The Trump Administration Learned Wrong Lessons from Mexico 'Win'
It seems, for the time being, that the United States has averted the implementation of any tariffs on Mexico. After President Trump’s tariff threat, both he and Mexican President Andres Manuel Lopez Obrador came to an immigration deal to prevent that threat from becoming reality. Champions of the administration’s strategy say this proves that tariff threats are an effective negotiating tactic.
The administration’s undoubted success in this particular negotiation begs two questions: Are tariff threats, in fact, effective strategic tools and are they ultimately worth it? For both questions, the answer is an unequivocal no.
First off, free traders across the country should be pleased that tariffs were avoided. Regardless of the discourse surrounding the dispute and the tactics employed, the prevention of tariffs is the ultimate goal of free trade advocates. In this case, it is good news that the Trump administration was successful. However, repeating this formula will have consequences down the line.
When Trump announced his threat, the stock market, particularly auto stocks, fell. We have seen the same sort of reaction from the market every time the administration threatens tariff actions against a foreign nation, whether it be Mexico, Canada, or China. While it may have worked out in the end, America’s economy took a hit in the meantime.
The markets cannot function to their full potential when the President introduces such uncertainty. If Trump decides to take the vindication he’s supposedly received from Mexico to utilize this strategy more often, the market will dip again in the near future. Eventually, a foreign nation will call the administration’s bluff and the administration will have to choose between being exposed as having made an idle threat or imposing tariffs that will severely damage the economy.
There is also the issue of replicating this success down the line. The heart of this dispute centered on immigration, with trade being used as leverage. However, in other cases, the central issue is trade. This has been the case for China where the administration laments the “massive trade deficit” we have with the Chinese. To try and leverage lower tariffs that China places on American goods, the administration has threatened tariffs on Chinese goods.
First of all, there is no reason to believe that taking this strategy with China could come to the resolution the administration wants: the elimination of the trade deficit. According to the Observatory of Economic Complexity, the U.S. exports $1.25 trillion worth of goods annually. On the other hand, China exports $2.41 trillion annually. China exports almost twice as much as the U.S. on a yearly basis. It is absurd to believe that this trade relationship should be balanced at the end of the day.
Trade relationships, like any other, need to be beneficial for both parties involved and recognize that both parties have different needs. China is an agrarian society still in the midst of a rapid period of industrialization. Europe faces unique economic realities as well. Simply pointing to deficits as evidence that the U.S. is somehow being ripped off reflects a mistrust in markets. Different markets have different needs and they act in their own self-interest to meet them in the most efficient way possible. In some cases, it means being a net importer. In others, it means being a net exporter. There is no right or wrong.
Government intervention cannot suppress market demand. It might warp the market, but it cannot eliminate demand. That is why, according to the latest data, that despite the prolonged trade dispute with China, our deficit with that country has hit record highs in recent months. Historical data shows that our deficits tend to be higher when the economy is stronger. That is because U.S. consumers have more purchasing power during these times. That is why these tariffs and threats have not impacted our deficit with China. American demand is driven by the market and no central planner can change that with threats.
If the administration were so keen on protecting American goods and making sure domestic products compete better with foreign goods, Trump should continue his policy of aggressive deregulation. Make it less costly for American businesses to produce goods here, instead of hurting consumers and businesses alike by making it more expensive to import goods from overseas.
Just because the Administration got lucky with Mexico, does not mean that the strategy of leveraging tariffs to get what you want is a good one. In fact, if it is repeated, it will stifle the economic growth that President trump has championed as his administration’s main accomplishment. Trade is not a zero-sum game and should not be treated as such.