Donald Trump is apparently considering imposing some tariffs on some imports from our trading partners. This prospect has many folks, including Paul Krugman, terrified. I don’t share his fear.
Before getting into any substance, I should be clear. I have no idea what Trump may be planning by way of tariffs. During the campaign, he threatened to put a 35 percent tariff on imports from Mexico and 45 percent tariffs on imports from China. These tariffs would, in fact, be scary. They would certainly create large disruptions of the type Krugman talks about. It would also be almost certain that they would lead to a trade war with both countries retaliating.
I should also say that tariffs are not my preferred way of dealing with the country’s trade deficit, which I do consider a problem. Anyone who thinks secular stagnation (i.e. not enough demand in the economy) is a problem should believe the trade deficit is a problem. If the trade deficit were 1.0 percent of GDP rather than 3.0 percent of GDP, we would have been approaching full employment many years ago.
But the normal mechanism for reducing a trade deficit is an adjustment in currency values. This means that the currency of the country (the United States) with the deficit falls and the country with the surplus (much of the rest of the world) rises. When the dollar falls in value relative to other currencies, U.S. made goods and services become more competitive internationally. That will lead to more U.S. exports, and fewer imports, bringing trade closer to balance.
This adjustment in currency values has not taken place primarily because foreign governments have bought up massive amounts of dollars. This is partly as a reserve currency to protect themselves against financial crises. (It is a failure of the International Monetary Fund that large amounts of reserves are considered necessary for this purpose.)
The purchase of dollars was also in part to keep the dollar up against their currencies in order to maintain trade surpluses. China was the biggest actor in this area, but many other countries also got in the act, although on a smaller scale.
During the campaign, Trump pledged to declare China a currency manipulator, which would presumably pressure them to reduce their holdings of dollars. The Chinese central bank is no longer actively buying dollars, although the country now has more than $4 trillion in reserves, including its sovereign wealth fund holdings. This massive stock of reserves keeps up the value of the dollar in the same way that the Fed’s massive holding of assets puts downward pressure on long-term interest rates even though it ended its quantitative easing more than three years ago.
Anyhow, Trump quickly abandoned doing anything on currency with China. After his meeting with China’s President Xi Jinping in April, Trump boasted of his good relationship. He said he didn’t want to jeopardize it by talking about currency, since President Xi promised to help in dealings with North Korea. (His daughter also got a number of trademarks for her clothing line approved by China.)
Since Trump is apparently not going to do anything about addressing currency imbalances, we are now looking at the threat of tariffs. While it is certainly possible that Trump will impose some really stupid tariffs, some tariffs may be both justified and useful. It is worth noting that there were several occasions on which President Obama imposed tariffs on imports from China.
China almost certainly is violating trade rules in many areas, most obviously by subsidizing exports to the United States and other countries. Tariffs can be a way to force China to change the policy. Perhaps Krugman thinks these tariffs by the Obama administration were also terrible, but they didn’t lead to the lovely trade war he warns about in his piece.
I would also differ with him on his negative view of an earlier round of tariffs during the presidency of George W. Bush. Bush slapped tariffs on imported steel back in 2002. These tariffs were scheduled to phase down to zero over a span of three years. Instead, they were ruled illegal by the WTO and ended after just over two years.
While we undoubtedly did pay more for steel as a result of the tariffs, this period of protection bought the industry some breathing space at a time when most of the old-line producers were facing bankruptcy. As a result, the companies were able to reorganize and are now profitable. This has likely preserved tens of thousands of jobs in steel in Pennsylvania, Ohio, and other rust belt states. This was exactly the period when manufacturing in this area was being ravaged by import competition, so this was an important lifeline for workers and communities who were getting little help from anything else.
There were of course better ways to deal with the job loss. We could talk about having a more generous welfare state and serious retraining efforts that actually would allow displaced workers to get comparable jobs in new industries. But we don’t live in this world, so it’s hard for me to see these temporary tariffs as an awful policy. (For the record, the most likely reason the Bush administration imposed the tariffs was that he knew Ohio was key to his re-election prospects.)
So, if Trump has temporary tariffs similar to what the Bush and Obama administration imposed, I can’t get too bent out of shape. They could actually be good policy in the sense that they may save some jobs in the short-run and get China to reverse its subsidies in the slightly longer run. (For those who get hysterical about the disruptions created by modest tariffs remember that the dollar can rise or fall by 10 to 15 percent, with an equivalent effect on import prices, and no one even pays attention.)
On the issue of hysterical reactions to trade tariffs, it is worth noting a front page piece on the regulation of dental practices the Washington Post ran last weekend. The essence of the piece is that American Dental Association (ADA) has been a very effective lobby for protectionist measures to maintain the income of dentists.
While the piece focuses on protection against competing professionals in the United States, the ADA also blocks foreign trained dentists from practicing in the United States. Dentists cannot practice in the United States unless they have a degree from a U.S. dental school. (Since 2011, graduates of Canadian dental schools have also been allowed to practice here.)
As a result of this protectionism, the pay of dentists averages $200,000 a year, roughly twice as much as their pay in other wealthy countries. This costs the country $20 billion a year (roughly equal to the TANF budget) in higher dental expenses.
For some reason, economists rarely seem to get too upset about this protectionism (or the protection for doctors or other highly paid professionals). Anyhow, you can read more about that one in chapter 7 of my book Rigged: How Globalization and the Rules of the Modern Economy Have Been Structured to Make the Rich Richer (it's free).
Note: Typos in an earlier version were corrected.