The art of the misdeal

Given Trump’s disruptive announcements relating to tariffs and trade policies, it’s hard to understand why he’s doing what he’s doing. It seems to me that Trump could have two legitimate policy goals relating to international transactions: (1) to increase the volume of exports from the US, and (2) to stimulate additional investment into the US from foreign agents.

With respect to the first issue, it would make sense to do whatever could be done to make our exports cheaper to foreign purchasers. This effort would involve working with our trading partners to lower the tariffs that they impose on the US goods and services that they import from us and to otherwise work to lessen any other trade barriers that might exist, like quotas or regulatory impediments that constrain our capacity to sell our products abroad. Instead, Trump is imposing tariffs that we pay on goods we buy from foreign sources. Unquestionably, this action makes those imports more expensive to us, but it does nothing to make our exports cheaper to them.

(In a prior blog, “Who Really Pays? The Tariff Myth That Just Won’t Die,” I lamented the fact that too many media sources perpetuate the fiction that tariffs are imposed on foreign countries, rather than the firms and individuals who purchase those foreign products. This point deserves to be made every time tariffs are misrepresented.)

If the objective of the policy is to expand our export volume, the current tariff policy with historically high tariffs imposed broadly on imports won’t do it. In fact, it would likely do the opposite. Given the magnitude of the tariffs we’re talking about, the hit to growth of economic activity on the part of our trading partners due to our reduced purchases from them would have secondary effects of reducing their demand for our goods and services — i.e., our exports. The current policy of introducing tariffs that Americans pay at the levels in excess 15 percent couldn’t be more wrong-headed.

Turning to the second objective, if we wanted to encourage more investment in the US, the best way to do it is to present our country as a reliable counterparty, where contractual arrangements are respected and where our exchange rates are stable such that currency risk to the investor is seen as minimal. Investors may enjoy the benefit of a dollar strengthening during their investment’s holding period, but a strengthening dollar is a two-edge sword. While it works to the advantage of foreign investors who hold US assets, it works to the detriment of US exporters whose goods and services become increasingly expensive for foreign purchasers, as the dollar strengthens. Given these considerations, maintaining a stable currency exchange rate would seem to be the most neutral policy.

Trump’s bullying can’t be good for us in the long run. Although he boasts that he’s extracted (extorted!) commitments from various trading partners to make investment funds available that Trump, personally will have the discretion to invest, I can’t believe these “commitments” will ever be realized. So far, according to White House fact sheets, Japan is down for a $550 billion investment, and the EU will invest $600 billion. These aren’t investments, they’re nothing short of bribes. They may be good for Trump, but they’re not good for the world order.

In any case, I take these promises with a grain of salt, I’ll believe these figures when I see the money, and I’m not holding my breath. Our trading partners may be bending the knee in front of Trump, but any of them with any brains and self-respect is probably working behind the scenes out of Trump’s purview to improve and expand trading relations with anyone but the US, with the goal of making themselves less vulnerable to the US’s heavy hand in the future. To think otherwise gives Trump far more credit than he deserves.