Today, the Trump administration’s reciprocal tariffs take effect on dozens of nations. The level of these tariffs, or taxes on imported goods, varies depending on Donald Trump’s perception of how much each country has taken advantage of the United States.
They also represent key leverage for the president, because they are higher than the basic 10% to 15% tariffs the U.S. is applying to most other countries.
Case in point: On Wednesday, Mr. Trump hiked duties on India from 25% to 50% for buying Russian oil, an example of using tariff leverage for political reasons, as well as pressuring nations to lower trade barriers and buy more American goods. India called the action “unfair, unjustified, and unreasonable,” in a statement by its Ministry of External Affairs.
Why We Wrote This
President Trump has identified persistently high U.S. trade deficits as a problem. Many economists say the solution involves patterns of saving and investment that tariffs won’t fix.
President Trump’s tactics reflect a distrust of central tenets that have guided U.S. trade policy for the past four decades: First, international trade is a win-win and, second, that markets, not governments, should shape it. His policies are also guided by a presumption – rejected by most economists – that a country is losing out if imports exceed exports.
Is trade always good?
As far back as 200,000 years ago, two humans bartered something, perhaps a primitive tool for food. Since then, trade and the rise of civilizations have been inextricably linked. The expanding exchange of goods has generated immense wealth and lifted living standards to levels unimaginable to previous generations.
But it has also created winners and losers and never guaranteed that its benefits would be equitably distributed. That’s not the fault of expanding global trade, some economists insist. In part, it reflects the values of the trading nations.
“Globalization is the field on which some of our major societal conflicts – including those over basic values – play out,” wrote Joseph Stiglitz, an economist at Columbia Business School, in his 2006 book, “Making Globalization Work.”
Are trade deficits bad?
Not necessarily. A nation that sells fewer goods than it buys from one nation often balances that by selling more goods than it buys from another. An oil-thirsty country, for example, might run persistent deficits by buying oil from Saudi Arabia. But it can later use that energy to build machines or cars that it sells to a third country. That’s the advantage of international trade. If trade is open and each nation does what it’s best at – whether it’s pumping oil or manufacturing cars or something else – everyone benefits.
The large and continual trade deficits of the United States, however, suggest a deeper problem: persistently high federal budget deficits.
Again, trade is not the cause of this problem; it’s a symptom. As economists model the world, America’s trade balance in goods – or, technically, its current account, which also includes trade in services and other factors – equals the difference between U.S. savings and U.S. investment. So if the nation persistently spends more than it earns by, say, running big federal budget deficits, then its current account balance will also be negative.
Are the president’s tariffs working?
Mr. Trump has managed to notch several wins this summer – at least in the form of promises.
Japan has agreed to make $550 billion in U.S. investments, mainly in the form of loans or investment guarantees. Ditto for the European Union, which, in order to get the same 15% tariff rate, agreed to make large purchases of American natural gas.
Indonesia has also been able to have its tariff rate reduced, from 32% to 19%, by agreeing to remove almost all its tariffs on imports from the U.S. and trimming other measures that discourage the purchase of U.S. goods.
Are tariffs a long-term solution?
It’s unlikely, because they attack the symptom, not the root problems. Those issues include, prominently, government overspending and a low national savings rate, but economists also cite other nations’ export-led growth strategies and the dominance of the U.S. dollar as a reserve currency.
Reciprocal tariffs will likely cause the prices of a targeted nation’s goods to go up in the U.S.; consumers will buy imported goods from a non-targeted country.
It’s like squeezing a balloon at the top only to see it bulge out at the bottom, wrote Robert Lawrence, a noted economist and senior fellow at the Peterson Institute for International Economics, in a PIIE policy brief on Monday. “If balanced overall trade is really the goal, it will not be achieved without additional policies that reduce overall US spending relative to income,’’ he wrote.
The irony is that President Trump’s new tax law, which is expected to boost federal budget deficits for the next century, might make it impossible to actually reduce the trade deficit he’s so worried about.
