Today, President Trump sparked an early stock market sell-off with the announcement that his administration has identified $200 billion in Chinese goods that it could hit with tariffs. This potential $200 billion tax increase on imports (which will go into effect if the U.S. and China are unable to strike a broader trade agreement) was announced mere days after President Trump enforced his first $50 billion in new tariffs on Chinese goods.
Although the markets were predictably whacked in the aftermath of this substantial trade war escalation, some Republicans appear to support tariffs as a ‘negotiating tactic’ for dealing with China. In a nutshell, their belief is that by Trump threatening — or even enacting — tariffs, China will eventually open up their markets more to the United States. In doing so, and after some admitted short-term pain, we will eventually have more free trade than we did before. Should this outcome occur, President Trump would be both a great negotiator and a great free trader.
From my perspective, it’s difficult to hold out hope for that outcome. Here’s why I believe this strain of thought is mistaken.
The assumption that politicians in any country can easily wave a magic wand and get rid of their tariffs shows a lack of understanding for why tariffs and subsidies exist in the first place. Tariffs and subsidies (both in the United States and around the world) are generally the result of entrenched domestic interests that have fought (and won) these special carve-outs, and politicians seek to appease these interests to ensure their own political preservation. In essence, politicians don’t want to bite the hand that feeds them.
It is for this reason that the United States, the most industrious country in the world, pays three times more for sugar than the rest of the world. The United States’ economy-sapping sugar program (which include subsidies and import quotas) dramatically increases costs on American businesses that rely on sugar as an ingredient in their products. However, the largest sugar-producing state in the United States is Florida. Since Florida is a critical swing state, which President is going to call for this special carve-out to be eliminated?
For these reasons, tariffs make for a difficult negotiating tactic. Demanding that political leaders from around the globe take on the special interests within their country is, in my view, unlikely to yield results. It’s simply asking too much of politicians, whose constant focus is holding on to power. When given the choice, global leaders will likely choose an unending trade dispute with President Trump rather than risk their jobs.
That’s my take on the end-result of all this. I hope I am proven wrong.