Amar Bhidé
About the author: Amar Bhidé is the author of Uncertainty and Enterprise. He is a professor of health policy at Columbia University and professor of international business emeritus at Tufts University.
A broad consensus among economists has warned of the dire consequences of tariffs since Trump issued his first salvo in January. Yet, even with tariffs now close to the much-feared Smoot-Hawley rates of the 1930s, the U.S. economy is still far from collapse. Growth and job creation continue, if slowly, and the stock market is hitting new highs.
What gives? Were economic gurus right but early, and the stock market myopically complacent? Or are Trump’s trade warriors right on tariffs?
In fact, both the president’s friends and foes exaggerate the economic significance of his tariff decrees and in doing so risk drawing attention from graver, but less obvious, threats. These risks aren’t immediate or even mainly about trade. They arise from ad-hoc arm-twisting and blustery dealmaking that threatens the country’s dynamism and its rule of law.
What are the trade warriors missing? For starters, market-determined exchange rates, which no one can control or predict, play material roles in determining the prices of imports. The dollar has declined nearly 10% this year. Another 10% fall would take the dollar back to its level in May 2021. Such devaluations have practically the same effect as tariffs: They make imports more costly.
Cross-border trade plays a modest role in the large, diversified U.S. economy. Exports and imports amounted to about 5% of gross domestic product for much of the nation’s history.
More impactful are domestic tax, spending, and labor policies—factors affecting internal trade, in other words. Biden-era inflation was driven by legislation that authorized eye-popping spending that couldn’t be met by domestic demand, helped along by a careless Federal Reserve. Similarly, a collapse in domestic housing and mortgage markets triggered the 2008 financial crisis. Popular mythology aside, the much-reviled Smoot-Hawley legislation couldn’t have produced the cataclysmic collapse in domestic demand during the Great Depression. It raised the tariff on dutiable imports—then amounting to just 1.4% of GDP—from 40% to 47%
Imports from low-wage countries have played a negligible role in the multidecade decline in manufacturing’s share of U.S. jobs. At no point in the country’s transformation from an agrarian economy in the 1800s to its current form did manufacturing employment ever exceed services, as the economic historian Angus Maddison showed. In 1950, even as the manufacturing sector was in full swing, it accounted for only about a third of total employment. Services had a 53% share of employment. Today, there are more than 10 times as many service jobs than manufacturing jobs.
Domestic policy will make or break Trump’s radical agenda. Unshackling domestic enterprise could deliver the unprecedented wealth that the president predicts his trade victories will produce. Conversely, beware if the law’s multitrillion dollar price tag provokes a bond buyer’s strike.
But that isn’t to say the president’s trade war theatrics are a sideshow or a problem just for hapless Bangladeshi or Sri Lankan garment workers. It may amuse jingoists to see foreign governments and leaders humiliated, but the concurrent shakedown of U.S. companies and executives is no joke.
U.S. dynamism relies on the enterprise of major corporations. Pressuring Apple to invest $100 billion in facilities in return for an exemption from a 100% tariff on high-end computer chips epitomizes the centralized heavy-handedness that stifles large European and Japanese companies. So does the deal squeezed out of Nvidia for 15% of its chip sales to China.
The president’s ad-hoc corporate shakedowns undermine the country’s constitutional architecture. The Constitution doesn’t expect government by and for angels: Framer James Madison foresaw that “the landed and manufacturing classes” would promote different tariff policies—without “regard to justice and the public good.” But without other sources of revenue, tariffs were unavoidable. From the 1790s to 1860, import duties accounted for 90% of the federal government’s revenue. A messy but effective antidote to capture by special interests was competition between interests and the separation of Congress’s power to enact laws and the president’s responsibility to implement them.
Fiercely contested legislation delivered predictable, if high, tariffs, and then a transition to revenue raised through income taxes in the early 20th century.
But over time, imperious presidents from both sides have undermined respect for enacted laws. Executive decrees that subvert legislation and ignore supine lawmakers have proliferated. At his current rate, Trump will sign more executive orders in the first year of this term than President Barack Obama signed in his eight years in office. Trump has dared judges to overturn the “emergency” tariff decrees he is using to coerce U.S. businesses and foreign governments.
Any tax or tariff is distortionary. Yet taxes are the price we pay for a civilized society, as the Supreme Court Justice Oliver Wendell Holmes put it. Likewise, messy Congressional compromises over taxes, tariffs, and lawmaking are the price of avoiding despotism. Partisans who cheer “their” president for brushing aside legal niceties fire up the other side to later do worse.
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