Trump’s Tariffs: The Art of the Deal? Not Exactly

President Donald Trump’s new tariff campaign, imposing heavy taxes on imports from both friendly and unfriendly U.S. trading partners, might have prompted the famous Prussian general and military strategist Carl von Clausewitz to revise his aphorism that “war is merely a continuation of politics by other means.” Today, tariffs are a continuation of politics by other means.

President Trump variously justifies his tariffs—a form of protectionism—as a means of restoring “fairness” to international trade, as a way to force other nations to reduce the taxes they impose on American-made goods, and even as a new “Liberation Day,” on which the United States no longer is beholden to foreign manufacturers for things that should, in his mind, be made here.

However, if tariffs, like war, truly continue politics by other means, American consumers will be the main casualties. And even most Trump voters probably didn’t vote for him so they’d become trade-policy victims.

Tariffs imposed by one country invite retaliation by others. The prices of tariffed goods rise—though not by the entire tariff rate, because the extent to which tariffs can be passed on to consumers depends on their willingness to buy at higher prices. Economists call this sensitivity to price changes the “elasticity of demand.” Only in the unlikely case that consumers are indifferent to price increases will prices rise by the full tariff amount. But tariffs do drive up prices, even if we don’t yet know the amount.

History is replete with examples of tariff wars that destroy international trade and punish—and impoverish—all combatants.

Perhaps the most well-known is the Smoot-Hawley tariff, enacted by the U.S. Congress and signed into law by President Herbert Hoover in June 1930, just months after the 1929 stock market crash. Smoot-Hawley raised tariffs on imported goods by about 20 percent. Although the U.S. economy already was skidding into recession when the Senate passed the bill in 1929, Smoot-Hawley helped send it over the cliff.

Many economists then and now blame the tariff for plunging the world into the Great Depression, or at least deepening it. At the time, a thousand of them urged President Hoover to veto the legislation. Hoover’s successor, Franklin D. Roosevelt, claimed Smoot-Hawley put America on the “road to ruin.”

Retaliatory tariffs unravel international trade because imports, in effect, buy exports. Foreign producers and consumers need dollars to purchase American-made goods. They obtain dollars by selling to U.S. buyers, both consumers (of appliances, cars, clothing, and other products) and producers who purchase intermediate goods (auto parts, computer chips, and even fertilizer and seed products) for use in American farms and factories. Imports flow into America from overseas; dollars flow into other countries, which foreigners can use to buy U.S. exports. Tariffs burden both sides, making everyone worse off.

Mesmerized by the art of the deal, President Trump thinks that international trade is a zero-sum game with only winners and losers. He ignores the economic lessons we have known for centuries: that voluntary trade, whether between two nations or between your household and your local Costco, makes both parties better off.

Imagine an international border between your home and the nearest Costco suddenly appeared overnight. Accounting rules imply that your household runs a chronic trade deficit with Costco: goods flow in just one direction, your money in the other; trade is unbalanced.

According to President Trump’s logic, the only way to prevent Costco from playing you for a sucker is to impose a tariff on Costco’s goods: from now on, “imports” from Costco will cost you more.

But were you really impoverished by buying from Costco? You patronize Costco because you think the products you buy there are worth as much, or more, than the money you give up. It’s largely irrelevant if the exchange crosses an international border or not.

Shooting wars destroy lives and the means of producing national wealth. Trade wars are recipes for poverty.

If President Trump wants foreign trading partners to lower tariffs on American exports, he should try reducing U.S. import tariffs, ideally to zero. The intelligent response from overseas would be to lower tariffs on U.S. imports.

Expanding, not contracting, international trade is the true art of the deal and the path to prosperity.