Trade Wars: Episode V - The Empire Strikes Back at Itself

All the tariffs I don't understand. It's just my job seven days a week

I didn’t watch Trump’s speech on Tuesday. I’m more addicted to political drugs than almost everyone, but even I have limits. Truth be told, there isn’t any point in watching those speeches no matter who is giving it. They have never made any difference on anything and in the age of 24 hour news and social media they matter even less.

The only good thing those speeches and the theatrics put on by the president and some members of Congress do is remind you of who not to listen to. If you heard or read anyone claiming that anything going on during the address matters in the slightest, what they are telling you is they need to go outside and touch grass. That’s all I’m going to say on that subject. Let’s move on to things that actually matter, substantively and electorally.

I figured I would be writing about trade sooner or later. In a way it’s hard to write about because Trump has threatened tariffs and then sort of backed off on a regular basis. By the time you’re reading this it may be somewhat outdated. As of this writing, it looks like we’ll be dealing with the threat of comprehensive tariffs against Canada and Mexico again next month just like we did this month.

Needless to say, imposing tariffs on both of those countries is senseless. The stated rationales for both countries are dubious, but even more so for Canada. One common complaint from Trump is that fentanyl is coming here from Canada even though that’s easily disproven. Canada is a major trading partner of ours and a very close ally. It’s beyond stupid to make it an enemy, but that is what Trump has done.

Domestically, Canada’s governing coalition, led by the Liberal Party of Canada, looks to have risen from the dead. Not long ago, it was poised to get wiped out, but now the election is close to a tossup. Part of that is because Justin Trudeau has agreed to step down as the LPC’s leader and he had some unique problems. Most of it, though, is because the election has switched from being a referendum on Trudeau to a referendum on Trump.

I know almost nothing about domestic Canadian politics so I can’t say I like or don’t like anyone in contention to be the next prime minister. But I’m hoping the reaction to Trump is a sign of how future elections in other countries will go. Trump is allied with far-right parties around the world. He’s also a very unpopular figure in most other democracies, especially Europe. If his unpopularity winds up saving Europe from the far-right that will be a huge silver lining in this otherwise awful situation.

In the case of Mexico, its president, Claudia Sheinbaum, has gotten Trump to twice delay tariffs in return for doing things she was already doing. After imposing sweeping tariffs on Tuesday, the next day he allowed all items covered by a trade deal agreed to in 2020 by the US, Canada and Mexico to be exempt from them. That still leaves a lot of items subject to tariffs and we’ll see what kind of effect it has.

As with Trump flipping off Europe and Ukraine, there is a tendency among some observers to look for a method to his madness. He’s using hard power to force other countries to do what they need to do. He’s aiming to create a new sphere of influence for the US and to subjugate Canada and Mexico to his will. He’s dead serious about making Canada the 51^st state.

The problem with all that is it’s unclear what the US gets from haggling its neighbors and making them into enemies. Trump has never stated any clear, rational or consistent goals in what he wants from Canada and Mexico. There would have to be some serious problems those countries were causing that his predecessors couldn’t solve and there just isn’t anything like that.

What is really going on is this is just a manifestation of his worldview, such as it exists. To the extent you can see any kind of coherence, it’s him seeing everything as zero sum. In his eyes, the institutions created since 1945 like NATO, the EU and the WTO are designed to screw the US. There is no such thing to him as a positive sum arrangement. One of the few things he has been consistent on for decades is his love for protectionism and hostility towards trade. It’s one of the few beliefs he has that doesn’t revolve entirely around himself.

How someone can look at what has happened since 1945 and conclude the US is worse off is beyond me. But if you’re looking for some kind of explanation for what he’s doing that’s really it. Trump isn’t playing the long game or three dimensional chess. He’s just acting out on his long held belief that there are only winners and losers and might makes right. Think of him as Thomas Malthus meets Al Capone.

If he fully goes through with tariffs, there will be significant economic effects and not in a good way. Arguably, the threat of tariffs is already clouding the US’ economic outlook. The regular threats of and sometimes actions on tariffs is not great for any kind of business planning.

There have been plenty of complaints about uncertainty and how it’s affecting business decisions. I’m not going to lie, I’m a little annoyed by those complaints. Uncertainty is a fact of life and is often used as an excuse for inaction or to shift blame. The world is an unpredictable place and that’s not going to change. I won’t ever forget the pathetic whining from thin-skinned businessmen during the Obama years about him causing “uncertainty” because he wasn’t flattering them about how they were magical job creators.

Still, that doesn’t mean uncertainty is never a problem. If you’re planning on, say, building a factory then you need some kind of clarity as to what the rules are going to be. Any kind of long-term investment will need that. With Trump, it’s hard to know what will happen in the next hour, literally. One hour he’s threatening tariffs, the next hour he says never mind.

As for all those in the business world who insisted Trump was going to be good for growth, the joke was on them. He said loud and clear that he hates trade and loves protectionism. Of all the twists and turns that have happened since he was sworn in, tariffs were easily the most telegraphed and predictable. His supporters like to say they take him seriously, but not literally. It sure looks like he meant tariffs literally.

