Trump on Tariffs and Investment

President Trump published an op-ed in the Wall Street Journal on Jan 30. You might have missed it in all the brouhaha. It’s not often a President writes an editorial explaining his economic policies in detail. And, one presumes that an effort like this is vetted by his economic team, so it provides an interesting insight in to their thinking as well.

The Journal does not link to sources of numbers, and I won’t play the numbers game. I’m more interested in the economic logic of the essay. Three principles stand out: Correlation vs. causation, budget constraints and accounting identities, and repeated game theory.

The essay has two main themes: Tariffs and foreign investment.

with the help of tariffs, we have cut that federal budget deficit by a staggering 27% in a single year, and even more incredibly, we have slashed our monthly trade deficit by an astonishing 77%…

The entire Trump economic agenda deserves credit for this explosion of growth and good news, including our record tax cuts, unprecedented regulation cuts, pro-American energy policies and much more!

But without question, the credit for this economic success must go to what the Journal itself described as “the largest economic policy shock” in more than 50 years—my tariffs! We have proven, decisively, that, properly applied, tariffs do not hurt growth—they promote growth and greatness, just as I said all along.

Because or despite? Relatively small income tax rate cuts (sorry, 1980s and 1920s were bigger; especially in marginal rates), unheralded regulation cuts, and revolutionary energy policies plausibly get credit for growth. Tariffs (higher taxes on imports) plausibly have something to do with lower trade deficits and have generated some revenue. But the oped offers no evidence that tariffs “promote growth and greatness,” contrary to basic economics.

At the same time, I have successfully wielded the tariff tool to secure colossal Investments in America, like no other country has ever seen before…. In less than one year, we have secured commitments for more than $18 trillion, a number that is unfathomable to many.

The world’s largest auto companies are now investing over $70 billion in America. Taiwan Semiconductor Manufacturing Co., Micron, Nvidia, Apple and others are investing hundreds of billions to build cutting-edge semiconductors and chips in the U.S. The world’s largest pharmaceutical companies are investing some $500 billion to reshore production of critical medications. …

…Korean companies are investing $150 billion to revive the domestic shipbuilding industry in the U.S. Japan will help us construct one of the largest natural-gas pipelines in the world, in Alaska, to export American energy to our allies in Asia. …

Tariffs as negotiating bludgeon is something that I and fellow economists underestimated last spring. A threat of something that hurts the US, but hurts the foreigner more—and especially hurts politically more than economically — can be used to coerce all sorts of behavior.

But how are foreigners supposed to get the dollars to invest in the US? There is only one way: They have to sell us stuff, more than they buy from us. You can argue about behavior and incentives, but this is an accounting identity, a budget constraint. More investment means more trade deficit. Another way to understand it, as all economics, is to look past the money. Money is just a way of keeping track of real things. How can Korea invest in the US? It must put things on boats and plant them here. It can put capital goods (shipbuilding equipment) on boats directly, or it can put cars on boats, sell them here, and buy shipbuilding equipment. Without a higher trade deficit, all these moves can do is displace private and voluntary capital investment.

The President and his team have a good instinct there. Investing in the US is good for the US economy. But it doesn’t add up with their instinct that trade deficits are bad for the economy. Making money for the US from foreigners is a good thing. But the only point of making money from foreigners is to spend it on foreign goods and services.

Another good economist question: Why weren’t these investments being made anyway? A first instinct is that the return to investing in the US was not as good as the return to investing abroad. If so, forcing investment in the US is not a great idea. Better for the US to make the more profitable investment abroad. Or, to figure out why the investment in the US was not profitable. Plausibly, that’s because there were too many regulatory and legal barriers to making the investment or making a profit on it in the US. The Biden restrictions on Chips Act factories were a hilarious progressive wish-list. Removing those barriers is a good idea, and many Trump appointees are working quietly to do that. But if successful, we don’t need to bludgeon other countries with tariffs to get the investment. Moreover, government-directed investment from other governments is not usually known for its focus on efficiency.

…Since Liberation Day, I have made historic trade deals with China, the U.K., the European Union, Japan, South Korea, Vietnam, Indonesia, the Philippines, Malaysia and others covering a majority of all U.S. Trade… the agreements are forging more sustainable relationships with many of our allies and partners, expanding our military alliances into the realm of economic security for the first time.

Trump’s tariffs are always an answer with five questions, and the foreign policy angle is interesting. The threat of tariffs has made many countries jump on foreign and security policy questions. Not always to Trump’s advantage. Without tariffs, the Conservatives would surely have won the last election in Canada.

“..expanding our military alliances into the realm of economic security” is a fascinating line. Tariffs combine with industrial policy to think of the economy as pieces in the giant geopolitical chessboard. “Economic statecraft” is a big theme of my national security colleagues here at Hoover, which we enjoy debating.

In any case, this function of tariffs is on another planet from David Ricardo, wine and wool, comparative advantage, accounting identities and economic efficiency which motivates economists.

I worry though about the repeated game theory aspect. Tariffs put on are hard to take off. Domestic producers get used to protection and want more. The multilateral approach allowed the President to say “I’d love to give the chicken-wing industry protection but those darn international treaties won’t let me.” That’s gone.

More importantly, in the economic statecraft angle, we have now bludgeoned allies to do our bidding and carve up markets. They are hurting from the humiliation, and see a more dog-eat-dog world When China blockades Taiwan, we will want to call them up and say “we really need your help to enforce our sanctions on China.” Will the Europeans, Canadians, and Latin Americans really forsake profitable trade with China to help us on that geopolitical quest? Sometimes flowers and chocolates are better than a big stick.