Trump’s Trade War

 

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President Trumps promise to impose tariffs to boost employment in the US will have consequences. It will make the US and the world poorer.

If the US imports foreign goods then there has to be an exact same amount of exports whether that is in goods, services or assets. Any payment the US makes for overseas goods can only be used to purchase something in the US. The only thing that US dollars can be used for by the the foreign seller is to purchase things in the US domestic economy just as only sterling can buy things in the UK or Euros can be used to buy things in Europe.

If the effect of the tariff is to level the price between imported steel say and US steel so increasing the ability of US steel producers to sell their product in the domestic market then that will be good news for US steel workers. The tariff makes no difference to the efficiency of the US steel industry.

To pay for that transfer of wealth to the US steel workers an equal amount has to be transferred from somewhere else in the US economy. It cannot come from anywhere else since dollars to US steel workers has to come from dollars consumed in the domestic market by someone else. President Trump’s view is I am sure that foreigners will be paying for the increased employment in US steel workers but they won’t at least not directly. They may pay for it with an increase in domestic unemployment but that won’t help the US. Only the US economy is able to make the redistribution of wealth within the domestic market. If the overseas exporter still wishes to sell in the US the price simply rises to US customers. If the overseas producer pulls out of the export market then the reduction in US imports will be matched by a fall in overseas purchases of US goods, services and assets. It is probable that this will effect President Trump’s wealthy backers as foreigners stop buying US real estate, companies and goods.

What happens in the exporting country? The fall in exports to the US has to result in a fall in imports from the US since US currency can only be used in the US domestic market. That means that even without tit-for-tat tariffs US exports must fall. The exporting country industry would need to make an adjustment resulting in unemployment and workers forced into new areas coupled with a deflation in prices as supply adjusts to a lower level of output.

Maybe President Trump is hoping that the tax give away to the wealthy will be redistributed to the Steel workers or at the very least compensate the wealthy for the loss of foreigners buying their assets. I suspect the burden of the transfer will actually fall on the rest of the US population to adjust their consumption in order that the consumption of poorer workers can increase. That’s good news for the US steel workers but bad news for everyone else.

 

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Politics is about story and narrative not economics

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Many believe that economics and the economy in general lead the political agenda. Economists have developed ever more complex mathematical theories in order to “prove” how society works and benefits from progress. Policy is formed from these economic insights.

But that is not how it works. Political parties have a set narrative and then seek justification for that narrative as a support to the story they want to tell. The story leads and facts and theories are sought to justify the policy narrative.

In the 80’s both Margaret Thatcher and Ronald Reagan had a narrative based around small government and individualism. Little matter that the size of government grew substantially over the period the story that the electorate wanted to believe was the one projected. To support the policy academics such as Hayek, Milton Friedman and the Chicago School of economics were pressed into service to give the narrative some gravitas but their theories followed the dynamic of the storyline offered by the politicians. There were many opposing economic theories to the monetarism of the day which could have supported a counter narrative. In many respect the political narrative came from an intuitive belief held by the chief protagonists. It was a gut view not one supported by hard evidence.

More recently Donald Trump gained success based on a narrative reasserting former national greatness and the resurrection of rust belt industries aimed at reinvigorating working class fortunes. The story is enhanced by a form a scapegoating of foreigners as being the source for the decline in working class fortunes whether that is Mexican immigration or a story of Chinese manipulation of world trade to the detriment of the US. There is no factual basis for these assertions but that does not matter. What matters is that the narrative is believable to those to whom it is aimed at. Trump has not sort to justify his position with any intellectual rigour or economic theory. His Presidency relies solely on his story narrative.

In the UK too we have Brexit. The leave campaign told a narrative that appealed to a large portion of the electorate. This narrative was one, like Trump’s, based on a story of former greatness now lost due to the unwelcome embrace of foreign powers taking away the sovereignty of the nation. As humans we are more susceptible to a story narrative than something based around numbers. The remain campaign lead with dry numbers and economic data in an attempt to show that economically leaving would be a mistake. But this was a mistake. We are a species of story tellers not mathematicians. There can be little doubt that on balance leaving will be economically detrimental but for voters that didn’t matter. What mattered was the affirmation of national pride and the promotion of a golden future free from foreign interference. The fact that the world does not work in this way did not matter. The narrative of the story was something the voter wanted to believe in irrespective of any counter narrative based on purported facts or economic numbers. The leave campaign found it easy to bat away these facts as “project fear” a narrative easily understood by voters who supported the central story of lost national power and lost cultural identity caused by immigration.

The way forward for politicians is clear. Have a strong spoken narrative for your policies otherwise voters will not connect with the message however strong the academic evidence backing it up.

For economics too the need to project a strong narrative outweighs the cleverness of the mathematical proposition. Only when economists grasp the fact that their discipline is only useful if people understand the story will it become truly relevant to our society.