Last week on April 2, what Trump dubbed "Liberation Day," Trump declared that "April 2nd, 2025, will be forever be remembered as the day American industry was reborn, the day America's destiny was reclaimed, and the day that we began to make America wealthy again." As the title of this piece indicates, I would argue that what he did could very well be a day that forever lives in the infamy of U.S. history.
Trump announced a two-tier trade policy: 1) a baseline import duty equivalent to 10 percent on all goods entering the U.S., and 2) so-called "reciprocal" tariffs on 90 countries that are generally equivalent to half of what he purports other countries are imposing on the United States. From Trump's telling, he is using these tariff rates to offset what other countries are allegedly implementing. He even pulled out a chart during his "Liberation Day" speech to illustrate the point. The reason I facetiously put "reciprocal" in quotes throughout is because what Trump claims about other countries' tariff rates and using corresponding reciprocity is false.
During his April 2 speech, Trump pulled out a chart that supposedly listed tariff rates that other countries were imposing on the United States. As you can see from World Trade Organization's database, they were not tariff rates. Rather than identify the tariff rates, what his economic team did was divide the trade deficit by imports for each country. This ratio represents the extent to which the United States has a trade imbalance with a given country.
Setting aside for a moment those are two distinct percentages, Trump's take on trade imbalances is that they are bad because he views them as a metric of unfair trade practices and "cheating" the United States. You would have thought we would have left mercantilism in the dustbin of history back in the 18th century, but here we are. I refuted this silly notion that "trade deficits are evil" back in 2017 when he was first toying with the idea. Here were my summary points back then:
- There is more to an economy than just the trade balance.
- A country running a trade deficit is not just throwing away money. It acquires goods and services that improves consumers' lives, creating a mutually beneficial relationship between the two countries.
- The United States ran a trade deficit for decades and its economy grew just fine.
- The trade deficit is not a good metric of economic health.
- Even if the trade deficit were an issue, the focus would need to be on savings, investment, and capital flows, not trade flows.
None of this matters to Trump because he is recklessly
trying to emulate President William McKinley, the original Tariff Man. Trump imposed a baseline 10 percent import duty (read: tax) on those who had lower rates, but overall imposed tariffs based on this trade imbalance ratio, not the other countries' actual tariff rates. He then divides the trade imbalance ratio by half to get at the new effective tariff rates on each country because he thinks he's a benevolent businessman giving a half-off discount.
To recap so far, we already have two main issues. The first is that
the rationale for implementing these tariffs is baseless because trade deficits are not the evil Trump makes them out to be. He is willing to unravel the global economy because he does not have a clue of how international trade works. I buy a lot of groceries from the grocery store, but they never buy anything from me.
I run a trade deficit with my grocery store, but that does not mean I am harmed by the grocery store. Quite the opposite! That money I spend helps ensure I am fed. Even if Trump's depiction of trade deficits were somehow accurate (to reiterate, he is way off), it does not matter because tariffs do not have a statistically significant impact on trade deficits (
Furceri et al., 2019). The reason for that is
tariffs disincentivize both imports and exports alike. And guess what?
All trade by definition is reciprocal because both parties mutually benefit. Trump's tariffs will interfere with that reciprocity, which brings me to the second issue.
Even if Trump were right about trade deficits, he
did not present other countries' tariff rates, but rather the size of the trade deficit that each country has with the United States.
He lied about the tariffs being reciprocal by presenting junk math. If you look at the tariff
data collected by Cato Institute, you will see significant discrepancies between what the White House claims and what is the actual tariff rate.
The chart from economist Justin Wolfers below shows how low the tariffs of major U.S. partners has been prior to the "Liberation" Day spectacle.
The excuse of reciprocity is nothing but a smokescreen to increase tariffs
to 22.5 percent, which is a tariff rate that has not been this high in the United States since 1909. You can put lipstick on a pig and it is still a pig. No matter how Trump talks up tariffs and no matter how much he tries to cut tax rates elsewhere, he is still calling for a major tax increase
because tariffs are taxes.
I wish Trump would look in the mirror when it came to harmful trade practices. While the U.S. has had a relatively low average tariff rate prior to "Liberation" Day, the United States has had plenty of non-tariff trade barriers, including subsidies, quotas,
"Buy American" restrictions, protectionist regulatory systems (e.g.,
baby formula regulations), and the farkakte
Jones Act. When adding up these interventions, much like the independent
Global Trade Alert has, the United States has actually contributed more trade interventions to the global market than any other country.
When looking at the Right-leaning Heritage Foundation's
Economic Freedom Index, it would explain why the United States
ranks 69th in the world when it comes to trade freedom, which is a lower ranking than Canada, France, or Germany. That means if he were to make it truly reciprocal, he would have lowered tariffs for nearly 70 countries because those countries have better trade policy than the United States. If Trump actually cared about trade reciprocity or trade fairness, he would be decreasing U.S. trade barriers, not increasing them.
Another thing that gets me is that in the Executive Order, he goes on about how the effects of the trade balances include "reducing opportunities for domestic manufacturers to expand, and in turn, leading to lost manufacturing jobs, diminished manufacturing capacity, and an atrophied industrial base." From the sound of this rhetoric, you would think that the U.S. manufacturing industry would be ecstatic about Trump's tariffs. So why did the National Association of Manufacturers (NAM) say earlier this week we need to brace for the tariffs?
Here is what NAM had to say shortly before the tariffs were announced: "The high costs of new tariffs threaten investment, jobs, supply chains and, in turn, America's ability to outcompete other nations and lead as the preeminent manufacturing superpower."
And if this is so great from America, why did the Dow Jones
drop 1,600 points in response to Trump's tariff announcement? The stock market is not a crystal ball about economic performance, but it does
generally track with what major corporations expect future profits to be. This makes sense considering that 30 percent of S&P 500 companies
derive their revenue from overseas operations. This is to say that neither do major corporations outside of manufacturing believe Trump's assertion that major wealth is going to pour into the United States as a result of these tariffs. The lack of support from those who Trump claims to be helping with these tariffs should give Trump great pause.
