Three lessons about this tariff debacle

The news cycle has been overwhelmed since the events of April 2, what the Trump administration chose to call “Liberation Day” in a series of shocking Rose Garden announcements regarding intentions for trade policy and tariff implementations. The aftermath of these announcements was a violent drop in the U.S. stock market, significantly enhanced fears of recession, and a general global uncertainty around economic conditions that provided the largest challenge to the economic competence of the Trump administration since his first term began.

The economic response was not specifically connected to the mere implementation of tariffs. While there are many arguments against such new taxes (including arguments this author endorses), global markets expected some form of tariffs based on campaign rhetoric. Some of this reflects Trump’s desire to obtain leverage around domestic policy priorities and the language included vague references to “reciprocity.” What put economic indicators into a tailspin (not to mention financial markets) was the shocking magnitude of tariffs initially announced, as well as the bizarre formula used to assess tariffs country by country. Rather than seek to “even the playing field” by charging countries a tariff rate equal to what they charged the United States for our exports to them, tariff levels were based on the mere level of imports the United States brought in from that country relative to the exports we sent.

In other words, countries with very low tariffs rates (or no tariff at all) were subject to massive new taxes merely for daring to sell the United States more goods than we sold them. The end result was chaotic, incoherent, and vastly different than what the administration had previously telegraphed.

The idea of $600 billion of new taxes of American imports put a recession shock into the economy, tanked global stock markets, and ultimately forced the president to revise his proposal—at least partly. Less than five days later President Trump announced a “90-day pause to allow countries to negotiate new trade deals,” all the while doubling down on increased tariff rates with China (essentially cutting off trade with China as both countries now assess tariff rates that are vastly higher than could possibly make sense economically). Even that announcement was followed up with another set of exceptions and delays, this one granting reprieve to phone makers, semiconductors, and computer equipment.

The major takeaways of this moment are important and ought to be remembered as the issue continues to play out with this administration and in the public square:

1. Economic stability requires clearly defined policy objectives. When businesses thought the objective was trade fairness and equity, they could calculate a reasonable expectation for how tariff rates may adjust. However, when the entire objective seemingly changed, it put global markets into disarray and imposed a cost on the U.S. economy of nearly 2% of GDP, all but guaranteeing a recession. The president has used chaos to his advantage in certain cases, but this time it backfired and continues to leave doubt as to what the administration is trying to accomplish.
2. Class envy and class warfare do not work when it comes to economic growth. The line that these policies are to “punish the globalists” or “help Main Street regardless of what it means for Wall Street” falls on deaf ears when multi-trillion dollar companies like Apple and Nvidia get exceptions and waivers, while small domestic companies get crushed with new costs and regulations. And demonizing Wall Street only works until regular mom and pop retirees look at their own retirement accounts and see that Main Street is hardly exempt! These issues are democratic in who they impact, and populism lacks a message for how government imposition of taxes and control can protect the little guy.
3. Messianic politics and messianic economics do not work. The conservative message that government helps economic growth the most when it attempts to do the least still applies. The removal of impediments to economic growth by lowering marginal tax burdens and through deregulation represent low-hanging fruit for the federal government. The Trump administration has done great work in these causes and may still do so in this new term. But a command-control view of tax and trade, outside the Article I intentions of the Constitution whereby Congress is empowered to act, all in the name of a single leader trying to “rewire” the American economy, is not just overly ambitious, disorderly, and unrealistic, it is dangerous. A more humble view of economics would focus on incremental decoupling from China where warranted, set a priority on national security concerns, and leave the government out of the business of picking winners and losers in the economy.

It may be too late for the United States to avoid a recession this summer—time will tell. But it is not too late to restore first principles of wisdom and prudence when it comes to trade and tariff policy.