Trump has Abandoned the Core Principles of America’s Economic Strength

President Donald Trump has erected yet another wall, believing others will shoulder the cost. His sweeping tariffs of at least 10% on nearly every product entering the US function as a barrier, aimed at retaining jobs and work within the country rather than keeping immigrants at bay.

This wall’s height must be viewed within a historical framework, reflecting a regression to a century-old protectionist era for the US. It elevates the US above G7 and G20 nations to customs revenue levels reminiscent of Senegal, Mongolia, and Kyrgyzstan.

What transpired this week wasn’t merely the start of a global trade conflict; it marked the US, a hyperpower, decisively renouncing the globalization it once championed and profited enormously from in recent decades.

Furthermore, by employing the principles underlying his grand tariff announcement in the Rose Garden, the White House also distanced itself from foundational concepts of conventional economics and diplomacy.

In his announcement, Trump frequently referred to the year 1913, a pivotal moment when the US implemented federal income tax while significantly lowering tariffs.

Prior to this shift, the US government primarily relied on tariffs to fund itself, unabashedly adopting a protectionist stance inherited from its first Treasury Secretary, Alexander Hamilton.

The White House has seemingly concluded that high tariffs historically bolstered America’s greatness and negated the need for a federal income tax.

In Europe, beliefs in globalization and free trade are built on the principles established by 19th-century British economist David Ricardo, particularly his 1817 Theory of Comparative Advantage.

The basic premise is straightforward: Different countries excel at producing different goods due to their unique resources and population skills.

Generally, all nations and their citizens benefit if each specializes in what they do best and engages in free trade.

In Britain, this notion remains a key intersection of politics and economics, with most of the world still advocating for comparative advantage, forming the intellectual foundation of globalization.

However, the US has never fully embraced this ideology. Its underlying skepticism has persisted, and this week’s events demonstrated this reluctance through the inventive equations developed by the US Trade Representative to support Trump’s tariffs.

It’s important to dissect the reasoning behind these so-called “reciprocal” tariffs. The figures often bear little resemblance to the stated tariff rates in those countries.

The White House claimed that adjustments were made for bureaucracy and currency manipulation. A closer examination revealed that the initially complicated equations were simply gauges of each country’s trade surplus with the US, calculated by dividing the size of the trade deficit by the imports.

Prior to the press conference, a senior official from the White House candidly explained, “These tariffs are tailored to each country, calculated by the Council of Economic Advisers… Their model is based on the premise that our trade deficit represents a sum of all unfair trade practices and cheating.”

This assertion is crucial. According to the White House, selling more goods to the US than the US exports to you is inherently “cheating” and warrants a tariff designed to correct this perceived imbalance.

This is why bizarre instances, like the US tariffing on islands solely inhabited by penguins, matter. They reveal the fundamental approach being taken.

The overarching objective is to eliminate the US $1.2 trillion trade deficit, particularly addressing the largest deficits in countries identified as having trade surpluses. The calculations were merely aimed at those countries with surpluses, rather than those with evident trade barriers, inadvertently penalizing poorer nations and emerging economies.

While these two factors can intersect, they aren’t synonymous.

There are numerous reasons for trade surpluses and deficits among nations. There’s no logical basis for insisting these figures should be equal. Different countries excel in creating various products, benefiting from distinct resources and human talents. This is the essence of trade.

However, the US no longer seems to subscribe to this belief. Furthermore, applying the same reasoning to services trade reveals that the US boasts a $280 billion (£216 billion) surplus in fields like financial services and social media technology.

Yet, services trade was entirely disregarded in the White House’s calculations.

There’s a larger narrative at play. As US Vice President JD Vance remarked recently, this administration views globalization as a failure because the expectation was that “wealthy countries would ascend up the value chain while impoverished ones handled simpler tasks.”

This has not unfolded as anticipated, especially concerning China, compelling the US to shift away from this global economy.

For the US, David Autor, a Massachusetts Institute of Technology economist credited with coining “China shock,” holds more relevance than David Ricardo.

In 2001, when the world was fixated on the aftermath of 9/11, China gained entry into the World Trade Organization (WTO), securing relatively unrestricted access to US markets and radically reshaping the global economy.

US living standards, growth, profits, and stock markets flourished as China’s rural workforce shifted to coastal factories, producing exports at lower costs for US consumers. This epitomized the principle of “comparative advantage.” China generated trillions of dollars, much of which was reinvested in the US through government bonds, assisting in maintaining low-interest rates.

While everyone benefitted to some extent, not all fared well. In effect, US consumers became wealthier due to access to cheaper goods, but this came at the expense of significant manufacturing losses to East Asia.

Autor estimated that by 2011, the “China shock” resulted in the elimination of one million US manufacturing jobs and a total loss of 2.4 million jobs. These consequences were particularly concentrated in the Rust Belt and southern regions.

The long-lasting effects of these trade shocks on employment and wages were striking.

After updating his analysis last year, Autor found that while the tariff protections during Trump’s first term had minimal overall economic impact, they did weaken Democratic support in affected regions and bolstered support for Trump in the 2020 Presidential election.

Fast forward to the present, with unionized autoworkers and oil and gas employees proudly supporting the tariffs at the White House.

The promise is that jobs will return, not just to the Rust Belt but throughout the country. This is probable to a certain extent. The President’s clear directive to foreign firms is to shift their operations to avoid tariffs. The incentives offered by Biden, coupled with Trump’s ultimatums, could result in tangible advancements in this area.

However, the President’s claim that the last fifty years of trade policies have “raped and pillaged” the US does not present a comprehensive understanding, even if it has negatively impacted specific areas, industries, or demographics.

The US service sector thrived, asserting global dominance through Wall Street and Silicon Valley. American consumer brands leveraged highly efficient supply chains extending into China and East Asia to achieve remarkable profits while selling their aspirational products worldwide.

Overall, the US economy fared quite well. The central issue was the uneven distribution across sectors. The US lacked adequate redistribution mechanisms and adaptation to share that wealth more broadly, reflecting the nation’s political decisions.

As the US pivots to reshore its manufacturing with an abrupt wave of protectionism, other nations face choices regarding their support of the trade and capital flows that have contributed to US wealth.

Consumers across the globe have options.

It’s unsurprising that major American corporations, which profited by constructing efficient East Asian supply chains to produce cheaply and sell globally based on attractive brands, are experiencing significant problems.

Their stock values are particularly vulnerable because the President’s actions have severely disrupted their supply chain strategies while jeopardizing their global brand image.

Ultimately, we are witnessing the first social media trade war. The decline in Tesla sales and Canada’s negative sentiment towards US products could have a ripple effect. Such reactions can be as powerful as any retaliatory tariff.

Nations that previously relied on being manufacturing hubs for US consumers have their own trade-related choices now.

The President’s acute awareness of this was clear when he warned of escalating tariffs if the EU and Canada coordinated their response.

In trade war game theory, credibility is essential. While the US enjoys unmatched military and technological prowess, attempting to redefine the global trading framework with arbitrary calculations—leading to glaring absurdities, even in the absence of the penguins—may encourage pushback from other nations.

Especially when the global community perceives that the firearm the President is wielding is aimed at his own foot. The stock market suffered most in the US, inflation is projected to rise sharply there, and Wall Street has begun to predict a significant chance of recession.

There may be validity to the theory that the ultimate goal is to devalue the dollar and reduce US borrowing costs.

For now, the US appears to be stepping back from the global trade system it established. While it can persist without it, this transition promises to be quite tumultuous.

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