2 weeks Ago
Secretary of the Treasury Scott Bessent and Secretary of Commerce Howard Lutnick have both enjoyed highly successful careers in finance. They are not fools nor have they any reason to be sycophants. Both endorsed President Trump’s across-the-board imposition of high tariffs, arguing that they will bring a new prosperity to the U.
S. economy. The financial markets have not agreed with them.
They immediately went into free fall. Subsequently on April 9, President Trump put a 90 day pause on the imposition of most tariffs, excluding the high tariff on China, which remains in place. The markets responded with a near record upturn.
Added uncertainty makes markets more volatile. We’ve been assured there is no need to panic or reduce 401(k) market exposure. As an economist, I believe the world benefits from producing goods and services, wherever that occurs, at the lowest possible opportunity cost.
For consumers, this leads to lower prices, and, with increased competition, more product variability, and higher quality goods and services. The benefits flowing from free trade are both theoretically established and historically vindicated. All this seems so obvious that one must wonder why President Trump imposed tariffs launching a trade war that will be detrimental to consumers both here and abroad.
There is no need for me to reiterate the benefits of free trade. I want, instead, to try to understand what might have motivated President Trump’s tariff policies. First, it might be noted that the debate about tariffs has revealed, at least for me, the many deviations from free trade that exist.
Certainly, the free trade model that economists postulate has never been fully realized. For example, the free movement of labor has always been significantly impeded by immigration policies. Economists, too, are not fools.
Model assumptions are simplifications that often led to important insights. Economists are fully aware of the simplifications, but are often well satisfied with the revealed insights. With a primary interest in model building, I have never had a detailed concern with real world deviations from model assumptions.
But, those “deviations” are often of great consequence to business firms and nations. I have become more aware of the trade and regulatory policies that unequally affected the United States. Some of the inequalities might be explained by an awareness that we are the more influential and wealthier trading partner.
There is a generosity and, perhaps, an obligation, to extend some unequal benefits to less well-off trading partners. No purely economic arguments in support of the tariffs have been advanced that are not reputed by theory and experience. There are, however, two possible explanations for the Trump tariff policies.
Tariffs may serve as an opening bargaining gambit to achieve the mutual lowering or elimination of tariffs and other policies that impede free trade. That is, the imposition of tariffs may be a disguised way to achieve freer trade. I’d like to believe free trade is a policy objective of President Trump.
But, there is too much else he says and does for me to put any confidence in free trade as his goal. Additionally if freer trade is the goal, there are more effective, and diplomatic, ways to move towards that end. The other argument for tariffs is based on national security considerations.
The full benefits of free trade depend on peaceful nations seeking economic benefits but not military advantage. That is not today’s world. China is a formidable military power that, their protestations aside, is perhaps seeking world domination and, more certainly, a global influence that will equal or surpass that of the United States.
Casual observation and a childhood recollection of World War II suggest we no longer have the manufacturing capacity to produce the tanks, submarines, aircraft and other war necessities needed in winning, or not losing, a future war. Thus, it may be desirable for us to take policy initiatives that assure our supply of the inputs, e.g.
, steel, aluminum, oil and rare earth elements, needed by a nation facing the possibility of armed conflict. If military preparedness is, indeed, a goal, then it would seem important that we not alienate our reliable friends and allies. Tariffs, to better prepare us for war, should be selective.
We would not, for example, want to depend on China or Russia for needed inputs. But, why high tariffs on Canada? We might want to discuss some trading policies that may be deemed as unfair, remembering, however, the great differences in our respective economies. But why alienate our long friendly northern neighbor? Certainly, too, there are many other countries that have long been reliable allies and deserving of our consideration.
Yes, there may be some national defense considerations that may warrant selective tariffs, but that objective is not being advanced by the tariff policies we are now implementing. Maybe, there will be long run benefits that we will come to attribute to Trump’s foresight. Unfortunately, we all live in the short run.
Or, as John Maynard Keynes wittily observed, “In the long run, we are all dead.” So prepare yourself for higher producer and consumer prices and possibly, too, a long recession. This is a contributed opinion column.
George Heitmann is professor emeritus of management science at Penn State (University Park) and professor emeritus of economics at Muhlenberg College. The views expressed in this piece are those of its individual author, and should not be interpreted as reflecting the views of this publication. Do you have a perspective to share? Learn more about how we handle guest opinion submissions at themorningcall.
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