has started.

I’ve been warning that the deindustrialization of the 1970s and 1980s which reached its peak after China was granted a “most favored nation” trading status and admitted to the World Trade Organization would come back to bite us. The reaction appears to be setting in fiercely. We’ll see what results the tariffs President Trump is imposing (see below) produce.

I’ve been warning that delegating its powers to the executive branch would return to haunt the Congress and in the excesses to President Trump’s second term, we’re seeing the fruit of that delegation.

There has been no declaration of war since 1942 but we’ve been at war for most of the last 80 years, the most notable of the undeclared wars being the Korean War, the Vietnam War, Operation Desert Storm, the War in Afghanistan, the War in Iraq, not to mention scores of other wars large and small.

Most of the pruning activities people are complaining about DOGE’s advising have little or nothing to do with what Congress has authorized. They are primarily the result of laws (and appropriations) written vaguely and enforced only half-heartedly or simply delegating the details to the executive branch. Some agencies (USAID) operated for decades primarily on the basis of an executive order and never received actual empowering legislation.

The Supreme Court will inevitably be ruling on the degree to which the president actually controls the executive branch.

Speaking of the courts, I’ve been warning that Congress’s delegation of its responsibilities to the courts would provoke a reaction. Perhaps the Supreme Court will curtail the scope of temporary restraining orders and injunctions issued by district court judges. Or maybe the Congress will do the right thing and act to do that or curtail it themselves. I’m not counting on it.

While I continue to struggle to write my post about why we should be balancing the federal budget, Edward Conard has an op-ed in the Wall Street Journal, urging reduced federal spending:

Trade deficits and the mistaken belief that they chiefly fund business investment have led to a debt-fueled increase in American consumption. This surging consumption contributed to the 2008 financial crisis and unsustainable federal deficit spending while doing little to boost domestic production. It has left voters addicted to deficit-financed consumption and determined to stick someone else with the bill.

Unless the U.S. begins painful fiscal consolidation—unlike anything it has undertaken before—it will inevitably face slower long-term growth.

There is empirical evidence for that in the form of a well-known study by Ken Rogoff and Carmen Reinhart. Contrary to the assertions of those who favor increased federal spending without regard to how much we borrow, that study has not been reputed—even the scholars who identified mathematical errors in the study do not claim to have refuted it.

There’s a lot more in Mr. Conard’s op-ed, particularly about trade deficits. Here are some eye-opening statistics:

Federal government spending has risen from 19% of GDP before the 2008 financial crisis to more than 23% today, while taxes have remained at a lower-than-average 17% of GDP. Publicly held federal debt has grown from 35% to 100% of GDP and that share will continue to rise according to the Congressional Budget Office. The future will likely be worse than CBO’s forecast, which assumes no budget-busting recessions.

Fiscal deficits have surpassed an unprecedented 6% of GDP during a period of economic expansion. Debt-financed consumption now devours savings that otherwise would have funded business investment.

That trade deficits do not result in increased investment is not the only mistake we have been making. Reductions in the personal income tax rates for the highest income earners does not produce increased business investment, either. Consider this chart:

The cuts in the personal income tax rates during President Trump’s first term took place in 2018. Do you see a strong persistent increase in business investment? Me, neither.

I don’t believe I need to document that consumer spending has increased or the effects that increased consumer spending has had on inflation, hurting the lowest income earners.

So, what does that leave us? Cutting spending and increasing taxes. As I’ve said before, spending money we don’t have is a lot more fun than making up for it.

The results of some early term special elections are in. After pre-election columns yesterday wondering if Republicans were expecting a “Blue Wave”, the opinion writers at major media outlets are touting the election of a progressive judge in Wisconsin despite Elon Musk’s campaigning for her opponent and two Republican Congressmen in Florida to replace two Republican Congressmen in Florida as a success for the Democrats.

Michelle Cottle at the New York Times
Karen Tumulty at the Washington Post

That looks like a maintenance of the status quo ante to me. How bad must things be for the Democrats if maintaining the status quo is a victory?