An economic, constitutional, and geopolitical disaster

Yesterday’s tariff announcement was long expected, yet its details came as a surprise. In one regard it was less bad than it could have been: The baseline tariff of ten percent was less than the 20 percent widely touted. But the methodology of the “reciprocal tariffs” added to the baseline tariff was dismaying and not one many practicing economists had considered. The effects of this announcement are likely to be disadvantageous to Americans and may risk economic disaster. They will also have geopolitical effects that future American administrations will rue.

To begin with, the reciprocal tariffs are supposed to represent the sum of tariff and non-tariff barriers imposed by the foreign nation on American exports, plus factors like Value Added Taxes (which are not trade barriers). However, the administration says it calculated this based on the assumption that “the trade deficit that we have is the sum of all the unfair trade practices, the sum of all cheating.” This assumption essentially says that all American trade deficits are the result of unfair trade practices, whereas economic analysis says differently (they are caused by differences between the nation’s capital account and current account). So, the initial assumption is faulty.

This leads to absurd situations. Small, poor countries that cannot afford to buy many US goods are penalized harshly. Even uninhabited islands are subject to the ten percent minimum tariff. But so are countries like the UK that has its own trade deficit with the United States (one might ask if this is the result of US “cheating”). Moreover, this applies only to trade in goods. Trade in services, where the US routinely runs surpluses, are not mentioned.

As CEI analysts have argued until they are blue in the face, these trade barriers will be harmful to American consumers. They will also cause problems for American producers, and have already led to factory closures and the loss of manufacturing jobs. Global stock markets are reacting badly, and the dollar is falling. All of this was entirely predictable, and it is likely to continue. A recession is not out of the question.

Then there are the geopolitics of all of this. As mentioned above, small poor countries are being hit hard and there appears to be no way for them to reverse the course, because of the simplistic math employed by the US. As such, this represents the end of the humanitarian idea of “trade, not aid” as the way for the US to encourage economic development in the developing world. That simple principle, combined with concomitant market liberalization, has been responsible for the greatest reduction in poverty in human history. This is, make no mistake, a humanitarian disaster.

Of course, other countries will not sit idly by. It is easy to see how countries like China, which have been aggressively trying to court developing nations through programs like Belt and Road, will step in to fill the breach as an economic friend to these nations. This has already been the case in South East Asia, where uncertainty over American trade policy during the last administration drove nations there to seek closer relationships with China. We can expect the same pattern in Africa and South America.

Yet besides being an economic and humanitarian disaster, the announcement also raises legal and constitutional questions. The president has based his action on powers supposedly granted him by Congress in the International Emergency Economic Powers Act (IEEPA). He has declared a national emergency “posed by the large and persistent trade deficit that is driven by the absence of reciprocity in our trade relationships and other harmful policies like currency manipulation and exorbitant value-added taxes (VAT) perpetuated by other countries.”

To say that this relies on an expansive reading of the IEEPA is perhaps understatement. IEEPA is meant to help the president protect national security, and does not mention tariff power at all. Interpreting it otherwise surely represents a Major Question for Congress, something that the Supreme Court has been emphasizing lately. As it says, agencies should not find “an unheralded power to regulate ‘a significant portion of the American economy.’” Using IEEPA in this way certainly fits the bill.

There is a further constitutional point. These tariffs unilaterally abrogate free trade agreements. While not all FTAs are treaties (some are “executive agreements,”) many are, ratified by the Senate. According to the way the Constitution deals with treaties, they are part of “the Supreme Law of the land.” While presidents have unilaterally abrogated treaties before, the question of whether they have the power to do so remains open, and abrogating so many treaties at once as a side-effect of an Executive Order might cause that question to be answered. At the very least, countries with whom we have a free trade agreement will need to start disputes using the treaties’ resolution process. The World Trade Organization, which would be expected to have something to say about this, is of course powerless, ever since the Obama administration blocked the filling of vacancies on its appellate board.

Then there is retaliation. While we at CEI have argued strongly against retaliation as an act of self-harm, the same instincts that have driven this neo-mercantilism here will drive other countries to retaliate by imposing trade restrictions of their own, which will hurt American exporters. They will also surely impose restrictions on American service exports. Of course, the president has threatened to retaliate against the retaliations, which is a sure-fire way to start a global trade war.

Are there any upsides? The president’s supporters have been advancing various ideas by which the US might benefit. One of these is that the tariffs are spurs to negotiations. Yet Israel had already offered to reduce US tariffs to zero and still got hit with a 17 percent tariff. Another is that the tariffs will bring in billions in revenue that can be used for other things, yet by their very nature tariffs reduce revenue the higher they go, and they are already at a higher level than the Smoot-Hawley tariffs that failed in their similar objectives in the Great Depression. Finally, will they “bring back” manufacturing? That remains to be seen, but if they do, it will be a long hard process and it is still uncertain whether Americans want to work in textile shops (or if they’ll even get that opportunity given the state of automation).

In short, there are certain economic, constitutional, and geopolitical ill-effects because of these tariffs, while any benefits are highly uncertain. This is simply one of the biggest peacetime policy mistakes made by an administration in living memory.