The argument for imposing tariffs as a potent $3 trillion negotiating tool
The argument for imposing tariffs as a potent $3 trillion negotiating tool
Trump occasionally labels himself as "Tariff Man" and considers these import taxes as "the best invention ever made." This approach, characterized by high risks and high rewards, is used to exert immense pressure on foreign nations, thereby forcing them to negotiate.
There's a valid argument supporting the utilization of tariffs as an influential negotiating tool, although it might escalate costs for consumers already bearing the brunt of living expenses.
The United States imports an estimated $3 trillion worth of goods annually. The threat of tariffs can offer substantial leverage over nations whose economies would take a substantial hit if they suddenly found it difficult to trade with Americans due to Trump imposing a 100% tariff on their imports.
"If we couldn’t sell our things to Mexico, we would manage. But it would be an apocalypse for Mexico. That gives us power. And power is everything in negotiations," Moore, a former economic adviser during Trump's first term, shared with CNN.
Moore, who initially leaned toward free trade, acknowledged that tariffs could serve as a useful negotiating tool due to Trump's persuasion.
"It's a dangerous game, though, one that might just work," added Moore, an advocate of "The Trump Economic Miracle."
Leavitt, a spokesperson for the Trump-Vance Transition, stated that during Trump's first term, he implemented tariffs against China that resulted in job creation, investment growth, and zero inflation. Leavitt further stressed that Trump would work quickly to revitalize the economy by reestablishing American jobs, reducing inflation, elevating real wages, decreasing taxes, curtailing regulations, and liberating American energy.
A mutually beneficial scenario
McDaniel, a former trade official under former President George W. Bush and a senior research fellow at George Mason University’s Mercatus Center, believes that tariffs can serve as a means to intimidate foreign nations and persuade them to reach accords with Washington.
"It can be effective, but it requires a legitimate threat, and it's risky," noted McDaniel.
Trump's recent threat to impose a 25% tariff on all imports from Canada was met with immediate attention from Ottawa.
Canadian Prime Minister Justin Trudeau was seen at Mar-a-Lago, where he claimed to have an "excellent conversation" with Trump. Although Trudeau didn't mention that Trump humorously suggested that Canada should become the 51st US state if it failed to handle US tariffs.
During his first term, Trump threatened to impose tariffs on imported automobiles, an action that drew attention from Japan, a country whose economy relies heavily on selling vehicles to Americans.
Trump later reached a deal with Tokyo that elicited praise from farmers due to Japan's commitment to opening its markets to US agricultural goods.
"It was a win-win," McDaniel concluded, stating that this agreement was necessary only because Trump had abandoned the Trans-Pacific Partnership, which resulted in significant losses for US agriculture.
It is conceivable that Trump 2.0 may still use tariffs, or the threat of imposing tariffs, to address legitimate concerns such as drug trafficking with nations like Mexico, Canada, China, or others.
"Using tariffs as a weapon to encourage foreign nations to prevent drugs from entering the United States could save lives," Moore, an associate at the Heritage Foundation, highlighted.
Are the celebrated concessions genuine?
There's a likelihood that the concessions Trump touts may not be as significant as they seem.
For example, in 2019, Trump promoted a Phase 1 trade agreement with China as a major victory for farmers because Beijing had pledged to significantly increase its purchases of US agricultural goods.
However, China fell dismally short — by more than $200 billion — of its commitment to buy US goods and services, as indicated in a Commerce Department report.
"He threatens to impose massive tariffs, and people scramble to find a solution that doesn't really require them to do much. They offer something that appears advantageous on paper and makes for a great photoshoot. The tariffs are never implemented, and Trump proudly proclaims himself as an expert negotiator," York, senior economist and research director at the Tax Foundation, pointed out.
York expresses doubts about the efficacy of tariffs as a negotiating tool, particularly because the mere threat of tariffs can negatively impact the US economy, the stock market, and business investments.
According to York, it is more a display for the public — and one that harms the economy by heightening uncertainty.
There's also a potential drawback to employing tariffs as a bargaining chip: the loss of trust from allies.
Baker, co-founder of the Center for Economic and Policy Research, suggested that Trump could achieve short-term success by threatening to "blackmail" Mexico and Canada through massive tariffs.
"I'll bet any amount that Mexico and Canada will try not to find themselves in that situation again. It's not a pertinent long-term strategy," explained Baker. "It's like breaking a contract. You can do it, but then nobody will work with you without first paying you in advance."
Using tariffs to safeguard national security
Another way tariffs can be utilized is to address national security vulnerabilities.
For instance, President Biden invoked national security reasons when he increased tariffs on $18 billion of imports from China, including batteries, critical minerals, and electric vehicles, in May this year.
"The overconcentration of critical mineral mining and refining capacity in China leaves our supply chains susceptible and poses a risk to our national security and clean energy goals," the White House stated at the time.
'You Can't Escape Them'
Trump has attempted to utilize extensive tariffs as a protective measure for factory jobs, even in areas like the Rust Belt that have struggled due to the deterioration of the American manufacturing sector over the years.
This strategy makes political sense, seeing as Pennsylvania, a key Rust Belt state, played a significant role in determining the winner of the last three presidential elections.
However, many economists remain skeptical of this approach, believing it to be a suboptimal policy choice.
McDaniel, a former trade official under George W. Bush, suggested that while tariffs may provide some industries with a temporary reprieve, they ultimately lead to increased consumer costs.
"It can generate short-term gains for a limited group of individuals. But in the end, you'll end up causing harm to more people than you help, and the benefits are only temporary," McDaniel explained. "Eventually, global market conditions catch up with you. You can't escape them."
Baker added to this sentiment, arguing that the perception of factory jobs as high-paying opportunities has largely faded away.
"The manufacturing wage premium has almost vanished. What's the point of trying to preserve jobs that aren't particularly good jobs - and forcing everyone else to pay more?" Baker asked.
Tariffs Exacerbated The Great Depression
In recent times, Trump has contemplated imposing a 100% tariff on Brazil, Russia, India, China, and South Africa – collectively referred to as the BRICS nations. The potential penalty for these nations was contingent upon their cessation of efforts to develop an alternative currency to the US dollar.
This proposal left many baffled, as many question the actual viability of toppling the US dollar's global dominance.
Moreover, countries would ideally choose to utilize the dollar because of its strength and the solidity of its associated institutions and economy, not as a result of external pressure or intimidation.
Even Moore, a critic of Trump's tariff tactics, admitted that using tariffs as a weapon against BRICS nations was a "seriously flawed strategy" on the part of the US President.
Although the motivation for imposing tariffs may vary, there is a potential danger of the situation spiraling out of control, leading to a surge in inflation, market volatility, and ultimately, a full-blown trade war.
When the US imposes tariffs, other nations tend to retaliate in kind. During Trump's tenure, this response led to the imposition of retaliatory tariffs on a range of American exports, such as automobiles, soybeans, and whiskey.
Moore drew attention to the historical consequences of such a pattern, highlighting how the Smoot-Hawley tariffs of 1930 contributed to the intensification of the Great Depression.
"You don't want to engage in a tit-for-tat situation," Moore warned.
The United States export industry could face significant challenges if other nations retaliate against the imposition of tariffs. The escalation of trade tensions could negatively impact the stock market and business investments, potentially leading to economic uncertainty.
In light of these potential consequences, it's crucial for policymakers to exercise caution when considering the use of tariffs as a negotiating tool. A mutually beneficial scenario that prioritizes long-term economic stability and trust-building relationships with allies might yield more sustainable results in the long run.