That Was the Week that Was, Updated

I am old, for those of you who don’t remember, this was the title of a satirical British news review show.  Let me try to point out what I believe is the fundamental conundrum Trump has created for himself with actions this week on the tariff front.  Let me start by making the observation, made by many others, that he has set out three inconsistent goals.  One is to remove trade barriers, including tariffs, that other nations impose on US products.  The second is to eliminate the trade deficit.  The third is to “reshore” manufacturing in the US.

Removing trade barriers from other countries is fine, but it means we would remove ours as well, under the “reciprocal” theory.  The reciprocal theory is correct, because no one is going to drop their trade barriers if we keep ours.  If everyone removes trade barriers basic logic says that our trade deficit will actually increase, so it is inconsistent with objective two.  It will increase because the reason we have the deficit in the first place is that the other country’s products are cheaper than ours so consumers prefer to buy them.  Since our products tend to be more expensive we won’t sell more in most countries under a true free trade regime.  Look at Vietnam, with the 50% plus tariffs imposed by Trump.  They figured it out–offered to drop all trade barriers to US products if we do the same for theirs.  They know what the end result will be–they will have an even bigger trade surplus with the US.

If you want to eliminate the trade deficit, I simply have no idea how you do that without basically banning the import of any products or services.  Trump’s tariffs on some countries come close to that.  Some products would simply become unavailable.  Other countries would obviously retaliate, causing a mutual cycle of economic destruction.  We would have far fewer exports and the costs for product and input services would soar.  Farmers need Canadian potash, you can’t get enough in the US.  I think it is basically impossible for the US to run an overall trade surplus.  It would take years for the US to even come close to being able to manufacture everything we buy from other countries.  It would be a massive misuse of a huge amount of capital.  Everything would cost more.  Who cares about a trade deficit anyway, because I keep pointing out repeatedly, the flip of the trade deficit is an investment surplus.  I will take the investment anyday and right now we need it because part of that investment is foreign countries, companies and individuals buying our federal debt.

The third supposed objective is one most vociferously voiced by JD Vance, who should know better.  Vance flat out lies by saying we have lost all these factories and manufacturing jobs, while ignoring all the new factories that have been built and the fact that manufacturing jobs have increased over the last decade and a half.  But more importantly, why are we so determined to bring back manufacturing jobs?  Should we also try to go back to a system where a third of jobs were in agriculture?  How much do you think our food would cost?  I can understand insisting on manufacturing here for a few critical industries–defense, drugs and medical devices, maybe semiconductors, although even there a policy that relied on strong allies like Japan, Korea and Europe could accomplish the same goal.

We don’t have the workforce to bring back millions of manufacturing jobs; we don’t have the engineering or process management skills.  These are not the highest paying jobs or the highest value industries.  We should allow our capital–financial and labor capital–to go to the highest value industries–tech, finance, etc.–where the pay is highest as well.  Products manufactured in the US will cost more, that is simply a fact shown by the fact that the manufacturing went overseas in the first place because the products would be cheaper.  It is just dumb economic policy to focus on forcing manufacturing in the US.  And to bring it back you will have to keep the high tariffs and other trade barriers, which will mean inflation, lower exports, lower total economic production and a lower standard of living.

President Trump himself went into real estate and leisure–gambling and hotels, not manufacturing.  Why?  Because he could get a better return and make more money in those higher value industries.  Vance went into finance, where he got paid multiples of what he would have made in manufacturing.  So these two are a great example of how the US has moved to a much higher-value economy.  If they think manufacturing is so important, why didn’t they go to that industry?

I will be clear in my position.  I believe in free trade.  That means not just low tariffs, but few non-tariff trade barriers.  I think consumers and workers in the US benefit from free trade.  Consumers spend less for goods and can buy more.  Workers are steered to higher-value industries, which the US dominates.  As noted above, I think it likely the US will run a trade deficit under free trade regimes.  But the flip side of that is that the world will remain dependent on dollars, and those dollars have to eventually come back to the US and they do to purchase US goods and services but more importantly, for investment–investment that supports our debt and that creates jobs in the US.

I am fine with actions designed to force free trade, to remove everyone’s trade barriers, including ours.  I am fine with actions that target subsidies of a country’s businesses or regulations that make it hard for foreign businesses.  I understand trying to ensure a secure supply chain for a few key industries, like defense.  These actions, however, can be taken without being adversarial, mocking or belittling.  The manner in which Trump has addressed other countries is insulting and demeaning.  It is to our benefit and the world’s benefit to have good relationships with other nations, particularly those that are also free-market-oriented democracies.  There is no good reason to intentionally trash those relationships.

A mess has been created.  Some people want to believe Trump is playing some deep 18-dimension chess.  I don’t.  I think he is ill-informed and ill-advised.  And as I started this post, it isn’t clear to me that he even knows what his goal is or how he will achieve it.  So I don’t look for a quick resolution to the economic uncertainty that certainly will bring pain around the world and in the US.  And I fear the consequences for all conservatives, who have to face an electorate that right now is very unhappy with what they see.