Trump's Misunderstanding of Economics and Trade

Today I am going to talk about trade. Yesterday, cult leader, convicted felon, and failed President Donald Trump sent letters to the leaders of a number of countries informing them of new tariff rates that would take effect on August 1, 2025. As such, this presents another opportunity to discuss how little Trump seems to understand about basic international trade, or indeed, any trade.

Trump views American trade deficits with other countries as an indication that those countries are somehow cheating us. There was a time when Republicans were all about "competitive advantage" and arguing that a country should focus on selling the products that it could produce cheaper than other countries. But those were the days when Trump was a Democrat and he probably didn't pay attention to what Republicans were saying. Incidentally, the Republicans back then promoted what were technically "liberal" economic theories. Similarly, Democrats in those days tended to be more protectionist, which is a conservative economic position. Down used to be up and up down, but that was the way we liked it. Now things are more complex with both parties having liberal and conservative economic proponents. Senator Bernie Sanders and Steve Bannon can probably find a lot of common ground on trade issues with both advocating conservative protectionist ideas. For that matter, if he were honest, I am fairly certain that Bannon would prefer former President Joe Biden's approach to trade and industry — in which targeted tariffs were used — more than Trump's uncoordinated approach. The problem with Trump is not that he is either liberal or conservative in his economic approach, but that he is just ignorant. None of it makes sense.

Let me start by putting things in terms that Trump might understand. If I purchased a Big Mac from McDonald's for $8, I would have a trade deficit with McDonald's of $8. According to Trump’s logic, McDonald's failure to buy $8 worth of goods from me means that they are cheating me and I am therefore justified in placing a tariff on McDonald's. Imagine that I decide that a 20% tariff is reasonable. Thereafter, a Big Mac would cost me $9.60. My trade deficit with McDonald's still increases by another $8, however, each time I buy a Big Mac. I've just put a dollar and sixty cents tax on myself. In theory, a high enough tariff could cause me to decide to start cooking hamburgers myself rather than buying Big Macs. In that case, my trade deficit with McDonald's would no longer increase. However, my cost in hamburgers would likely go up. Not only would I probably have to pay more than McDonald's for the ingredients, but I would have to factor in my labor, something for which I normally charge more than the average McDonald's employee receives. At the end of the day, I simply end up with more expensive hamburgers.

But let's take things further. I own a website and sell advertising on that website. As it happens, McDonald's advertises on my website. As such, there is reciprocal trade. In reality, I almost never eat at McDonald's and, therefore, if anyone has a complaint about a trade deficit, it is McDonald's because I am earning more from them than they are from me. But, let's keep this in the somewhat hypothetical realm. Imagine that I initially was spending $8 on a Big Mac while McDonald's was spending $6 on advertising. I still would have had a trade deficit, but just not as large as it appeared originally. However, after I place tariffs and/or stop buying McDonald's hamburgers in favor of cooking my own, the deficit is reversed. McDonald's could retaliate by placing its own tariff on my advertising, increasing what they pay while keeping my revenue the same. Alternatively, they could decide to stop advertising on my website altogether. If they did that, I would lose the $6 I used to get. In addition, I am now either paying $9.60 for a Big Mac instead of $8 because of my tariff or even more — let's say $12 — for my home-cooked burgers. Looking at it this way, I am now essentially eating $18 hamburgers. Simply put, in a world of $8 Big Macs, Trump wants us to pay $18 for a burger.

Despite this analogy, I am not a wholehearted believer in competitive advantage. I think that it often locks some countries into a disadvantaged position and is exploitative of them. But even from the perspective of the United States, there are disadvantages. Take, for example, the North American Free Trade Agreement or NAFTA. From an international trade perspective, labor is just another product. If Mexico can provide it cheaper, that's where consumers will purchase it (the consumers in this case being corporations). NAFTA resulted in large-scale unemployment in parts of the United States, which itself had considerable additional negative fallout in those regions. Moreover, the U.S. might not want to find itself dependent on foreign nations for certain products. As we learned during the COVID trade disruptions, dependencies on foreign products such as semiconductors brought some U.S. manufacturing to a halt when they were not available. Therefore, from a national interest perspective, it is probably a good idea to protect some industries. However, that can be done through either a carrot or a stick approach. The Biden administration was having success with carrots in the form of the CHIPS and Science Act, which incentivized U.S. semiconductor manufacturing. Trump, on the other hand, is entirely focused on sticks.

