{UAH} TRUMP REINVENTED TARIFFS AND IT WORKED

Trump reinvented tariffs and it worked

by Jason Orestes

 | January 29, 2020 03:45 PM

 

Tariffs were once a mainstay in U.S. trade policy. Constituting the main source of federal revenue from 1790-1914, and at one point providing over 90% of government income, they were a pivotal component of U.S. fiscal and foreign policy. Their main motivation in those times: protect U.S. industry from foreign opposition. It wasn’t until colossal industrial growth coupled with the introduction of the income tax rendered them less critical to the government balance sheet, and their use declined.

Post-World War II, tariffs took on the negative connotation you see today. The West largely eschewed them in favor of free trade and established organizations such as the World Trade Organization (at the time known as the General Agreement on Tariffs and Trade) to seek to remove barriers to commerce.

While presidents have implemented them since, the degree to which President Trump has deployed them drew near universal rejection. Pundits disparaged them as economically illiterate, and the same class of expert that predicted Trump will lay waste to the economy claimed these tariffs would usher in recession and global malaise. Even members of Trump’s own staff resigned because they carried such ideological opposition to even the notion of tariffs.

Well, none of that happened. It turns out tariffs make for quite the negotiating instrument.

Trump’s simplistic-yet-correct sentiment that leverage in a trade war essentially resides with the party who incurs the trade deficit should no longer be condescendingly dismissed by economy wonks who denigrate any policy that isn’t globalist goodthink. China relies far more on exporting to the United States than we do purchasing those same cheaply made imports: a straightforward notion that tariffs exposed.

Perhaps one of the most significant externalities the tariffs and trade war prompted was a business manufacturing exodus out of China, causing companies to move factories and curtailing Chinese investment in the process. When companies move these supply chains, they aren’t coming back. China ran headfirst into this unforgiving reality and as a result we have a "Phase 1" trade deal with genuine structural reforms and more to come as negotiations continue.

China is not an opponent where diplomatic finesse accomplishes anything, and the blunt mechanism that is the tariff was the perfect apparatus to force their hand after decades of cowardly Western appeasement. It’s difficult to conceptualize a better time to wage this unavoidable confrontation. The Trump tax cuts gave ballast to an already expanding and diverse U.S. economy, replete with a robust consumer and in the midst of the longest economic expansion in its history. It was the perfect opportunity to weather retaliations while inflicting long overdue pain on the Communist Party.

What the tariffs were intended to do and their actual results were almost never reported on fairly by liberals in the media. They were uniformly touted as retrograde protectionism rather than what they actually were: an asymmetrically internecine bargaining tool, entirely necessary for the opponent at hand.

We were told consumer costs would skyrocket when the pricing effect of tariffs can be much more nuanced. Retailers had margins that could weather the duties and resisted passing price increases on to customers — something you could see both in reality and further confirmed by studies that found companies absorbed the duty or used their economies of scale to negotiate better terms, only passing on about a 1% increase in cost for products subject to 20% tariffs.

Fear-mongering and "Trump Derangement Syndrome" precluded any rational analysis of U.S. strength and tariffs as a strategy. The U.S. was perpetually framed as a helpless giant doomed from the start, at the mercy of an adversary that’s a fraction of the size and with an economy far less sophisticated.

Unsurprisingly, a country with full employment, energy independence, trade-imbalance leverage, a strong consumer, and 2-3% GDP growth can in fact renegotiate better terms. Trump was able to impose U.S. will with varying degrees of tariffs, resulting in about $70 billion in annual import surcharges: approximately just 0.3% of U.S. GDP. The U.S. is a $21-trillion behemoth with a massively diversified, services-oriented economy. There was little chance China ever could inflict real damage.

China represents the consequence of blindly adhering to a globalist world view. Its competitive advantages aren’t borne of any innate or geographical advantages like free-traders will spout as if it’s religious scripture when trading with anyone gets you cheaper products but as a result of inhumane working conditions and poverty-level wages. The same corporations that adorn themselves in rainbow flags; virtue signal about their commitment to the environment, equality, and human rights; and can’t wait to tell you how inclusive they are on their hiring page had zero concern exporting their manufacturing to a country that spits in the face of all of these causes and is the world’s worst polluter to boot.

Human rights and U.S. middle-class citizens be damned if it means larger margins and cheaper trinkets.

Trump has fundamentally recalibrated how tariffs can and should be assessed and applied in the face of bad actors in the global trade landscape. Superficial economics lessons that operate in a naive vacuum while informing you that all that matters is the end price of a widget should be viewed as the supine policy that it is.

There is nuance to the modern tariff that transcends just an import price, and the holistic view Trump took when using them to facilitate better terms for the country should be applauded.

Jason Orestes (@JasonOrestes) is a former Wall Street financial analyst who focuses on contemporary political developments affecting economics, markets, and culture. His financial commentary can be found on Jim Cramer's TheStreet, where he is a regular contributor.

EM         -> { Trump for 2020 }

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