Over the past week, President Donald Trump announced, and then largely paused, a new tariff regime more severe than anything seen in more than a century, and certainly out of step with the United States’ role as the creator and guarantor of an international system of free trade. (On April 9, hours after they had gone into effect, Trump announced a 90-day postponement on some tariffs to many countries, though not China.) Questions around these policies remain. Will tariffs help the U.S. economy, as the president has said? And what effect will the uncertainty and turmoil have on the United States’ role as an anchor of the international economic system? We sat down, before the latest pause was announced, to speak with international trade expert Robert Lawrence, the Albert L. Williams Professor of International Trade and Investment at vlog and author of “”&Բ;
Q: How do you understand the economic and political arguments behind the Trump administration's tariff policy?
President Donald Trump has told us that tariffs are a wonderful word, and I think he sees them as a multipurpose tool that can advance the variety of concerns which he has and the number of goals which he'd like to achieve. Tariffs firstly raise revenue and there's a debate over who will actually pay the money. The evidence suggests that, by and large, tariffs are likely to be passed through to American consumers who purchase the products on which the tariffs have been levied. But there's also evidence that in some cases foreigners might lower their prices and therefore implicitly pay some of the tariffs.
Although the president has proposed using the tariffs to help raise revenue for the government, he's proposed using tariffs to obtain leverage from foreign governments, for example, with Canada and Mexico over smuggling of fentanyl and immigration. There's also an idea that tariffs can level the playing field because there's a perception that is widely held that Americans have been taken advantage of, our market being more open than those of the rest of the world. So they are viewed as a multipurpose tool.
Q: Does the president have a point when he argues that the United States has been taken advantage of—that it has played by the rules but other countries have not?
I think if you look historically, the United States has typically had lower tariffs than other countries, and the U.S. is a very open society as well as economy and easier for foreigners to enter than many other places. But whether this is unfair or not really depends on whether you think this openness is a cost to the United States or a benefit.
The fact that the U.S. has low tariffs actually means that Americans can buy imports more cheaply, which I see as a benefit. The fact the U.S. is a rules-based, open society likewise brings strong advantages.
In any case, what the president believes is that a trade deficit tells us that foreigners are unfairly taking advantage of us. However, there's another, and perhaps more relevant, way to look at a trade deficit. A country borrowing from the rest of the world can be a very good thing if it allows you to invest to build a plant or equipment, for example. You can actually enjoy an advantage from having a trade deficit.
Just as individuals who go to Harvard have student loans, we wouldn't say they're being taken advantage of. We'd actually say they're going to derive some benefit in the future. Most economists would say that the reason the United States has had prolonged deficits has little to do with whether foreigners are fair or unfair or whether American tariffs are lower or higher than those in other parts of the world. It is much more a reflection of American spending patterns.
Ironically, with the current policies of the Trump administration, on the one hand they're trying to close the deficit by raising tariffs, but on the other hand, they're trying to use the money to give tax cuts, which will mean that the U.S. government is saving less. So, our left hand is at odds with what our right hand is doing, and unless we change our spending patterns and either save more or invest less in the United States and borrow less, the trade deficit isn't going to change at all.
“It’s important to realize and recognize that only just over 8% of Americans work in manufacturing. ... Manufacturing is simply too small to have a significant impact on the American labor force.”
Q: Among the reasons given for tariffs is the need to protect U.S. jobs and reshore or inshore manufacturing. Is there evidence that this will happen?
The central claim is that America can be revitalized and indeed the American middle class can be revitalized; workers without college education can be helped, and left-behind places can be restored if we stimulate manufacturing production in the United States. But at the moment it's important to realize and recognize that only just over 8% of Americans work in manufacturing and even if we were to entirely close the trade deficit that we have in manufactured goods, it's likely that manufacturing employment would increase by somewhere between one or two percentage points. So instead of around 8% of Americans working in manufacturing, 10% of Americans would work in manufacturing.
Manufacturing is simply too small to have a significant impact on the American labor force and both Presidents Biden and Trump have been obsessed with restoring American manufacturing. In my own view, the claims that they make that somehow this is going to have a significant impact on the availability of jobs for the middle class is completely unrealistic.
There are some manufactured products that are very important. We need semiconductors—they're important for artificial intelligence, they're important for national security. We need to decarbonize, and so electric vehicles and solar panels are important. So there are certain kinds of products which can help us meet national goals. But it is unrealistic to see manufacturing as a policy that is going to have a significant impact on the major problems of less educated Americans.
