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Donald Trump wants to use trade and tariffs as weapons. This won't end well  4 Days ago

Source:   USA Today  

The Trump administration is weaponizing access to U.S. markets, through tariffs and sanctions, more than any other modern presidency. This is unlikely to end well.

Donald Trump’s chief fixation is the trade deficit. He clearly views trade as a zero-sum game. If you have a trade deficit, you are losing.

And tariffs are his weapon of choice. He reportedly was irritated during his first year because his staff wasn’t producing tariffs for him to impose or threaten. That’s been remedied.

However, it was never clear what the purpose of the tariffs was to be.

One possibility is that Trump believes in insulating American businesses from foreign competition in this country through a protectionist tariff, a return to the U.S. economic policy of the 1800s. In that case, a tariff is an end in and of itself.

Another possibility is that Trump views tariffs as leverage to get other countries to reduce their own protectionist measures that disadvantage American businesses in trying to sell goods and services overseas. In this case, a tariff is a tactic while the goal is actually free trade.

A third possibility is coming into focus, and seems to best reflect what Trump truly wants. It appears that Trump believes in managed trade, which is the worst possible resting point on the spectrum from protectionism to free trade.

In managed trade, politicians from different countries get together and decide how much of each other’s goods they will buy.

The evidence that this is Trump’s preference is mounting. The counties that have been granted exemptions from his steel and aluminum tariffs – South Korea, Brazil and Argentina – have agreed to quotas limiting the amount of those materials they will export to the United States.

China is coming up with a shopping list of U.S. goods to purchase, in an attempt to avoid Trump’s threatened tariffs against that country.

In NAFTA negotiations, the administration initially sought to set a minimum amount of U.S. content a car would have to contain to be duty free. It is now trying to do the same thing through the back door by requiring that a certain amount of content be produced with high-wage labor.

Trump’s preference for managed trade explains his previously inexplicable preference for bilateral, rather than multilateral, trade agreements. If the objective is lower barriers to facilitate freer trade, the more countries the better. If the objective is for the politicians to divvy up the goods, that becomes more complicated the more countries that are involved.

In free trade, what counts is a business’ ability to produce and market a better good or service than competitors, irrespective of where domiciled. In managed trade, what counts is a business’ political clout, the ability to get your politician to limit the ability of foreign competitors to sell or require foreign purchasers to buy from you.

Left by the roadside are consumers, who fail to get the full benefits of robust competition.

The Trump administration is also trying to force other countries to follow the U.S. on foreign policy through sanctions regimens. This is clearest in the case of the Iran nuclear deal.

Trump withdrew from it. European countries think that is a mistake and want to stay in the deal. And by staying in the deal, they hope to persuade Iran to stay in it as well.

To force Europe’s hand, the administration is threatening sanctions not only against companies that do business with Iran, but also against companies that do business with companies that do business with Iran.

This is more than just making countries choose to do business in either Iran or the United States. It’s hard to conduct international commerce anywhere without access to U.S. financial markets and the dollar. Roughly 40 percent of international trade is denominated in dollars.

Economists generally believe that the role of the dollar as the global reserve currency is of benefit to the United States. I’m skeptical, but to the extent the United States uses that role as an instrument of foreign policy, other countries will want alternatives. China has been particularly vocal about the need to develop alternatives. Europe may now join it.

The United States is less than 5 percent of the world’s population. We produce less than a quarter of the world’s goods and services. Both figures are diminishing with time.

The rest of the world can figure out a way to do business around us. Weaponizing access to our markets quickens the arrival of that day.



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