Though I generally believe Paul Krugman is an also ran, in this case he seems to have gotten it right.
Opinion | The New York Times
By Paul Krugman
Do you remember Donald Trump’s trade war? You can be forgiven for having forgotten all about it, given everything that has happened since; it sounds trivial compared with his effort to stay in power by overturning a fair election. Even in terms of policy while in office, it was far less important than his pandemic denial, and probably less important than his tax cuts or his sabotage of health care.
But the trade war was uniquely Trumpian. His other policy actions were standard-issue Republicanism, but the rest of his party didn’t share his obsession with trade deficits; indeed, he probably wouldn’t have been able to do much on that front except for the fact that U.S. law gives presidents enormous discretion when setting tariffs. Only Trump really considered trade deficits an important issue; and he, er, trumpeted what he called a “historic trade deal” under which China agreed to buy an additional $200 billion in U.S. goods and services by the end of 2021.
Now, Chad Bown of the Peterson Institute for International Economics, who has been the go-to source on the trade war from the beginning, has a final assessment of that deal. And it turns out to have been a complete flop: “China bought none of the additional $200 billion of exports Trump’s deal had promised.”
So Trump was a chump; the Chinese took him to the cleaners. But if you want to do a post-mortem on the trade war, Trump’s haplessness in dealing with foreign leaders is actually a minor part of the story. Far more important is the fact that the shocks we’ve been experiencing since the pandemic began make the Trumpian view of trade look even more economically foolish than it did when he took office.
In the world according to Trump and Peter Navarro, the man he chose as his trade czar, international trade is a zero-sum game. If other countries buy stuff from America, we win; if we buy stuff made abroad, we lose. Navarro and Wilbur Ross, Trump’s commerce secretary (he really knew how to pick them), made this explicit in a policy paper they put out during the 2016 campaign, which asserted that the trade deficit subtracts one-for-one from U.S. growth: Every dollar we spend on imports reduces our G.D.P. by a dollar.
Economists scoffed at this crude mercantilism, which completely ignored the point that imports can make us richer, because the whole reason we buy some goods from abroad is that they are cheaper and/or better than domestically produced alternatives. This is especially true in the modern world economy, where many products that enter international trade are “intermediate goods,” like parts that are used in production. As it turned out, Trump’s tariffs disproportionately affected intermediate goods. So the tariffs raised U.S. production costs and, according to almost all estimates, reduced the number of manufacturing jobs.
Still, mercantilism isn’t always unadulterated nonsense. (Sometimes it’s adulterated nonsense?) Under certain conditions — namely, when the economy is depressed because overall demand is inadequate — trade deficits can reduce output and jobs, and actions to reduce those deficits can act as a form of economic stimulus. That’s why, back in 2010, when lack of demand was the overriding constraint on the U.S. economy, I called for strong pressure on China to end the undervaluation of its currency.
And it’s possible that one of these years we will once again find ourselves facing persistent problems of inadequate demand. But that’s not where we are now.
We are, instead, currently living in a world of constrained supply — a world, in particular, in which domestic factories are struggling to produce what consumers want. Those supply constraints are why inflation has surged.
As we have entered this world, the United States has plunged deeper into trade deficit:
How should we think about this plunge? Would we be richer and better off if we didn’t allow as many imports?
The answer should be an obvious “no.” As many economists have pointed out, the pandemic has caused consumers, still nervous about face-to-face interaction, to switch from buying services to buying goods:
Imports have surged because many of the goods consumers want are produced abroad, and America doesn’t have the capacity to produce them here — at least not on short notice. Furthermore, even when we can satisfy demand with domestic production, that production, the tariff debacle tells us, often requires imported intermediate goods.
So if we had tried to block the pandemic-related import surge, we wouldn’t have had more jobs; we would just have had more shortages and even higher inflation. In fact, some economists have urged President Biden to help the fight against inflation by lifting the Trump tariffs — something he could do without congressional approval.
Unfortunately, it’s easy to see the political and strategic problems with doing this, no matter how much sense it would make. Trump may have been China’s chump, but Republicans would pounce on any action that could be construed as a gift to China, even if continuing Trump’s tariffs hurts us more than it hurts the Chinese government.
I’ve called today’s newsletter a post-mortem on Trump’s trade war, but, in fact, that trade war isn’t over. Trump’s trade policies were foolish and costly — they failed by any measure you choose — but it may be a long time before any president is in a position to undo the damage.