President Donald Trump’s dramatic tariff imposition reverses more than a century of U.S. policy, all in an effort to fix a problem about which he has been raging since the 1980s. What appears to most everyone as a wild gamble feels to him like a certain prescription to fix what fundamentally ails the United States, namely its inability to compete in manufacturing with nearly all countries in the world.
There is an even more fundamental question that burns beneath the surface: Is there anything really wrong here that needs fixing?
For at least a year, I’ve found myself disagreeing with my traditional compatriots on this question. Many of my pro-trade friends don’t see an issue at all. My response is that we need a better understanding of how trade works today—not the ideal version of the 18th century and most of the 20th century, but the reality as it has existed since February 1973. That was the month of birth of a new system, the world economy ruled by a fiat U.S. dollar, wholly untethered by the gold standard.
That date marked the loss of U.S. manufacturing advantages over the rest of the world. No longer would international accounts settle the traditional way. In the old system, when goods flowed in and money flowed out, prices would adjust, falling in the importing country and rising in the exporting country.
The opposite was also true. That’s why we saw no trade deficits before 1973.
Thus was born a different system. With all trade accounts settled in one paper currency, there was an infinite demand for dollars abroad. They could be held as assets by any banking system. That meant they never came home to the United States.
With traditional trade flows as they once operated, money exported would have resulted in falling production costs, allowing U.S. manufacturing to flourish so that we had plenty of comparative advantages as an exporting country. Low-wage countries would have seen costs rise in a gradual tendency toward equilibrium.
That did not happen, and this is for several reasons. Taxes in the United States kept rising. Regulations kept piling up. The Federal Reserve kept inflating, turning what should have been a currency with rising purchasing power into a piece of paper that was always falling in value. The United States just kept printing and printing for decades, all the way to the present.
Costs of production kept rising while income stayed flat when it should have been rising, given the remarkable technologies that were coming online. The United States outsourced its productive capacity to the world. The comparative advantage that enables trade became the absolute advantage of everyone but the United States. This is the core of what rubs Trump the wrong way.
The results of this were guaranteed by the math. The United States would lose its manufacturing base. Exports in goods would collapse. Trade deficits would rule, forever. Every textbook then and now predicts exactly this result.
It did not happen all at once. The first great competitor became Japan, which ate into traditional U.S. industries such as pianos, watches, and cars. In the next decade, China caught on. Once it, too, opened to join the world trading system, opportunities abounded. Over 20 years, the United States lost everything else: textiles, clothing, steel, tools, shipbuilding, appliances, toys, and nearly everything else you can name.
Then other countries joined. After reform efforts toward market economics, shepherded in part by the United States, poor countries such as Vietnam and Cambodia found advantages in manufacturing, too. In the United States, there was unlimited demand for low-priced products from abroad; all we had to do was keep the shipments of dollars going, which were in turn deployed to build up more manufacturing to beat anything and everything the United States could produce.
After 50 years of this, the United States is left importing vast amounts of stuff while retaining mostly only two reliable exports: our natural resources of oil and gas plus products and services rooted in finance. The infrastructure of the past has decayed. The factories have long been closed. The workers have found employment in services, and a huge class system in the United States has been born: laptoppers versus everyone else.
Connected with this loss of purpose has come a physical and mental health crisis alongside chronic substance abuse and other forms of poisoning. The demoralization of the working classes alongside the gradual shrinkage of the middle class is palpable.
This is a story of tragedy, in my view, born of huge mistakes dating back many decades. Most of the architects of the system are either dead or long gone from public life. At no point were they blamed for anything. Richard Nixon’s new system, with Milton Friedman as the architect, ended up changing life in the United States forever.
The loss of U.S. manufacturing power occurred too slowly for anyone to sound the alarm but quickly enough to shock and disorient an American public that pretty well experienced a changed social and economic order in the course of just a few generations. There was a moment in 1985 when James Baker sought a fix of tying down world exchange rates to stop the meltdown, but he failed.
Forty years later, we now have a president who sees the problem and seeks dramatic change to fix it. He has taken huge steps to effectively dismantle the world trading order built over 80 years. His choice of weapon is the most blunt one any nation has: the use of tariffs as sanctions. The theory is that these sanctions will create a level playing field in which U.S. industry can thrive again.
The financial markets hate this. It’s not clear that Trump’s supporters are wholly enthusiastic about this, either. For years, Trump has campaigned for tariffs. He could not have been clearer about his intentions. I’ve been trying to explain since 2015 that mercantilism is central to his political vision. For some reason, most people thought that it was a personal eccentricity on which he would never act.
Trump has acted. This forces the point. He believes that this will help fix what ails the United States. The trouble is that tariffs are not magic dust. They can be helpful for raising money in ways that do not tax incomes. If Trump manages to fund a greater share of revenue through tariffs while giving back to U.S. citizens, he could turn out to be a winner with this gambit.
But there are other effects, too. One is that every U.S. import, wholesale or retail, faces much higher costs now.
I was just at a Vietnamese superstore in which 90 percent of the products sold are from a certain country. Imports from this country now come with a 46 percent tax. I don’t know if this store can survive this. The managers must be in a panic. Customers, too. A deal may be in progress to save such imports. One hopes so.
What about the new U.S. manufacturers that will be helped? Let’s think about this. If such manufacturing were not previously viable and only now viable with tariffs, there simply cannot be an export market for them. That’s because whatever they make—whether clothing, tools, ships, meat, or whatever—will be available more cheaply from other countries. Therefore, this will help not at all with the trade deficit.
There is a true danger associated with the creation of a new class of industries that get fired up by tariffs but will forever depend on sustaining these tariffs to sell goods only to Americans at higher prices than goods from abroad.
This turns the United States into a walled garden, insulated from the normal competitive pressure of the rest of the globe. That is not competitiveness; that is autarky and a prescription for stagnation.
Tariffs are not magic. They are simply taxes, paid directly by U.S. importers, whether consumers, wholesalers, or retailers. To be sure, they could put pressure on foreign exporters to lower prices. It will be interesting to watch and see if this happens. But even then, this will do nothing to achieve the goal of reducing U.S. trade deficits with the world. Those will only come down if the United States becomes a net exporter again. That simply cannot happen as long as the United States is not competing on production costs and price.
As much as I would like to think that there is some hidden brilliance to this whole strategy, I simply cannot make sense of what it is. It feels cobbled together out of a mathematical formula that targets “bad actors” who are doing nothing but making stuff and selling it. The ideals are good, but the precise mechanics of implementation are not so good. This is why financial markets are coughing it all up.
My genuine concern is that Trump’s second term is risking the whole of his hugely important and implausible presidency on policy that will ultimately prove damaging to U.S. prosperity and liberty.
What’s my solution? I have no blueprint for fixing the world monetary system, which is the real root of the problem. Still, there are plenty of ways to make the U.S. economy more competitive without building tariff walls. They include dramatic reductions in taxes and regulations of all sorts. Maybe those are coming, but we have no assurance of that.
In addition, the U.S. Treasury must stop printing up debt and shipping it all over the world. Putting a hard stop on that simply by balancing the federal budget would go a long way toward solving the problem to which Trump has drawn attention.
Honestly, these are scary times and “liberation day” has not made me more confident in the future. My worry is that the whole of the revolution that Trump has brought is being put at risk on an unproven theory that could make the problem even worse. If I’m correct, there is a reason to feel a sense of heartbreak about what is unfolding here. I would love to join those celebrating, but I cannot find my way toward joining them.
