A short time ago, over a thousand (actually 1,140) economists sent President Trump a letter. They were clearly appalled at President Trump’s economic protectionism, his tough and erratic rhetoric on the Trade requirements of the US and in particular, his apparent willingness to repeat the very same mistakes the US made in the 1930s. They saw Mr Trump’s present stated policy on tariffs very close to the ill-fated 1930 protectionist Smoot Hawley Tariff Act which is now widely agreed to have been a key factor in the economic chaos which ensued. Since in their view those mistakes had been instrumental in plunging much of the world into deep recession they saw it as vital that Mr Trump changed course.
“Today, Americans face a host of new protectionist activity, including threats to withdraw from trade agreements, misguided calls for new tariffs in response to trade imbalances, and the imposition of tariffs on washing machines, solar components, and even steel and aluminium used by US manufacturers.”
The authors of the letter noted: “Congress did not take economists’ advice in 1930, and Americans across the country paid the price. The undersigned economists and teachers of economics strongly urge you not to repeat that mistake. Much has changed since 1930 – for example, trade is now significantly more important to our economy – but the fundamental economic principles as explained at the time have not… (gone away)….”
Unfortunately, although Mr Trump seems to delight in threatening to dismantle the last few decades of Trade agreements, as other economists have been stressing, Mr Trump apparently neither understands the current arrangements and agreements now in place, nor it seems, even the basics of economics. He certainly bends the truth when he “quotes” trade figures and fails to understand the place of services as well as goods in the balance sheet. In one irony it turns out that when all the trade tariffs are averaged and weighted Canada has a much lower weighted mean tariff figure than that of the US. (the reader can check the WTO averages to get the summary figures). According to the Trump version, the lack of manufacturing jobs is because trading partners have taken over the manufacture. On the other hand most economists point to automation as a more serious issue.
The US public should not be surprised that Trump in effect trying to advantage the US by placing tariffs on overseas exports is not likely to win cooperation or friends. For example Mr Trump created so much anger amongst the trading partners of the US that on his recent tour to Europe virtually every leader was protesting the US actions and resulted in the more significant trading partners threatening reprisals by placing their own tariffs on US goods and services and seeking alternative sources for key US exports like Soy Bean.
One of the worrying warning signs of trade breakdown is one of the apparent probable consequences of forcing more short term value into the strong US dollar. The current scenario means a rise in the US dollar has two apparently inevitable consequences. One is that it places strain on the US trading nations because their currencies have lost purchasing power for US goods and services. The second is that the Trading partners for the US are going to experience severe strain on their own exchange. Either less is then purchased by the partners or the weaker trading partners will experience crippling inflation.
Perhaps the most baffling lack of understanding on the part of President Trump was that he did not seem to understand that reacting to an established deficit by reducing taxes by 1.5 trillion dollars to assist the wealthy in the US might free up some money in the very short term but ultimately feeds the size of the deficit. Giving people cash in hand does not help much when the prices of the goods they seek to buy will cost more. Yes you can shift money around but first look to see exactly who is advantaged and more importantly who will now be disadvantaged. It is curious that someone like Trump who claims a degree in economics acts as if he has never even heard of the Pareto Principle let alone known how it is normally applied. (OK I guess it was only an undergraduate degree from Wharton – but one focussed on Real estate and Trump’s implication it was an honours degree is curiously missing from the lists provided by the College!)
The letter to Trump was signed by Nobel laureates including Oliver Hart, James Heckman, Roger Myerson, Irvin Roth and Richard Thaler, as well as James Miller, budget director to Ronald Reagan, and Jason Furman, former chair of the Council of Economic Advisors to Barack Obama.
The American economist, Jeffrey Sachs, didn’t mince his words when he provided a commentary for CNN on Friday night. He called Trump delusional, psychopathic and a “threat to the nation and the world.” Remembering that Sachs is world renown professor from Columbia University who heads its Center for Sustainable Development and also serves as an adviser at the United Nations, perhaps we should listen. Trump’s “so-called policies are not really policies,” he claimed. “Trade wars are on, off, on hold, on again, within the span of days. … Foreign companies are sanctioned today and rescued the next. … Global agreements and rules are ripped to shreds. Trump’s garbled syntax and disorganized thoughts are impossible to follow.” Sachs called the tariffs on exports from Mexico, Canada and the European Union part of a “psychopath’s trade war”
As it happens I would also like to add my own postscript. Over the last few years the US has been the most powerful economic nation in the world. As a citizen of a more vulnerable nation I struggle to see why rearranging our trade to ensure the wealthy in the US move further up the ladder is in our interests. Given this strange new Trumpian world I would wonder why we don’t simply concentrate on building trade ties with those who are more likely to respect our present and future trade agreements.