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Why Trump is Right About Tariffs

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In 1988, Donald Trump told Oprah Winfrey that America was being “ripped off” by its trading partners. Nearly 2 million Americans lost their manufacturing jobs between 1979 and 1988 to cheap, government-backed Japanese competitors. Oprah’s audience applauded.

Three decades later nothing has changed: America lost 5 million more manufacturing jobs, and Trump is still lambasting our trade partners for ripping us off:

President Trump is right. Our trading partners—particularly China, Japan, and Mexico—are taking America to the woodshed.

Consider that China steals more than half a trillion dollars in American intellectual property every single year. This is one of the reasons America’s trade deficit with China is so massive. For example, in 2010 Chinese companies stole high-speed rail designs from American firms, thereby depriving them of hundreds of billions in potential revenues. Such theft occurs in nearly every industry, whether it’s software programs or branded consumer goods. And the worst part? We let it happen.

The globalist GOP refuses to punish China for its predatory trade policies. Why? Some congressmen are Chinese pawns, no doubt, but many erroneously believe that asymmetrical free trade works. Some even think large, chronic trade deficits are good. This is wrong—seriously wrong. Economic growth has nothing to do with international free trade. Rather, growth depends upon human creativity, made manifest in better technology. Until our politicians and our people understand this axiomatic fact, America will continue getting ripped off by anyone and everyone.

Rumpelstiltskin’s Spindle: Understanding How Economies Grow
Economic growth occurs when—and only when—either more stuff is made or better stuff is made. For example, America’s economy grows when it produces more trucks or better (more fuel-efficient or luxurious) trucks with the same labor. In either case, the value of America’s production increases. The same logic applies to all products, whether goods or services.

There are two ways to make more stuff. First, we could work harder. For example, we could cultivate more land to grow more wheat, build a new factory to produce more globes, or work longer hours to draft more architectural blueprints. The common denominator, in this case, is to add labor. This understanding of economic growth is called the archaic growth paradigm, and it can be summed up with the maxim: more input equals more output. The problem with this model is that it links population with production in a linear way, which means wealth is zero-sum—one can only get richer by making someone correspondingly poorer.

The second way to make more stuff is to increase productivity: that is, make more stuff in the same amount of time. This is the industrial growth paradigm, and it’s how countries get rich. Why? Because it snaps the link between population and production. Consider Britain at the dawn of the Industrial Revolution. In centuries prior, if Britain needed more cloth, it needed more weavers. Everything changed when Edmund Cartwright invented the power loom in 1785. The power loom made British weavers 40-times more efficient, generating massive surpluses of cloth—and therefore wealth.

The significance of the power loom cannot be overstated: not only did it usher in the industrial age, it also changed how people thought about economic growth. It switched the paradigm from one that was population-driven to one that was productivity-driven—one in which growth is linear to one in which growth is exponential. That’s still true today.

How then do we improve productivity? In the short, run there are many options. We could drink more coffee, organize our labor more efficiently (think Henry Ford), or we could trade with more efficient producers. These work—but only to a point: we can only do things so efficiently with our current technology before we hit a ceiling. For example: no matter how freely the Dutch traded, their textile mills could not compete with Britain’s until they also used power looms. Technology drives long-run productivity, and therefore economic growth.

Better technology is also how we make better stuff. Televisions are a good example. The first TVs were clunky boxes with gritty images. Today, TVs are thin, elegant, and can produce more colors than we can imagine. Even if we were no faster at manufacturing TVs than we were in the 1930s, the improvement in quality still would have expanded our economy by increasing the value of our production. Both quantity and quality are elements of economic growth.

The key takeaway here is that long-run economic growth depends upon technological growth. This is the signal. Everything else—including free trade—is noise.

Killing the Golden Goose
The data confirm my point. In his book Antifragile, Nassim Taleb notes that economic growth depends upon “black swan” events: highly improbable, yet highly consequential inventions that shift the economic paradigm. Good examples of these are the railroad, the lightbulb, or the microchip—economies without access to these technologies could never be as wealthy as those using them, no matter how freely they traded.

Likewise, research from the Brookings Institute finds that nearly all of America’s economic growth in recent decades was generated by our advanced industries—those that focus on inventing new technologies. Examples of these include America’s advanced manufacturers like Boeing and information technology (IT) companies like Google. Although these advanced industries employ just 9 percent of America’s workforce, they file 85 percent of all patents, provide 90 percent of private sector research dollars, and employ 80 percent of all engineers. This is where the economic growth happens, since advanced industries are the most likely to generate new paradigm-shifting technology. Therefore, if America wants to increase its odds at exponential growth, it needs to concentrate more advanced industries within its borders.

