Trump’s Tariff Talk Might Already Be Hurting the Economy
6 min read
Perhaps the most levelheaded defense of Donald Trump’s misguided plan for steep global tariffs is that they’ll never be imposed. Trump surrogates have lately been assuring the business world that the former president will, if elected, use merely the threat of across-the-board import taxes of 10 to 20 percent to pressure other countries to lower their own barriers to American goods. The result: freer trade among participating nations, and more revenue for American companies, without ever firing anything more than a warning shot.
Howard Lutnick, a billionaire co-chair of the Trump transition, recently made a version of this argument on CNBC, using the auto industry as an example. “If we said, ‘We’re going to tariff you the way you tariff us,’ do you think they’re going to allow Mercedes and all these Japanese companies and Porsches and BMWs to all of a sudden have 100 percent tariffs in America?” he said. “Of course not. They’re going to come and negotiate, and their tariffs are going to come down, and finally Ford and General Motors are going to be able to sell in these places.”
The idea that the White House can use import restrictions to affect foreign governments’ policies is not entirely without precedent. Research shows that from the 1970s through the early 1990s, various administrations sometimes succeeded in prying open foreign markets by threatening tariffs or other protectionist measures. A reasonable case can even be made that Trump’s 2019 promise to slap 10 percent tariffs on Mexican imports helped push our southern neighbor to cooperate more fully on restricting illegal immigration.
Trump’s new global tariff threat, however, would likely be far less successful, and would impose significant costs even if the tariffs were never applied. The “just a threat” strategy sounds nice in the abstract but in reality suffers from fatal flaws: It ignores not only America’s checkered history of such gambits but also the economic damage that threats alone can inflict on the American and global economies.
The occasional tariff-threat success stories are exceptions to a broader negative trend. In a comprehensive analysis of every U.S. unfair-trade investigation from 1975 to 1993—91 cases targeting foreign discrimination against U.S. goods, services, and intellectual property—Kimberly Ann Elliott and Thomas O. Bayard found that American efforts to pressure foreign countries to open up their markets were successful less than half of the time. The authors’ definition of “success” was generous to U.S. officials: It could include just the partial achievement of U.S. objectives and result in no actual trade liberalization. Even then, the wins occurred mostly when a single country was dependent on the U.S. market—a situation that applies to only a few countries today—and during a short period in the mid-1980s, when the U.S. had far more economic heft in global markets than it has now. (China in 1991, for example, shipped almost one-third of its exports to the United States; today, the number is about 15 percent.) When the U.S. government actually applied trade restrictions, moreover, the strategy worked only twice in 12 tries. In the other 10 cases, foreign governments did not acquiesce to American demands; despite new U.S. protectionism, they kept in place the policies and practices to which Washington objected.
Trump-era trade actions have encountered similar difficulties. No nation lowered its tariffs on U.S. goods in response to tariffs imposed, or merely threatened, during the Trump administration, and most of those U.S. tariffs remain in force today. Even worse, several foreign governments—in China, the European Union, India, Turkey, Canada, Mexico, and Russia—retaliated against U.S. exports, which in some cases remain depressed. Since then, Trump’s “Phase One” deal with Beijing, signed in early 2020 and hailed as proof that the tariffs were working, because China had agreed to buy American farm goods and open certain domestic markets, has fizzled out; China has largely failed to follow through. And, as the current U.S. Trade Representative Katherine Tai just confirmed, the China tariffs have not changed Chinese government policies or behavior.
Overall, a recent analysis of the Trump-era retaliation shows that “a one percentage point increase in foreign tariffs was associated with a 3.9 percent reduction in U.S. exports.” So Trump’s previous strategic tariff experiment resulted in less trade, not more, and America is still paying for it.
Just the threat of a tariff also can inflict considerable economic costs, because it increases uncertainty for business, which has been found to reduce U.S. investment, output, and hiring. An unpredictable policy environment gives private companies an incentive to stay out of the U.S. market until policy is clarified, resulting in a lower level of current economic activity overall. Numerous studies have confirmed these effects, but they’re really just common sense: Who would want to wager millions of dollars on a new U.S. facility that might soon face higher production costs, or be unable to sell products abroad, thanks to possible tariffs?
Various measures of what economists refer to as “trade policy uncertainty,” or TPU, spiked during Trump’s time in office as he routinely announced or teased radical changes to U.S. tariff policy on Twitter. According to one index, average TPU during the Trump administration was the highest recorded under any president since 1960, when the series began. A study in the Journal of Monetary Economics estimated that the increase in Trump-era uncertainty reduced aggregate U.S. investment by $23 billion to $47 billion in 2018 alone.
American trade law compounds this uncertainty by giving the president broad and ambiguous power to quickly impose new tariffs without congressional input or approval. As my Cato Institute colleague Clark Packard and I detail in a new paper, following the Smoot-Hawley tariff debacle of the 1930s—in which Congress dramatically increased U.S. protectionism and thereby set off a global trade war that deepened the Great Depression—the legislative branch delegated much of its constitutional trade authority to the executive. Congress assumed that the president, with national constituency and foreign-affairs responsibilities under Article II, was less likely to repeat Smoot-Hawley. This approach to U.S. trade policy making worked reasonably well for 80-plus years, but Trump (and, to a lesser degree, Joe Biden) exposed a key flaw: The laws at issue are so broad and ambiguous as to allow a president to unilaterally impose or maintain damaging tariffs on dubious grounds.
Over the past seven years, moreover, U.S. courts have rejected every challenge to the Trump-era tariffs on steel, aluminum, and Chinese imports, and to the laws under which the tariffs were imposed. Judges have proved to be particularly deferential to the executive branch in cases alleged to involve “national security,” a term so broad and undefined that one Trump-administration lawyer famously refused to concede that it couldn’t apply to imported peanut butter.
Given this precedent, the next president will effectively have a green light to impose new tariffs—and dictate U.S. trade policy—with little concern that the other branches of government will stand in the way. Any such tariffs, as well as their size and scope, will thus come down to the whims of one person in the Oval Office, who might be Trump. Future courts might find global, across-the-board tariffs to be fundamentally different from past actions and thus beyond the bounds of whatever law was used to justify them, but that outcome is far from guaranteed. Until Congress changes the law, trade policy will be vulnerable to abuse and will therefore continue to thicken the fog surrounding trillions of dollars in annual U.S. trade.
That fog is, unfortunately, again building up as trade-policy uncertainty has climbed back to levels not seen since Trump’s time in office. His victory next week would likely boost uncertainty even more, with inevitable collateral damage to the U.S. investment climate and economy. Indeed, with reports of corporate angst and delayed investment already proliferating, the damage appears to have already begun.
