“Mr. Trump sometimes sounds as if the U.S. shouldn’t import anything at all, that America can be a perfectly closed economy making everything at home. This is called autarky, and it isn’t the world we live in, or one that we should want to live in, as Mr. Trump may soon find out.”
– Wall Street Journal (£)
I think this post is going to annoy Trump defenders, and of course he’s done a few things (shutting DEI down in schools and so on) that I applaud. But this is not the time for whataboutery when considering how terrible Biden was and Harris would have been, as they were and would have been. Those talking points have their place, but now Mr Trump is in office. He’s the President for the next four years.
So there’s no way to finesse this. Tariffs are a form of self-harm, and the reasons given in this particular case shows they are seen as clubs to hit countries with in order to make them change this or that policy. It creates uncertainty, hits inward investment and domestic activity. Domestic and global economic growth will be reduced from where it might have been. Tariffs are taxes, however hard one might try and spin that fact away. Since Adam Smith pointed this all out 250-plus years ago, the damaging impact of tariffs have been widely understood.
Tariffs, particularly given how they been justified and enacted, are a grave mistake by Mr Trump. Trying to claim that the US hit economic heights when tariffs existed in the late 19th century is another case of correlation and causation getting all blurred. The US in the post-Civil War era was a low-tax place: no federal income tax, no Fed, hardly much of a Welfare State as we’d call it, immense inflow of immigrants from places such as Russia, Germany, Italy, Sweden, etc. (Because there was little state welfare, such folk had to work their backsides off, and they did.) Here is an essay that in my view debunks the idea that the post-Civil War tariffs were a good idea.
There are facts that might be a puzzle, but not when you consider that Mr Trump loves tariffs even because they are a weapon. That’s what gets him out of bed in the morning, sometimes for good causes, often not. But the economic rationale is even worse when you consider that American energy costs, thanks to all that fracking he’s in favour of (a plus for him, in my view) means American manufacturing in some ways has a big competitive advantage on Europe, which self-harms because of Net Zero, red tape and high taxation.
Here is an essay I came across via social media and I think it is worth a read:
“I’m going to get a little wonky and write about Donald Trump and negotiations. For those who don’t know, I’m an adjunct professor at Indiana University – Robert H. McKinney School of Law and I teach negotiations. Okay, here goes.
Trump, as most of us know, is the credited author of “The Art of the Deal,” a book that was actually ghost written by a man named Tony Schwartz, who was given access to Trump and wrote based upon his observations. If you’ve read The Art of the Deal, or if you’ve followed Trump lately, you’ll know, even if you didn’t know the label, that he sees all dealmaking as what we call “distributive bargaining.”
Distributive bargaining always has a winner and a loser. It happens when there is a fixed quantity of something and two sides are fighting over how it gets distributed. Think of it as a pie and you’re fighting over who gets how many pieces. In Trump’s world, the bargaining was for a building, or for construction work, or subcontractors. He perceives a successful bargain as one in which there is a winner and a loser, so if he pays less than the seller wants, he wins. The more he saves the more he wins.
The other type of bargaining is called integrative bargaining. In integrative bargaining the two sides don’t have a complete conflict of interest, and it is possible to reach mutually beneficial agreements. Think of it, not a single pie to be divided by two hungry people, but as a baker and a caterer negotiating over how many pies will be baked at what prices, and the nature of their ongoing relationship after this one gig is over.
The problem with Trump is that he sees only distributive bargaining in an international world that requires integrative bargaining. He can raise tariffs, but so can other countries. He can’t demand they not respond. There is no defined end to the negotiation and there is no simple winner and loser. There are always more pies to be baked. Further, negotiations aren’t binary.
China’s choices aren’t (a) buy soybeans from US farmers, or (b) don’t buy soybeans. They can also (c) buy soybeans from Russia, or Argentina, or Brazil, or Canada, etc. That completely strips the distributive bargainer of his power to win or lose, to control the negotiation.
One of the risks of distributive bargaining is bad will. In a one-time distributive bargain, e.g. negotiating with the cabinet maker in your casino about whether you’re going to pay his whole bill or demand a discount, you don’t have to worry about your ongoing credibility or the next deal. If you do that to the cabinet maker, you can bet he won’t agree to do the cabinets in your next casino, and you’re going to have to find another cabinet maker.
There isn’t another Canada.
So when you approach international negotiation, in a world as complex as ours, with integrated economies and multiple buyers and sellers, you simply must approach them through integrative bargaining. If you attempt distributive bargaining, success is impossible. And we see that already.
Trump has raised tariffs on China. China responded, in addition to raising tariffs on US goods, by dropping all its soybean orders from the US and buying them from Russia. The effect is not only to cause tremendous harm to US farmers, but also to increase Russian revenue, making Russia less susceptible to sanctions and boycotts, increasing its economic and political power in the world, and reducing ours. Trump saw steel and aluminum and thought it would be an easy win, BECAUSE HE SAW ONLY STEEL AND ALUMINUM – HE SEES EVERY NEGOTIATION AS DISTRIBUTIVE. China saw it as integrative, and integrated Russia and its soybean purchase orders into a far more complex negotiation ecosystem.
Trump has the same weakness politically. For every winner there must be a loser. And that’s just not how politics works, not over the long run.
For people who study negotiations, this is incredibly basic stuff, negotiations 101, definitions you learn before you even start talking about styles and tactics. And here’s another huge problem for us.
Trump is utterly convinced that his experience in a closely held real estate company has prepared him to run a nation, and therefore he rejects the advice of people who spent entire careers studying the nuances of international negotiations and diplomacy. But the leaders on the other side of the table have not eschewed expertise, they have embraced it. And that means they look at Trump and, given his very limited tool chest and his blindly distributive understanding of negotiation, they know exactly what he is going to do and exactly how to respond to it.
From a professional negotiation point of view, Trump isn’t even bringing checkers to a chess match. He’s bringing a quarter that he insists of flipping for heads or tails, while everybody else is studying the chess board to decide whether its better to open with Najdorf or Grünfeld.”
— David Honig
So there you have it. A bad idea having a damaging impact. Is Mr Trump playing 4-D chess with us all, as his defenders and explainers (including those who consider themselves pro-capitalism seem to be doing in some places that I see on social media), or is this in fact a big error that will eventually hurt America and the freer bits of the world? My worry is that history tells us that, with exceptions, tariff clashes tend to go wrong, lead to slower growth, and even nastier conflicts. It may be that Mr Trump is cleverer than we can appreciate, but I am sceptical.
Not a good start to his time in office. May wiser heads prevail, as they say.
Update: Here is a good article today (4 January) from Daniel Freeman at CapX on how, in his view, Mr Trump has misread the causes of America’s ascent as a business powerhouse.
