Trump And The Coming Global Trade War

President Donald J. Trump is a consummate salesman and a master marketer. On April 2, Liberation Day, the day he announced his worldwide tariffs, it was a presentation long on benefits but short on costs.

Like any salesman, Trump was anxious to "sell" the country on the benefits of this new import tax. The new tariffs would provide a short-term, one-time price boost, while offering a lasting income stream to "even the playing field" in international trade, said Trump.

For years, the President told us, countries like Japan, Europe, and especially China had been "ripping us off," charging exorbitant prices and tariffs on the goods they sold us. He pointed to the ongoing American trade deficit as proof of this international conspiracy. No one could argue that this country has a significant trade problem. But one can question whether Trump's Global Trade War is the solution.

For over half a century, the United States has built the most intricate co-dependent trade mechanism in history. By optimizing the outsourcing of production, we have established a robust economy that relies heavily on offshore production, positioning us as an international financier. In short, we are the world's bank, while other countries are the farmers, manufacturers, and miners.

Asia and Europe accepted our model, and they became the factories, laboratories, and workshops to supply our needs and wants. At the same time, Wall Street supplied its capital.

However, as Trump has noted, there was an imbalance as well; too much of our capital flowed from Broad and Wall to the rest of the globe. American, the financier, was in trouble. Our wealth was going overseas.

It's essential to recognize that the United States establishes the rules governing this interlocking, global trade system. We created it, and we still finance it. It was only natural that, with a problem as significant as America's trade deficit, we should reform it and bring it back into balance.

However, before attempting any reform, the reformer must have a thorough understanding of the system's complexity. If anything, the COVID-19 Pandemic, with its "Supply Chain" issues, should have introduced us to how interdependent we are on offshore suppliers. When the ships stopped crossing the Pacific, American store shelves went empty.

It was the first time that many of us were introduced to our long line of benefactors, the producers, transporters, importers, wholesalers, and retailers who bring us our everyday goods. Each one of these parties is an active participant in America's prosperity, one big "team" working in harmony. It is the 21st-century version of Adam Smith's Invisible Hand. That invisible, unnoticed coordination that brings prosperity and well-being in this American-built Global Trading System.

Add to that list the American consumer, and you begin to have a comprehensive list of all the parties affected by a tariff hike. In scope, it circles the globe, from the seamstress in Vietnam to the engineer in Germany, the pharmaceutical lab in China, and eventually to the American shopper in a big-box store. Everyone is a party to any change in American trade policy.

But were any of them consulted when, on the morning of April 2, the President, along with a couple of his aides, was deciding on what tariff to charge the world? Apparently not. The President took the position that "we're the buyer, we'll determine the price." Any semblance of international cooperation was broken. This Administration would determine the price and terms, take it or leave it.

Americans have accepted the President's construct. We now know that prices will rise in proportion to the new tariffs. Wall Street and the Federal Reserve are on hold, anticipating a round of "transitory" inflation. We hope that once tariffs are finalized, things will return to normal. That shelves will remain full, and aside from that price hike, all will be well.

But that's not what history tells us.

Remember all those other parties to trade reform? Some of them will decide whether to continue to do business under these new Trump terms. Among them are the importers, who may not be able to pass on those higher tariffs; some may have to reduce shipments, or even stop working. The same is true throughout the entire supply chain; companies that cannot endure higher prices or pass them along may have to close their doors.

However, the most powerful members of the Supply Chain, the producing countries, will fight back with their counter-tariffs. China, our third-largest trading partner (after Mexico and Canada), has been more than willing to match Trump's Tariffs. At one point, both the US and China were set to impose tariffs exceeding 100%, essentially closing the door on all trade.

And lest anyone think that won't happen, there is historical precedent to all this. In 1930, America was facing a similar issue with its farm produce. Incredibly, the United States was running a trade surplus, and although our manufactured imports were rising, our manufacturing exports were growing even faster. The issue for President Herbert Hoover was that American farm exports couldn't keep up.

And like Trump today, Hoover took an axe to the entire system, slapping tariffs on all American imports. Another example of: "We'll set the price and terms. Take it or leave it."

Well, the answer came back, a resounding: "We'll leave it!" from the world. International trade plummeted by two-thirds, and the Great Depression was underway. An arrogant America, which for years had benefited from global trade and cooperation, decided to change the rules alone. It was assumed that it was the indispensable country, and all others would need to bow to our terms.

We learned a powerful lesson 95 years ago: in today's world, no country is an island. The suffering caused by President Hoover's actions was real; it would be more than a generation before we returned to the prosperity we knew before the Smoot-Hawley Tariff.

Today, only a few of the Trump Tariffs have been finalized. Let us hope that while negotiations continue, someone reminds this Administration of the dreadful history of the Smoot-Hawley Act.

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