Economist, Former USTR Staffer Disagree on Reciprocal Tariffs' Wisdom
A former staffer in the Office of the U.S. Trade Representative during President Donald Trump's first term and a Harvard professor agreed on very little in a debate hosted by The Federalist Society on Trump's tariffs and trade policy.
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Mark DiPlacido, a policy adviser at a populist think tank -- American Compass -- said the decision to set tariffs based on bilateral trade deficits was justifiable. He said that when observers heard "reciprocal tariffs," they assumed "we just would be matching other countries’ tariff rates." But he said, "It would be almost impossible to go through 13,000 tariff lines" and adjust each one to reflect a country's tariffs and non-tariff barriers. (There are actually about 17,000 tariff lines.)
He said because the Trump administration is concerned about Chinese inputs flowing to countries like Vietnam, Cambodia and Mexico, and being used to manufacture goods exported to the United States, that's one reason they implemented a 10% global baseline tariff.
Professor Gordon Hanson, an economist who has studied the job losses due to a surge of imports from China, called the "China shock," did agree with DiPlacido (and the president) that it's a problem that so many good jobs were lost over decades. But using tariffs to revive manufacturing in the Rust Belt won't work. To the extent there are more manufacturing jobs, they're likely to go to what he called "vibrant parts of the Southeast," such as Georgia, where electric vehicles are being built by Hyundai.
Moreover, he argued, only 8% of employment is in manufacturing. Even if you increased that by 50%, it wouldn't dramatically change the employment outlook of adults with less than a four-year college degree.
"Why do we care if those good jobs are in manufacturing," he asked, "or whether those are in IT activities folks can get without having to get a BA in engineering?
"We’re fixated on the notion that bringing back manufacturing to the US is a good thing in and of itself," he said. He said that Trump is trying to "recreate this nostalgic version of the American economy at a very high cost."
Hanson pointed out that the Section 301 tariffs on Chinese goods during the first Trump administration were mostly passed through to consumers.
"You’re trying to undo what comparative advantage is telling you to do," he said, and if tariffs stay for the long term, Americans will pay higher prices and buy less -- and export less, because manufacturers' costs will be higher.
DiPlacido said he does think deals will be reached with trading partners, as long as they buy more U.S. goods and agree to keep non-market goods out of their supply chains. However, for countries like Vietnam, that are so dependent on Chinese inputs, he said those tariffs are likely to remain. He predicted that tariffs on Chinese goods may moderate, but at a high level -- 35% to 50%.
He said the World Trade Organization has been utterly ineffective at dealing with China's state-directed economy, and therefore the concept of non-discrimination enshrined in the WTO's most-favored nation tariffs makes no sense.
"The United States cannot treat China and Great Britain the same," he said, but in an MFN regime, "that’s essentially what we’re expected to do."
"There’s a method to the madness, there’s an idea animating this [tariff action] -- the Chinese model cannot stand anymore," he said.
Hanson scoffed. "If we wanted to effectuate that change, we would be working hand in hand with our trading partners," he said, like Europe, Canada and Mexico.
"If the goal is changing China, we’re going about it in a way that’s entirely counterproductive," he said.
Hanson said that, given the fact that trade barriers have little to do with the trade deficit -- it's primarily a function of the U.S. taxing itself too little to support its government services and spending and borrowing from abroad to make up the difference -- he wonders if the real goal is to create a Fortress America.
"We've seen the way the financial markets react to that. This summer we’ll start to see how consumers react to that," he said.
DiPlacido questioned that economic wisdom, pointing out there was a trade deficit even when the budget was balanced in the 1990s.
"We need severe pressure," he said, given that China is not the only country that is selling far more to the U.S. than it buys. He said the trade deficit with Mexico is triple what it was in 2018, and the EU is not far behind China in trade deficit. "Whether it’s gone too far with specific countries, that’s to be played out," he said.
DiPlacido said that the model for deals will be a high regional-value-content standard, as USMCA has, and said that USMCA goods that meet that standard aren't subject to tariffs.
However, that's not so -- cars and light trucks that meet the 75% rule of origin are being taxed at 25% under a separate Section 232 action on cars -- contrary to the trade pact.
"If we want to negotiate with all of these countries at once, countries have to trust that, first we’re interested in making a deal, and we’re not just buying time … and we will abide by this deal as a country," in this presidency or a future one, Hanson said. "What we’ve done, by casually walking away from so many trading agreements, has really shaken the confidence of the rest of the world that we’re a reliable negotiator."