Both Biden and Trump are in a sense appealing to nostalgia for a world that no longer exists, in which manufacturing is a major driver of access to the middle class. They're about 30 to 40 years out of date because, as a result of both automation and the way we spend our money today, manufacturing has shrunk and is a relatively small part of our economy.
Q: Will tariffs help raise revenues, as the administration has claimed?
It's problematic, because the higher the tariffs that you impose, at some point the less revenue you're actually going to receive. The kind of estimates we're seeing from the administration are that they will raise $600 billion. I think that's an extremely optimistic view because as you make products more expensive, consumers will pay less or will be prepared to spend less on those imported products. In addition, one of the purposes of the tariffs is to get foreigners to come and invest in the United States. Well, if they do, they'll no longer be paying the tariff. So ironically, the long run achievement of goals like bringing a lot of investment into the United States to replace the imports is going to undermine the goal of raising revenue, and that's why it's very difficult to know exactly how much is going to be raised.
But it's important to point out that people, as they get richer, spend less and less on goods and more on services, and that means that tariffs have a regressive incidence because they take much more out of the pockets of poor Americans than they do of rich Americans. So to the degree that we now raise revenue using tariffs and use the money we save or the money we raise to reduce the taxes patented after the previous Trump tax cuts, this is an extremely regressive move for American households and the estimates are that the typical household is going to spend an additional $2,000 to $4,000, depending on which economist you believe.
There's also an exaggeration of the employment impact that you're going to get from tariffs. Let's take the example of a tariff on steel. You might create more jobs in the steel industry, but you will also raise input costs for the users of steel, and this in turn affects somewhere between 60 and 80 jobs for every one you save in the steel industry itself. So in the aggregate, the tariffs can be counterproductive, especially if they're put on inputs which are used in producing other products.
Q: Is the United States’ large trade deficit sustainable?
I think firstly there's an obsession with goods that isn't the right measure. What we ought to be looking at is not only our trade in goods, but also our trade in services, and we have a significant surplus in our trade in services. Therefore, when you aggregate the two together, you get a much smaller percentage and a smaller number relative to our GDP.
The second point is that we've been running deficits for 30 or 40 years, and what it means is that the United States is borrowing much more from the rest of the world than we lend, and therefore our net position has been declining over time. But remarkably, Americans earn more from, or earn just about as much from, their total investments abroad as foreigners earn in the United States. So if you look historically, we have felt no additional pressure about sustainability of our position. As long as we borrow the money and use it productively to increase investment in the United States, it is eminently sustainable, as with any investment.
Q: How would U.S. exports be impacted?
One of the effects of the tariffs is going to be over the medium term to strengthen the American dollar because Americans will need less foreign exchange in order to import, and when the dollar gets stronger, this affects all American exporters, whether they are exporting goods or whether they are exporting services.
A second point is that foreigners are not going to take these tariffs lying down. They are going to retaliate. Much of their retaliation can take the form of higher tariffs on American exports of goods, but in addition, foreigners are talking about levying taxes on the sales of American services and indeed some of the information technology company services that are being sold abroad. So there are going to be an adverse impact on exporters virtually any way you look—there are going to be higher input costs, they are going to have to sell into markets which are closing to them because of foreign retaliation, and the currency is going to get stronger and so their products are going to get more expensive.
“One view is that we’re increasingly going to see the United States separate from the rest of the world. The old debate was, do we decouple the West from China? The new debate is going to be, does the rest of the world really need the United States?”
Q: The World Trade Organization was created to oversee international trade. What is its role now?
Since the late 1940s, under American leadership, a rules-based multilateral system has been operating, and its performance has been outstanding. It has been associated with increasing trade liberalization. It has allowed millions of people living in Asia and other poor countries to rise out of poverty, and by and large countries have respected its rules. This is how the WTO operated, I would say, until 2015 or so.
Since that time, the WTO’s attractiveness and its power have been considerably diminished. The United States, which had led this institution, became, under Donald Trump, its biggest violator. The most important principle is that all nations who belong to the World Trade Organization are “most favored.” That is to say they should all be treated equally. Secondly, America pledged to bind its tariff, as do all WTO members, at particular rates. And on average, these were around 3%. What the Trump moves indicate or represent a complete violation of those principles. It's treating trading partners completely differently, demanding reciprocity, which is a complete violation of the rules and raising tariffs at multiples of the rates which America pledged never to exceed.