Regardless of whether an administration chooses carrots or sticks, or a combination, the policy should be well thought out. This has rarely been the case. For instance, the negative impact of NAFTA on the industrial Midwest could have been decreased if more thought had been given to the fate of those who would be left unemployed during the transition. Many lives were unnecessarily ruined, and it could be argued that the roots of MAGA were planted in that disruption. More relevant to Trump and his tariffs, tariffs should be applied in a coherent manner rather than the across-the-board method preferred by Trump. First of all, it makes no sense to place tariffs on goods for which there are no suitable U.S. replacements. In a recent Congressional hearing, Representative Madeleine Dean pointed out that the U.S. has a 10% tariff on bananas, which has resulted in Walmart increasing its price on bananas by 8%. The U.S. cannot produce bananas and, as a result, when it comes to bananas, American consumers are left to pay more while Walmart earns less. Trump apparently considers this a good outcome. In other cases, the U.S. could produce the products but currently lacks the capacity. In still other cases, it is worth questioning whether it is actually in the U.S. interest to create such a capacity. For instance, does the U.S. have a national interest in producing, let's say, toasters? Or is that something better left to countries that can do it cheaper?

Trump's entire justification for tariffs is based on a falsehood and a contradiction. He argues that foreign countries will pay tariffs which go to the U.S. treasury and will allow U.S. taxes to be lowered. In reality, tariffs are paid by those who purchase the foreign goods, or in this case, U.S. consumers. Trump's tariffs are a tax on Americans. But Trump also argues that tariffs will encourage manufacturers to move production to the United States. Again, as in the case of bananas, sometimes this is simply not possible. But, when it is possible and does happen, there are no longer tariffs on the products produced and, therefore, no tariff revenue. Essentially, we can have tariff revenue or we can have U.S. production, but you can't get both for the same product. Moreover, as in the case of the $18 hamburgers I imagined above, the U.S.-manufactured products are probably going to have a much greater total cost. There will be trade repercussions that will be harmful to the United States, such as retaliatory tariffs and trade boycotts.

There is one specific industry that I fear Trump and his economic policies are likely going to destroy completely. That is the auto industry. Not just electric vehicle manufacturing, but the entire U.S. auto industry. It is clear now that EVs are the future. It is also clear that China is far and away the leader in EV manufacturing. China is producing products right now that we might have expected would be available in a decade. Tariffs on Chinese vehicles have kept the cars out of America, offering protection for U.S. manufacturers to build up their own capacity. Biden also offered generous support for auto manufacturers to transition to electric vehicle production. During the Biden administration, battery factories were announced, tax credits for new and used EVs were encouraging purchases, and a national EV charging infrastructure was being built. EV manufacturing in the U.S. appeared to be about to explode. Trump has reversed all of this. Previously announced factories have been cancelled, and auto manufacturers are rethinking their EV manufacturing plans. To be clear, I don't think this will kill EVs in the U.S., but it will make it harder for U.S. manufacturers to become competitive with China. In the U.S., the auto industry, protected by tariffs from the Chinese, will continue to do well.

The problem for U.S. auto manufacturers is abroad. As the world turns increasingly towards EVs, U.S. manufacturers — with the possible exception of Tesla — are not in a very competitive position. Tesla has its own issues caused by its owner, but that is a separate topic. Increasingly, Chinese EV manufacturers are going to overtake other automakers. In an environment in which the U.S. is in a trade war with much of the world, it will be especially hard for U.S. manufacturers to complete abroad. They will likely face retaliatory tariffs or just general hostility from foreign consumers. To be clear, American gas cars face a dismal future because the world is turning to EVs and U.S.-manufactured EVs will simply not be competitive. Therefore, I fear we face a future in which the U.S. auto industry has shrunken to just the domestic market and a few foreign exceptions. I have real doubt that the industry can survive at all in such circumstances. That market would just be too small.

Again, Biden was addressing the possibility that I am describing by supporting U.S. manufacturers to become competitive in the EV market. Trump is doing the opposite. There is a locomotive heading toward the U.S. auto industry and it is powered by electricity, not by coal or petroleum. We have the choice to climb aboard or be run over. Right now, Trump is tying us firmly to the railroad tracks. I assume that U.S. manufacturers are either trying desperately to change the situation or simply hunkering down in hope that they can survive the remaining 3 1/2 years of Trump. They can obviously see the future.

Trump appears to lack even a rudimentary understanding of tariffs but loves the ability he has to enact them with a stroke of his Sharpie. This is a power that Congress unwisely delegated to him and, in some cases, is utilizing beyond his legal authority. However, in our current situation in which all three branches of government have been subjugated to Trump, nothing appears likely to stop him. Trump does no planning whatsoever and acts erratically and irrationally. This has repeatedly resulted in his changing course at the last moment as he becomes aware of the damage he is about to cause. In this way, he has earned the sobriquet TACO, or Trump Always Chickens Out. Now that Trump has sent out his letters establishing new tariff levels, as Josh Marshall recently said, he is probably stockpiling tortillas and ground beef for a giant taco party. As sad as it is, that is probably our best hope.