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.

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.

“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.”

This guy should change his monicker to Retardo. Yeah. Let’s send Canada some flowers so they don’t trade with China. Or we can just tell them we’ll tariff them 100% if they trade with China and they’ll call the deal off like they just did.

“Thanks for posting. I won’t read further though, because I’m sure that within the article there is most likely a but enbedded in there.”

Here’s the ‘but’:

“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.”

As an economist, he assumes rational actors. But world politics is anything but rational. Countries do things to their own harm all the time. Trump realizes this and bullies them to help the US.

Nor does he compute the ‘bandwagon’ effect, nor the effect of foreign domestic politics on the political leaders’ decisions.

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