In addition, the United States, starting back with President Obama, began to veto appointments to the WTO’s dispute settlement system. Today the appellate body no longer functions because they can't make appointments. So not only is the WTO in trouble because it cannot apply effective negotiations, it's also in trouble because it cannot enforce its rules.
Additionally, we’ve seen many regional trade agreements created in the past couple of decades. Some argued these were substitutes for the WTO, others that they were complementary, but they showed that the WTO no longer had a monopoly on where the rules were being written. There are certain regional agreements—in Asia in particular, but also in Africa—that are thriving today.
Another huge problem that has confronted the trading system is how we absorb a country that operates by different rules and is the largest exporter in the world: China. How can the more market-oriented western countries coexist in a single framework with China, particularly as Chinese exports have become increasingly disruptive of labor markets around the world. This has become a very salient issue. People are calling for different solutions, but it's widely recognized that the WTO is subject to huge stress because of the different views on how the system should operate.
Q: Are we in a global trade war? What does economic tell us will happen next?
At the moment, nobody knows. One view is that we're increasingly going to see the United States separate from the rest of the world. The old debate was, do we decouple the West from China? The new debate is going to be, does the rest of the world really need the United States?
We are, after all, only about 12% of world trade. And so, can the 88% just simply get along without us? What we can expect is that if these tariffs remain in place for a long time, the goods that would have come here from China and elsewhere are going to go to third markets, and this trade deflection could in turn give rise to protectionist pressures in those other countries. That's the great danger of whether the impact spreads to the rest of the world. Moreover, there are many countries, most notably our neighbors, Canada and Mexico, who are very dependent on the American market, and they're going to experience a slowdown and perhaps recessions, and in turn, their sluggishness can be spread to the rest of the world. So, in the long run, there are negative consequences that are likely to result from these measures.
Q: How would tariffs impact the dollar?
There are kind of two effects at play. If you ask what happens when you put on tariffs, generally the answer will be the exchange rate will strengthen. So, you would expect, as I said earlier, that the dollar will strengthen. On the other hand, if this is like a big supply shock and if we have a weak American economy, that in turn could cause an increase in the price level in the United States and could feed into wages so that the Federal Reserve has to slow down the economy. And investors may find the U.S. a less attractive place, and dollars become a less attractive currency to purchase. So, it's a very tricky thing to forecast over the medium term.
There's another question. The administration's position is to acknowledge that there may well be a slowdown and there may well be inflation, but this is short-term pain for a long-term gain because eventually these high tariffs are going to spur foreigners to come and set up their production facilities in the United States.
Firstly, even if this works, it will take a long time to plan a factory, to find the location, to get the permits, to find the workers. And it can be a very lengthy process—on the order of two to four years—before you start to see the fruits. And I don't think we would see significant effects before Donald Trump has left office.
Secondly, in order to make those investments, foreigners have to be convinced that these policies will remain permanent, but the way they've been rolled out and the kind of disruption they're going to cause is going to lead to a political reaction that is going to cause a lot of uncertainty. And with uncertainty, foreign investors are going to be unlikely to sink their capital into investments that are premised on the idea that the market will remain permanently protected.
Q: Are there concerns at all about the role of the dollar as the global reserve currency?
Yes, we have an amazing privilege in the United States. Traditionally, as soon as there's any trouble in the world, people flee to the safe haven of the U.S. dollar. Even after the 2008 financial crisis, despite the fact we caused it in our own housing market, the dollar strengthened. All of this is based on foreign faith that the United States is a strong economy and is governed by the rule of law. And what we're seeing today in a variety of places is that Americans are starting to question the validity of rulings by courts, and I think this is a significant impact. A second danger is that foreigners sometimes see their currency holdings used against them in the form of economic sanctions, and this undermines their willingness to hold the dollar as a reserve currency.
The full faith and credit of the United States is vital in sustaining our position as the central reserve currency of the world, and the kind of instability that we're seeing today stands as a threat. In addition, picking on our allies and taking these steps is severely undermining the goodwill that foreigners have towards the United States and their faith in the United States as an economy that is a model for them. The long run undermining of our soft power, as our colleague Joe Nye refers to it, will take its toll, and that in turn will impact people's confidence in the United States as a secure and safe haven.
—
Banner photograph by AFP/China OUT/Getty Images; portrait by Martha Stewart.