Yet our trade policy does exactly the opposite. After the North American Free Trade Agreement took effect in 1994, U.S. corn exports surged, as did our imports of automobiles. The problem is that automobile manufacturing is much more likely to benefit from disruptive technology than is growing corn—under NAFTA, the preponderance of long-run benefits went to Mexico, not the United States. The same is true with America’s trade relationship with China: America’s advanced goods trade deficit with China now tops $120 billion. Meanwhile, our biggest export is soybeans.

Free trade is, quite literally, turning America into China’s mercantile resource colony: we buy their value-added, manufactured products, and we sell them raw materials.

The picture is slightly more rosy globally: in 2016 America ran an $83 billion trade deficit in advanced technology products according to the U.S. Census Bureau, which slightly mitigated our losses to China. The core issue remains: we continue to  offshore our advanced industries at an alarming pace, which will only increase the likelihood that the “next big thing” will be invented abroad. If we do not reverse this trend, we will soon be on the outside looking in.

America needs to impose large tariffs to discourage its advanced industries from moving abroad. This will not only help us retain our technological edge, but it will also create an incentive for foreign technology firms to invest in America, further concentrating advanced industry in our nation. Although we cannot guarantee that America will invent the “next big thing,” we can maximize our odds. To do this, we need tariffs.

Photo credit: Stephen Jaffe/AFP/Getty Images

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33 replies
  1. hamburgertoday2017
    hamburgertoday2017 says:

    I think there is a typographical error in the following sentence: ‘The picture is slightly more rosy globally: in 2016 America ran an $83 billion trade deficit in advanced technology products according to the U.S. Census Bureau, which slightly mitigated our losses to China.’ I think the sentence is supposed to read ‘The picture is slightly more rosy globally: in 2016 America ran an $83 billion trade surplus in advanced technology products according to the U.S. Census Bureau, which slightly mitigated our losses to China.’ Otherwise, fine work as usual.

    • Spencer Morrison
      Spencer Morrison says:

      Perhaps I phrased that thought poorly: we are running a deficit globally, although this deficit is because of China. Excluding China, we’d be running a surplus with the rest of the world in advanced technology products. Our rather large deficits with placed like Japan are more than offset with our exports to Latin America, Europe etc.

      I suppose “rosy” is the wrong word, it’s just less bad.

      • hamburgertoday2017
        hamburgertoday2017 says:

        That’s what I thought you were saying, but did not think the sentence fully conveyed that intent. I’m not criticizing you, just misunderstanding you. We have a trade surplus with some countries and a trade deficit with others. The problem is that the deficits at this time significantly outweigh the surpluses.

        On a different note, what I find in the various counter-arguments against ‘protectionist’ trade measures is an emphasis on the cost to consumers, which is more frequently a rhetorical approach used by ‘progressive’ and the Left, but now being used by Chamber of Commerce types, who never before met a consumer protection measure they supported.

        Somehow the simple insight that (a) you cannot be a consumer if you don’t have an income and (b) most people receive their income from employment which requires (c) businesses to employ (or self-employ) people is lost on those arguing against ‘protectionist’ measures.

        The one ‘drag’ on the ‘income’ side of the domestic economy equation is that as wages increase due to domestic labor demand, more businesses will automate. This has been true since the dawn of the industrial revolution, but I wonder if the addition of machine ‘intelligence’ (essentially microprocessors and computer programming) have not created a new set of conditions around automation. I know you have examined the history of ‘protectionist’ measures, do you have any ideas about whether automation in the new era may change how well such measures will work?

        • Spencer Morrison
          Spencer Morrison says:

          I am wrestling with this very question myself.

          On the one hand, the relationship between employment is well understood and historically robust: provided output increases in tandem with productivity, then employment is unaffected (as the jobs shed via automation are balanced out by increased labor demand as output increases).

          This has been true since the dawn of the “machine age” in the 1100’s AD, when Europeans first began to “automate” in the modern sense, using waterwheels to full cloth, grind wheat, and saw wood. Since then human labor has been continuously replaced or augmented with more advanced machinery, with notable periods of replacement in the late 14th century (in the wake of the Black Death), the 1550-1650 in the Netherlands, and of course the “big” Industrial Revolution in Britain. In all cases, output increased in tandem with the rate of productivity, and employment remained stable (in the long run).