As much as I think tariffs are bad policy, I have to make a confession. The schadenfreude I’m feeling now from watching his business supporters flail makes it worthwhile. Here’s looking forward to a lot more of it. That should help us get through the next 46.5 months.

Listening to Trump’s cabinet officials vouch for tariffs has been great entertainment. Howard Lutnick, our Commerce Secretary, says we should be thrilled about tariffs because of all the manufacturing jobs that will come here. Before you know it, we’ll be making t-shirts and shoes again just like the good old days of the 1910s. For those concerned about egg prices, relax. Brooke Rollins, our Agriculture Secretary, says you can just raise chickens in your backyard, easy-peasy.

Sure, there may be a little short-term pain, but Dear Leader says it’s necessary and that’s good enough for me. As Scott Bessent, our Treasury Secretary, explained, there will be a “detox period.” I guess that’s what they now call recessions.

People are going to have to learn the hard way with tariffs just as they are with so many other things. Voters wanted lower prices and so they elected someone who made raising prices the centerpiece of his campaign. You can’t make it up.

I’m not rooting for economic harm, but it’s going to have to happen. Already, there is talk about a slowdown in growth and even stagflation. I have no idea whether that will happen, but it needs to for protectionism to be discredited. God willing, the entire populist project will go down with it.

Say it loud, I’m a globalist and I’m proud

I’m not going to argue in detail here about why trade is good and tariffs are bad. That’s such a widely held view among economically literate people you can find arguments for it everywhere. Economists disagree about many things, but trade is one area where there is a solid consensus on its wisdom and on the folly of protectionism.

To be fair, tariffs can occasionally have legitimate uses. In the case of China, I think tariffs can sometimes be appropriate. China is the biggest antagonist on the world stage and trade has only made it stronger and more oppressive. China also heavily subsidizes many of its industries so as to put them at an advantage. It’s only fair that the US and other countries get to respond.

Trade is good, but is not perfect. Like everything, it has winners and losers. Although trade tends to make most people better off, there are some who are worse off. It’s not uncommon to hear people argue that workers care more about their status as workers than as consumers. Considering we just had a bout of inflation that people really didn’t like, I wouldn’t be so sure of that. Both matter, but the idea that people will tolerate higher prices in return for bringing back manufacturing jobs strikes me as a bad bet.

People like to have lower prices. That’s what enables them to buy the things they want and need. It’s how living standards rise. Jobs are crucial, but prices matter just as much and sometimes even more so, as is the case today.

Like everything else, protectionism involves tradeoffs. It’s popular to talk about making everything in the US, but it has costs. There is nothing wrong with making things here, but the US isn’t the best place for making everything. There are other countries where goods can be produced at a lower cost. For many reasons, some parts of the world are better able to produce things than other parts are. That’s what is known as comparative advantage.

The problem with requiring federally funded projects to use only items made here is they often cost more and/or are in short supply. If everyone was cleareyed about it and was willing to accept that tradeoff that would be one thing, but they aren’t. The people to be mad at here, by the way, are not politicians, but voters.¹ Politicians aren’t always economically literate, but voters almost never are. Voters want everything made in the US and they want lower prices and they want things to be built very fast and they want sky high wages.

I don’t envy those running for office who have to deal with that. Trying to explain basic economics and tradeoffs to voters is a great way to lose. Voters want to hear about how they’re perfect and are innocent victims, not to be told they can’t have their cake and eat it, too. In parts of the country that have seen job and population losses, anti-trade sentiment can run deep, no matter how little it has to do with those places’ problems. The midwest has been fertile ground for that.

For decades, there was a consensus among people in both parties that trade was good. Republicans tended to be more enthusiastic about it, but Clinton and Obama were both supporters of it. Trump ended that. Now, if anything, there is a consensus that trade should be curtailed. Biden wasn’t as much of a protectionist as Trump, but he was in favor of Buy American requirements and deferred to unions on just about everything.

Protectionism can be left-wing or right-wing and has many varieties. What it all has in common is nostalgia. Look closely enough at anyone advocating for tariffs and other protectionist measures and what you will find is an effort to bring back manufacturing as the dominant employer. That has long been something Trump has said he wants to do and it was a driving force behind much of what Biden did.

I wouldn’t advise candidates or elected officials to say this explicitly, but I don’t think bringing back manufacturing jobs per se is something that should be pursued. In a few cases such as items crucial to national security like semiconductors, and to a lesser extent clean energy technologies, I understand the rationale for making things here.² Otherwise, it’s not a valid goal.

For one thing, it’s totally disconnected from where the economy is. The US economy is heavily service-based. We manufacture plenty of things, but it’s not where people work. If you want to make jobs better, you have to focus on where people actually work, not on where they worked 50 years ago.

