President Trump’s tariffs and trade policy have sparked extensive debate and heated arguments both at home and abroad. The tariffs started with a 25% tariff on steel imports and a 10% tariff on aluminum. Retaliatory tariffs from our trading partners soon ensued.
Since June 2018 the trade tariff salvos have continued and are now in the billions of dollars with no one yet blinking.
Tales of trade wars being started and world economic collapse following are being bantered about by critics of the President. It is clear that trade barriers; such as tariffs; can be problematic and should not be taken lightly. However, the U. S. balance of trade worldwide has been decidedly against the United States for decades with devastating impact in the Rust Belt.
What has propelled Donald Trump into the presidency is perhaps his decidedly clear understanding of the impact of this trade imbalance on the average American. The devastating reality to American workers of unfair trade barriers have been known for decades. In a 2010 article about Chinese trade barriers and tariffs against the United States showed substantial regulatory bias by the Chinese against the United States products particularly in manufactured goods.
Previous presidents have been unwilling to play the game of chess and brinksmanship that solves the trade problem but instead caved in to pressure to maintain the status quo. Trade policy was not an integral part of their negotiating posture with rare exception since President Reagan.
In economics, fiscal and monetary policies are mentioned as the two primary tools available to government to stabilize an economy.
With his trade posturing, President Trump has opened a third prong to the economic arsenal of policies available to the United States with his decidedly different approach to foreign trade than his predecessors.
The conditions for the policy shift are perfect.
The United States is at full employment. For the first time in recent history there are more job openings than there are people looking for work. In the most recent unemployment statistics, the unemployment rate increased to 4% only because over 600,000 people reentered the workforce and increasing labor force participation rate.
The inflation rate is still very manageable at approximately 2%. This rate of inflation is the Federal Reserve target rate and has sparked modest increases in interest rates.
Quantitative easing, a program of monetary policy used during the great recession, peaked in 2014 and is starting to be paid back. Currently, there is approximately $4.1 trillion of QE funds outstanding down from the $4.5 trillion at the height of the program.
These fiscal and monetary policies had little material affect during the great recession even despite such extensive intervention. President Trump’s allure to the electorate was the realization that jobs, regulatory pressure hurting job growth, and foreign trade were the culprits. The electorate responded, and the strategy was set.
This departure in policy by adding our trade policies into the arsenal of our economic strength may possibly provide the world a substantially improved trading market with free trade truly being free. It is even possible that in the long run prices for consumers may come down.
Tariffs are in essence a tax and get paid to the government that imposes them. Concurrently, tariffs done in retaliation are paid by the consumer in the long run. The effect of these tariffs is to pay down the deficit while at the same time potentially cooling off the economy.
The strategic imposition of tariffs and trade policy can only be truly effective during a period of relatively full employment when the economy is able to absorb those workers temporarily dislocated from their jobs because of retaliatory tariffs.
During any trade policy adjustment, great care must be taken to ensure that permanent damage to domestic industries does not occur.
In essence, the President has added trade policy and tariffs as a fully functioning prong to the economic arsenal of weapons available to the United States to restore a balance of power and trade in the world. It is not without risk and it is not without significant potential, long lasting rewards.
In the most recent past, only President Reagan was willing to engage in such strong jawboning negotiations with our international partners and the Iron Curtain fell.
President Trump’s approach, during a period of full employment, as it relates to trade policies and tariffs is likely to be successful in restoring fair trade for the American worker and business.
This parity in the international arena will yield continued growth rate. Such a growth rate assumes we are able to transition our educational systems to graduate more students capable of handling the expanded growth.
With trade policies, the President is able to exercise financial muscle as any CEO would do. With fiscal policy and monetary policy, the time lag of dealing with the legislature and the Federal Reserve to enact the policy shift is seldom, if ever, timely. Trade policy decisions and strategies are immediate. With President Trump’s policy shift, free trade may truly become free.
Frank Ryan, CPA, USMCR (Ret) represents the 101st District in the PA House of Representatives. He is a retired Marine Reserve Colonel, a CPA and specializes in corporate restructuring. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at [email protected].