          Although it is up for debate whether or not the advent of proto-AI has changed the paradigm. That is, has technology reached the point that man could be obsolete. Ray Kurtzweil discusses this in his book “Singularity”. Frankly, I think his argument is grounded in a few massive factual errors & faulty logical conclusions, but it’s an interesting perspective.

          I don’t think the paradigm has shifted yet—things still function today as they always have in terms of the relationship between productivity & employment. In fact, productivity growth has been slowing for about two decades, which undermines the “machines will replace us” argument. The rate of productivity growth was over twice as fast in the 1950s-60s.

          The paradigm may shift if we actually develop a viable AI, but I’m not sure it’s worth speculating about at the moment.

          In any case, I think that the automation problem needs to be addressed by liberals who favor offshoring & open borders—why import millions of “cheap laborers” if “robots are stealing our jobs”?

  2. Brett baker
    Brett baker says:

    Or perhaps instead of payroll and income taxes, we could pay for the welfare state with a border-adjusted value added tax. When China entered the WTO, it had to gut It’s tariffs, which averaged 17%. So they imposed a 17% VAT, which did an even better job of keeping out imports.

    • Warren Dew
      Warren Dew says:

      Excellent point. And Germany – more of a direct competitor to the US, with high manufacturing wages more similar to the US – has a VAT rate of 19%.

  3. GAbuck
    GAbuck says:

    Interesting. But a few nits to pick. We gain wealth by exporting soybeans because our farmers use advanced technology to be the most efficient. It’s just like the power looms. Same product, but we are the most efficient producers in the world. Same with oil and many of our extractive industries. In a world which is growing in population and getting wealthier, efficiently producing readily available export commodities is good.

    IP theft is serious. Not to discount that, but much of the advanced technological innovation and work is still done in America, we just outsource the crappy low value added steps. We design the shoe, but get Vietnamese women to sew it. Whose making more in that transaction? Do American workers really want to sew tennis shoes? Maybe a few. But most would rather design and market and sell that shoe to the world without having to sew.

    Finally. The author is absolutely correct about being the ones to invent and exploit new technologies driving future growth. That takes having the world’s brightest people AND giving them the resources. For this we need to shift our entire view of growth and wealth. Today we are a consumption based economy of cheap material goods. We need to become an investment based economy with consumption of more durable goods. Not everyone can invent the next big things but everyone can invest in the next big things. For that, we need to encourage investment and production over consumption. Tariffs can be helpful as they are a consumption tax, but they can’t be punitive and steep and must be offset by reductions in production and investment taxes.

    • hamburgertoday2017
      hamburgertoday2017 says:

      The issue in trade is not technological efficiency. The issue is subsidy and barriers to trade. Even if a US business produces a product product more efficiently than some other business in some other country, it still cannot compete with a less-efficient business in a national economy that subsidizes the less-efficiently-produces product to allow it to enter the international market at below cost *and* has trade barriers to prevent the US product from entering that national market.

      • Spencer Morrison
        Spencer Morrison says:

        This is actually the case. In Eric Reinert’s book “How Countries Get Rich” he notes that highly efficient American factories are, in fact, being replaced by less-efficient, but nominally-cheaper, factories in China. This is due to lower labor costs, government subsidies, and the fact that cost externalities (like pollution) are not priced into Chinese goods—whereas they are priced into American goods via labor codes & environmental regulations.

    • YouCantMeanThat
      YouCantMeanThat says:

      Academic thinking: ” Do American workers really want to sew tennis shoes? Maybe a few. But
      most would rather design and market and sell that shoe to the world
      without having to sew.”

      And pray, what of those who cannot and/or do not wish to “design, market, and sell that shoe?” Which, by the way, includes the vast majority of the population. They should move to Viet Nam? Or starve? Or commit slow suicide by opioid? And ok, have it your way: Assume that everybody finds their internal Gucci — how many shoe designers can the world, much less the country, support? The ivory tower MUST reexamine some of its shibboleths. I fear that, as with democracy as a form of decision-making, tariffs may be the worst course of action — except for all the others.

      • Spencer Morrison
        Spencer Morrison says:

        This, my friend, could be the most important point of them all—and it’s one I’ve been saying for years.

