Donald Trump's Spiteful Tariff Delusion

This may not end well

Designed by Rube Goldberg

He may be 78 years old, but Donald Trump sounded like a self-pitying spoiled child when he unveiled his packet of tariffs which is supposed to raise money, cure the trade deficit and deliver punishments, almost the worst of which fall on the US’s major Asian friends – Japan, South Korea, Vietnam and India – as well as Europe.

The underlying theme in Trump’s mind is that unfair practices by foreigners account for the trade deficit. In the real world, the issue is that America consumes too much, either by households or by a government whose own deficit is running so high that a downgrade of its debt is now likely. One can be sure that if the US government returned to a primary surplus – excluding the cost of debt service – interest rates and the dollar would fall and consumption would fall, and with it the trade deficit.

The US trade deficit has reached very high levels because the nation has had, since the 2020 onset of the Covid-19 pandemic, a run of unique economic growth faster than other developed countries – due to sectors of excellence and absorption of migrants. When Trump came into office on January 20, it was on the cusp of a slowdown and likely a moderate recession which would have seen interest rates and the dollar fall quite sharply and, at least if accompanied by fiscal restraint, a big reduction in the trade deficit. Conventional tools to deal with imbalances were readily available. But Trump chose to throw a spanner into the whole international works, of which the US was the creator.

The US may argue that countries such as Korea and India have too high tariffs, but the fact is that they are mostly non-discriminatory, so other countries are disadvantaged too. That the US doesn’t have the goods to sell compared with China or Germany or Indonesia is the underlying US problem, at least while the dollar’s high level is sustained by interest rates, and faith in exceptional stock values.

It is true that US tariffs have generally been below those of most countries. But the gap has only been notably wide in the case of developing countries such as India and Vietnam whose exports to the US are mostly in low value-added industries such as textiles. The chart which Trump paraded supposedly showing the levels of tariffs that the US faced was a dishonest confection based, it seems, on US trade deficits with specific countries, not actual tariff levels.

Any sympathy that the US might enjoy for being an open economy is lost by this nonsense as surely as Trump’s ripping up of the very NAFTA which he himself had signed. The serious fentanyl and other drug issues are largely one of US demand and domestic distribution. Blaming China, Mexico, and now Canada is yet another example of unwillingness to face reality.

Needless to say, while blaming the world for its merchandise trade deficit, Trump made no mention of the surpluses the US records on its services account – US$70 billion at least. Think of the non-merchandise revenues of Google, Microsoft, Apple, Meta, and lesser players on the internet and cloud stage, not to mention the royalties generated by the likes of McDonald’s, Coca-Cola, and a dozen other globalized US brands.

If the earnings of these American companies don’t all flow back to the US, look to US tolerance of tax-dodging by such companies that rout their profits from global operations through small low-tax regimes and keep the cash offshore, practices mostly designed by legal and accounting firms with US roots and global tentacles. Yes, it’s ridiculous that so many profits of US giants should flow through small, low-tax Ireland.

But who is to blame? The Wall Street Journal recently pointed out that although the pharmaceutical concern Pfizer makes most of its profits in the US where it had sales of US$27 billion, it paid no federal income tax. And that is, like most major pharmaceutical companies, after charging more in the US than for the same product in rich western Europe! It is not as though the US notional tax rate of 21 percent is notably high – in France and the UK is 25 percent.

The earnings of US companies are impressive by any standard but unfortunately, not enough to offset the ever-growing cost of servicing debt to foreigners, even though return to federal debt is low relative to corporate returns on capital invested overseas. The cost of debt now exceeds the US$886 billion defense budget for 2024, and foreigners hold about 23 percent of all federal debt. The US has been able to finance at relatively low cost years of high current account deficits – currently about 4 percent of GDP – thanks to the predominant position of the dollar in the international trade and financial system.

Americans had already begun to worry about the size of the federal debt – although its politicians haven’t – its growth rate and the reliance on foreigners to buy a significant part. The foreigners now have an additional worry. If the US cannot be trusted to keep its word on major trade agreement and strategic alliances, how safe is their money? The US will not default on the debt itself, but the convertibility of the dollar is another matter.

The British pound sterling used to play a similar, if much more limited role. Other countries, particularly those of its empire, kept their reserves in sterling at the Bank of England. But World War II and huge dollar debts – buying weapons and food from the US – left sterling holders, such as Hong Kong, with currency which could only be used in what was called the sterling area. This issue was not finally resolved until nearly 30 years after the war.

The US may now face a situation unlike that Britain faced in 1940. Nonetheless, use of the dollar’s position for strategic purposes, for example against Russia, was already causing concern to some official holders of dollars. Now Trump has given many others cause for concern. Why not tell China, Japan, etc, that their dollar holdings can only be used to buy American goods? Wouldn’t that be entirely in accord with Trump’s transactional policies?