Is There a Tariff End Game?

I still don't see an off-ramp

On May 12 Donald Trump suddenly reduced the tariff on China from 145 percent to 30 percent. This may seem like a big reduction. But while the higher rate would have completely cut off trade with China, even the lower tariff rate, by my estimates, would cut U.S.-China trade by two-thirds. It wasn’t clear that much had changed.

But many retail investors, engaging in wishful thinking, interpreted the apparent climb-down as proof of concept for TACO — Trump always chickens out. So the stock market began behaving as if Trump would soon find an off-ramp out of his whole tariff obsession. Notably, however, the bond and currency markets, dominated by pros, didn’t let up on the “sell America” trade — the dollar continued to fall while interest rates continued to rise.

So I’m not convinced that the worst is over. In fact, I’m not convinced even though the U.S. Court of International Trade has pronounced Trump’s invocation of IEEPA, the International Economic Emergency Powers Act, to impose tariffs without Congressional approval illegal. (A colleague of mine used to return student papers with the comment YHTMAAAIYP — “you have too many acronyms and abbreviations in your paper.”)

In a conversation I had with Joseph Politano, who has been following the tariff issue very closely, he predicted that tariffs would be going up, not down, from here. His reasoning was that Trump would begin adding tariffs on specific goods to across-the-board tariffs on everything we import from a country. So far it looks as if he’s right: The tariff rate on steel has just jumped from an already very high level of 25 percent to 50 percent.

The court ruling against Trump’s invocation of a nonexistent economic emergency may slow him up, but he’ll probably find a number of workarounds — for example, the steel tariff is legally justified by claims that steel imports in particular threaten national security, rather than a claim that we’re facing a general economic emergency. I still see no sign of a tariff end game. And the legal wrangles over what Trump can and can’t do will only add the the uncertainty and sense of chaos that is strangling business investment.

First, however, a word about those taxes on steel imports, which are almost the Platonic ideal of a tariff that destroys jobs rather than creating them.

Here’s why: Nobody consumes steel directly. It’s an “intermediate good,” used in the production of, well, almost everything. So imposing a tariff that makes steel more expensive raises costs and reduces employment all across the manufacturing sector.

But won’t tariffs create jobs in the steel industry itself? Maybe a few. But the tariffs won’t create many jobs, because steel employs so few workers to begin with — fewer than 90,000 in 2024, out of total U.S. employment of 159 million:

You might think that we have so few steelworkers because we import it all, but we actually only import 27 percent of consumption, with the other 73 percent produced domestically. The point instead is that steel production is highly capital-intensive and just doesn’t employ many people — so steel tariffs can’t possibly create enough jobs to replace those lost elsewhere in manufacturing.

So steel tariffs don’t make any policy sense. But then neither does anything else in Trump’s trade war — and the nonsensical nature of the whole enterprise is why I don’t think he’ll find an off-ramp. After all, it’s obvious that the increased steel tariff wasn’t a considered policy, it was a temper tantrum after the Court of International Trade ruled against his other tariffs.

When you see Trump officials claiming that they’re in the process of negotiating trade deals with lots of countries — dozens! hundreds! thousands! — always ask, deals about what?

In Trump’s psychodrama version of world trade, other countries are snickering at us while they treat us “very badly,” shutting out our products with high tariffs and whatever. But the reality is that until Trump came in we were living in a world economy shaped by reciprocal trade agreements that brought tariffs down everywhere. The average tariffs the European Union charged on U.S. exports were less than 2 percent.

So if the EU is supposed to make big concessions to the United States, the question has to be, “concede what?” The EU can’t eliminate high tariffs that only exist in Trump’s fevered imagination.

During Trump’s first term China responded to his tariffs by making a never-honored promise to buy $200 billion of U.S. soybeans, allowing Trump to a glorious victory. But that strategem — making impressive-sounding but meaningless promises — isn’t available to either the EU or China this time. Trump’s tariff moves have been so extreme this time, his claims so grandiose, that he probably won’t accept the subterfuge — not least because he fears that everyone will be snickering “Taco, taco” behind his back.

In addition to imagining that foreign countries are engaged in dastardly trade practices nobody else can see, Trump and co. clearly have a distorted view of the balance of power, imagining that they can easily dictate terms (about what?) to the rest of the world.

The truth is that there are three roughly co-equal economic superpowers in the world: the United States, China and the European Union. All three rely significantly on access to the others’ markets, but not as much as you may imagine. China and the European Union each export around 3 percent of their GDP to the United States; losing a significant part of those exports would hurt, but the job losses could be significantly offset with expansionary monetary and fiscal policies.

And in full-scale economic warfare, access to the goods other nations produce becomes a lot more important than access to their markets. China understands this, which is why they are restricting exports of rare earths and certain kinds of batteries — going after our supply chains rather than our markets. And it’s a lot easier to use stimulus policies to offset job losses in export industries than it is to conjure up a domestic manufacturing base from scratch. China wants access to U.S. markets, but America needs Chinese rare earths, batteries and more.

So we’re in a situation where Trump imagines that the world is laughing at us over our open markets, but perceives correctly that everyone is laughing at him over the TACO thing. And at the same time he has delusions of grandeur when it comes to U.S. economic power.

Does this sound to you like a situation in Trump makes big boasts but effectively climbs down? That’s not how I see it. Instead, I think we’re in for a prolonged period of chaotic Trump lashing out through whatever trade weapon he can get his hands on. If you want to know where this is going, keep your eyes on the bond and currency markets, where cool-headed traders realize that U.S. policy is still being dictated by the whims of a mad king.

MUSICAL CODA