        Most people could never become engineers or designers, whether due to personality inclinations, or intelligence limitations. We need an economy that works for all our people, not just those who are highly educated or who hit the genetic jackpot in terms of intelligence or creativity.

        • Greg Buls
          Greg Buls says:

          BINGO. There is a hint of elitism to their arguments about factory work. Not everyone can or wants to write code.
          Thank you for addressing comments, it’s great to have the author’s follow-up input.

    • Tsc Admin
      Tsc Admin says:

      It’s called protectionism, get used to it. It was only the policy of this country from its birth centuries ago all the way to the year 2000.

    • Greg Buls
      Greg Buls says:

      What’s better, globalization with a level playing field, or globalization where we are at a perpetual disadvantage? The clarion call of the ‘free traders’ is to do _nothing_ about trade inequities or we’ll have trade war/military war/thermonuclear war. Methinks they protest too much.

  4. Dennis Nichols
    Dennis Nichols says:

    Where do you find such authors? Spencer Morrison is almost completely innocent of all economic understanding of the past two centuries. He has made up his own “common-sense” arguments, which fail because they omit such understandings as the benefits of specialization and division of labor, which are the basis of comparative advantage. That he takes an interest in the topic of economics does not imply that he knows what he is talking about. He doesn’t.

  5. Carlos Danger
    Carlos Danger says:

    Many forget that the first Republican president, Abraham Lincoln, was protectionist. Times were different then in many ways, but they were also the same in many ways.

    Abraham Lincoln had five points:
    — tariffs and subsidies to support industry
    — government creation of improvements to help business and build infrastructure
    — government regulation of credit and direct intervention in banking
    — support for public education and research grants to advance science
    — avoid enriching factory owners at a cost to workers

    An adviser to Abraham Lincoln said:
    “Two systems are before the world. . . . One looks to increasing the necessity of commerce; the other to increasing the power to maintain it. One looks to underworking the Hindoo, and sinking the rest of the world to his level: the other to raising the standard of man throughout the world to our level. One looks to pauperism, ignorance, depopulation,and barbarism; the other to increasing wealth, comfort, intelligence, combination of action, and civilization. One looks towards universal war; the other towards universal peace. One is the English system; the other we may be proud to call the American system, for it is the only one ever devised the tendency of which was that of elevating while equalizing the condition of man throughout the world.”

  6. Harvey Manfrenjensenden
    Harvey Manfrenjensenden says:

    Speaking of Boeing, they currently outsource some engineering work to Russia. Yeah I’m sure we don’t lose ANY IP that way….

  7. phildivalerio
    phildivalerio says:

    This poor fellow just has no idea what he’s talking about. I’m interested in how he manages his personal life. The trade balance is not a score card. How is his personal trade balance with his local grocery store going? He gives it money and they give him things. Does he feel cheated? Would he be better off if they took his labor instead of his money? Maybe instead of paying for his groceries he could instead sweep their floors and clean the warehouse? Then would his trade balance be more fair and he would be better off?

    • Spencer Morrison
      Spencer Morrison says:

      This analogy makes no sense because:

      (i) You cannot reduce a complex system to a simple system, and then claim the complex system works the same as the simple system—you’re conflating your model with reality. It’s like trying to explain the mob by way of the man. Impossible.

      There’s a reason psychology & sociology, or chemistry & biology are distinct fields of study—secondary causality & emergent properties govern complex systems, but do not exist in simple systems.

      (ii) Even if we assume your logic is correct, your analogy is still deeply flawed. America’s situation is more akin to an individual spending more than he earns for 50 straight years, and racking up personal debts worth over 100% of his annual income to pay for his junk. Eventually, he will either need to reduce his consumption, or increase his income so as to pay for his goods & service the debt. In either case, he will eventually pay the piper.

      So I turn the question back on you: do you run your household in this way? After all, you seem to think endless debt & deficit is a good way to run a nation, and you believe that the household is analogous—so it follows that endless debt & deficit must be a good way to run a household, no? Syllogisms run both ways.

