Does Trump Even Understand How Tariffs Work?

It’s unclear what the president wants to accomplish with his trade war.

President Trump holds his signed memorandum on intellectual-property tariffs on high-tech goods from China on March 22, 2018.
President Trump holds his signed memorandum on intellectual-property tariffs on high-tech goods from China on March 22, 2018. (Jonathan Ernst / Reuters)

This weekend, President Donald Trump announced a major economic deal with Beijing. “China has agreed to reduce and remove tariffs on cars,” he wrote on Twitter. “Farmers will be a a very BIG and FAST beneficiary of our deal with China. They intend to start purchasing agricultural product immediately,” he added. “Farmers, I LOVE YOU!”

A few days later, Trump flip-flopped. “We are either going to have a REAL DEAL with China, or no deal at all—at which point we will be charging major Tariffs,” he wrote. “If a fair deal is able to be made with China, one that does all of the many things we know must be finally done, I will happily sign. Let the negotiations begin.”

These quick-succession declarations roiled markets: Stock prices bounced and then plunged as traders responded to good news (a potential U.S.-China deal) and bad (the apparent lack of a “REAL DEAL”). It seems trade wars are not, in fact, good and easy to win—especially if it is not clear what winning looks like. For all of Trump’s bellowing about tariffs and China and trade, his goals and strategies remain confused and confusing, and much of what he wishes to accomplish might be impossible.

This is not to say that all of Washington’s complaints have been unreasonable or unimportant. It has accused China of forcing technology transfers, stealing intellectual property, spying, unfairly promoting certain industries, and shutting out foreign competitors; experts believe China is guilty of all of these offenses. But the White House has bewildered the Chinese by changing its emphasis and taking up specific trade complaints only to drop them again. The public infighting among Trump officials, the departure of many staffers experienced with trade concerns, and the administration’s tendency to hash out agreements at big meetings rather than before them have not helped.

Nor has the administration’s (lack of) strategy been in service of a clearly defined broader goal. Over the past two years, the White House has justified its trade war—including tariffs on billions of dollars of imported goods—on broad and distal grounds. It has pushed for levies on steel and aluminum for national-security reasons, for example. But Defense Secretary James Mattis has indicated that these tariffs are not, in fact, necessary for the country’s defense: “The U.S. military requirements for steel and aluminum each only represent about three percent of U.S. production,” he wrote in a memo. Trump has talked about punishing China for manipulating its currency—something that the Treasury Department has said it is no longer doing. He has also talked about wanting to stop China’s geopolitical rise, not something a legal trade dispute would normally address.

The president has also said he wants to restore domestic manufacturing, reduce the trade deficit, and stop the country’s foreign trading partners from ripping it off. His is a zero-sum, mercantilist understanding of the global economy, in which trade deficits are a kind of bloodletting and the United States is strongest when it produces what it consumes. But the vast majority of economists, politicians, and business leaders—including many in the Trump administration itself—believe that fair trade is positive-sum, and that trade surpluses are often nothing more than indications that one country is more capable of producing a given item. “There are lots of good reasons why you’d want to run a trade deficit,” Kevin Hassett, Trump’s top economist, recently argued. Given these dynamics, bringing manufacturing back would not necessarily make America great again, and a smaller trade deficit with China would not necessarily mean a stronger American economy.

Nor would it be easy, or desirable, for American companies to end production in China and make more things in America. Global supply chains are intricate, investment-intensive, border-spanning webs. Uprooting them would come with a tremendous cost, and would mean diverting American resources to producing low-value, low-tech goods. Trump’s trade actions “are a prime example of 20th century tools aimed at the knowledge-embodying trade flows of the 21st century,” Mary Lovely of the Peterson Institute for International Economics and Yang Liang of Syracuse University have argued.

Fundamentally, Trump seems to misunderstand how tariffs work, insisting that they act as a tax on foreign companies and translate into more American wealth. “I am a Tariff Man,” he wrote on Twitter. “When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs.” But the tariffs are acting, as one would expect them to act, as a tax on American consumers, raising domestic prices and slowing the domestic economy. (They’re slowing the global economy, too.)

Despite the back-and-forth, it seems likely that at some point Trump will get some trade concessions from the Chinese and both sides will lift their tariffs. At that point, Trump will undoubtedly declare a “win.” But he won’t have managed to change the Chinese economy, revitalize the heartland, or reduce the United States’ trade deficit—which has grown to a record gap with China since he took office.