For another, the manufacturing jobs from the days of yore no longer exist. Trade is not the main culprit behind eliminating manufacturing jobs. Those jobs aren’t being done by people in other countries. They aren’t being done by people at all. Automation is what has eliminated those jobs and that’s not going to be undone. Of all the bad trade-related policies, none are worse than Luddism.

You can see that in what has happened since 2022. Investment in factory construction has boomed since the Inflation Reduction Act and CHIPS Act were passed. What hasn’t really changed is the percentage of the workforce working in manufacturing and it’s not expected to change very much in the future. Granted, that percentage may go up by more than projected if all those factories are completed, but it won’t change the fact that the overwhelming majority of people work in services.

To the extent manufacturing will make a comeback here, it’s going to be with high-end products like semiconductors and clean energy technologies, which are heavily automated. It’s not going to be like the steel and auto jobs of the 1970s and before. Sooner or later, cars are going to be heavily if not entirely electric and those may require even fewer people to build than ICEs. The economy of the 1970s is long gone and is not going to come back. Love it or hate it, that’s the reality of the situation.

Telling people you’re going to bring back the 1970s is selling a bill of goods. It’s not going to happen because it can’t. If Republicans are going to be the party of protectionism going forward, I would really like for Democrats to not try to outdo them there. It would be nice for one of our two parties to be in favor of consumers and to be future oriented rather than wrapped up in nostalgia for a bygone era.

Trade isn’t just good economically. It’s critical for countering China, which is by far the biggest challenge the US faces. Trump is doing his very best to make enemies of allies like Europe, Canada and Mexico. For those who insist he’s going to be tough on China, please explain how that’s consistent with it. How does threatening allies of ours with economic destruction make them more likely to help us against China?

The need to trade with allied countries has never been more apparent. We should get our supply chains out of China as much as we can, but they can’t all come back here nor should they. Where they can go is to allied countries, particularly in Asia. We’re going to need not just Japan and South Korean on our side, but also countries like the Philippines, Indonesia and Vietnam. Moving supply chains over there would go a long way towards helping with that.

On the whole, trade has made the world a much better place. The creation of the EU is one of the best things to ever happen. By getting European countries to become trading partners, they have become interdependent and no EU member has gone to war with another since its creation. Living standards around the world are better than they’ve ever been. The number of people living in poverty has gone way down. For that, you can mostly thank trade.

To help struggling places, embrace abundance

Along with many others, I have been writing a good bit lately about the need for Democrats at all levels of government to embrace what is often referred to as the “abundance agenda.” The goal of it is not just to increase the supply of goods and services in the economy, but also to get Democrats to take tradeoffs seriously. The world has always been full of tradeoffs, but it’s never been fun to campaign on that. But ultimately, governing is, in my view, what counts the most and it’s hard to do that well when you pretend tradeoffs don’t exist.

Abundance is just as much about having an effective government as it is having more goods and services. We’re seeing now with the DOGE that taking a chainsaw to the government is bad. But the takeaway from Democrats should not be to keep everything as it is. We need a more efficient government at all levels, one that addresses its constituents’ needs and does so in a timely fashion. Just as much, we need one that sets goals and sticks to them and doesn’t shoot itself in the foot in trying to accomplish them, i.e., no more everything bagels.

Embracing trade is part of embracing abundance. I’m not just talking about trade in goods, but services, too. Immigration really comes into play here. The politics of it are tough now, but my guess is public opinion will be more favorable to it in the years ahead by virtue of there being a backlash to Trump. Democrats messed up on immigration under Biden, but the key is to take border security seriously while also recognizing the importance of immigration to our economy.

High-skilled immigration is the lowest hanging fruit. A much better way to help struggling places than protectionism is to send immigrants there, especially those who are high-skilled and likely to start businesses that will be successful. An idea I would like to see a governor or someone in Congress promote is making it a breeze to get a green card provided that someone is (a) high-skilled and (b) is willing to go to a place that is struggling. How to define those two things will take some work, but first we have to get the concept out there.

There are large parts of the country that are losing people and are economically declining. States like Iowa, Ohio, Pennsylvania and West Virginia are not places native born people want to move to. The only way to get those places growing again is through immigration.

I’m sure many of those places won’t want immigrants to move there and that’s their choice. No place should be forced to accept them. But if they want to grow again and be revitalized they will be out of luck. That is the tradeoff. A place can opt to keep everything as it is or it can grow and be prosperous. It won’t be both.

The best and, I would argue, probably only way to help out struggling places is through immigration. The more high-skilled immigrants go to an area, the more likely it is to do well. It’s not guaranteed to work everywhere, but it has a much better chance of succeeding than making promises that can’t be kept.

1. The next time you feel like bashing politicians for believing dumb things, try this as an exercise: replace the word politicians with voters. Remember, politicians don’t create themselves, they get elected by voters. Politicians promote dumb ideas and sometimes believe them, but it’s because voters believe them even more and want to hear magical thinking. You don’t have to think politicians are great, but don’t treat voters like they’re being swindled.

2. Even in those cases, the reason for making things here is national security. It is not to create jobs.