      (iii) The lessons in (ii) were proven with “mathematical certainty” as far back as the 1970s by the Nobel Prize-winning economist Joseph Stiglitz. See:

      https://ideas.repec.org/a/ucp/jpolec/v78y1970i3p456-88.html

      • phildivalerio
        phildivalerio says:

        Happy to reply. Yes, I run my household this way. Don’t you? I pay people who can provide services and products more efficiently and at higher quality than I am able to do myself. My labor in producing value, for which I am paid, is what I have to offer in exchange for goods and services that provide both myself and the seller with increased value. I don’t consider my household’s economic well-being to be improved by incurring higher costs for products of the same or lesser value. And I certainly don’t consider my household’s security to be enhanced by entering into trade conflicts with close, peaceful neighbors who I would like to perhaps have dealings with in the future. And as it seems that you have reduced the entire international trade system to a single variable – trade balance – you are apparently willing to engage in simplistic reductionist arguments regarding complex systems.

        I know at least one Nobel Prize winning economist who would certainly have disagreed with you.
        https://www.youtube.com/watch?v=urSe86zpLI4

        • Spencer Morrison
          Spencer Morrison says:

          You dodged my question so I’ll ask it again: do you spend more than you earn, and would you be comfortable spending more than you earn for the next 50 years? If not, why?

          • phildivalerio
            phildivalerio says:

            Didn’t mean to appear to dodge anything. The US debt burden is far, far too high, if that’s what you mean. I spend more than I earn because I have a house that was financed by private mortgage and which I am in the process of repaying. I will not continue that pattern when I’ve paid off my debts. However, that’s not akin to a trade deficit. Trade is always in balance. We pay for what we buy from foreign countries (well, regular citizens do; governments are different unfortunately). Trade is always in balance because we get goods and services for the same value as the money that we’ve spent. “Deficit” only means that we exchange cash for goods and services. And there’s nothing inherently bad about a deficit. Those we buy from have now dollars to buy things from us. IPhones, cars, vacations to Florida, etc. When we use government policy to make things more expensive to buy, unfortunately it means that our friendly trading partners are likely to buy fewer of these things, or buy them from other countries.

            I think you’re the one who dodged a question: how does making American products more expensive help improve our economy and enhance security? If it could, then why only 25%? Why not 50% ? 100%? 1000%?

  8. reaganite88
    reaganite88 says:

    Interesting article but I am not seeing how tariffs on steel and aluminum are going to promote advanced technology products. In fact quite the opposite of what the author states… by making US manufacturers pay more for raw materials (without also having a tariff on goods produced abroad based on the aluminum and steel CONTENT of products) it is more likely that Trump is making the case in the boardrooms to ENCOURAGE our advanced industries to move abroad. The author makes an interesting case for technology tariffs… but Trump’s ACTUAL tariffs are more of a shot across the bow of countries like China which have gotten away with too much chicanery for too long under the rubric of “Free Trade.”

    I have other quibbles but some of the other commenters have addressed them already:

    1) US farm production is actually the most high tech in the world. Much like the example given of the power loom, the mechanization of US farms allows productivity that simply isn’t matched anywhere else. In fact, most problems with negotiating free trade agreements have come down to other countries wanting to keep our farm products out because their own farmers would go under in short order if they had to compete with U.S. farm imports.

    2) NAFTA did not promote the movement of advanced design car plants to Mexico. Even 25 years after NAFTA was approved the plants in Mexico mainly produce the simplest and cheapest cars that can be made. Ones that U.S. labor costs prevent from being efficiently built here. The actual advanced design cars are still built in the U.S.

    • Spencer Morrison
      Spencer Morrison says:

      I somewhat agree: these particular tariffs do not address the main issue as I see it (advanced industries). However, I think they are a crucial first step, and could go a long way to setting China straight without further escalation.

      That being said, I think it’s worth noting the existence of (i) path dependency, (ii) clustering, & (iii) the anchor-predicate industry dichotomy—all of which points towards the logic behind protecting America’s steel industry. I am currently working on an article on just this subject, and I will link it here for you once it’s published.

      Best,

      Spencer

  9. Eugene Lonnon
    Eugene Lonnon says:

    The bottom line, the reason the Tariffs and possible trade wars is a good idea under Trump and not other Presidents, is because Trump is the President. I hope I have blown the minds of liberals, who are screaming hypocrite at this point. Now for the reason only Trump has the talent stack finely honed from years of experience to turn a trade war into a BONANZA.

    • Eugene Lonnon
      Eugene Lonnon says:

      The two presidents that should never ever have tried to walk the tightrope of negotiating trade aggressively are Jimmy Carter and George Bush Jr. Both lacked the skills needed, whereas Trump is the master. Time is on my side, oh yes it is. God Bless the President.

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