One of the myriad of justifications given for Trump’s love of tariffs is that they are actually a negotiating tool to get the rest of the world to be more fair to American firms. American firms supposedly face high trade and non-trade barriers and these tariffs are to show that “we mean business” and force other countries to the negotiating table.
Let’s take that explanation as given. In theory, if tariffs are short-lived enough and can reduce barriers, then that could be acceptable. But, as economists since Adam Smith have noted, the success of such a maneuver is highly dependent on the skill of the negotiator. We have empirical evidence from Trump’s first term as to his skill in such negotiations. The evidence is not in his favor.
In Trump’s first term, there were two major trade deals:
- the conclusion to the China-America trade war he started
- the renegotiation of NAFTA, called the US-Mexico-Canada Agreement (aka USMCA or NAFTA 2.0)
Let us look at each of these in turn.
First, the trade war with China was a monumental loss. Even figuring in tax revenue (which is not a welfare loss but a transfer to government), US total welfare was down following the trade war (see here, in particular Section 6, for a discussion and various estimations on welfare).
What’s more, the trade war resulted in permanently higher tariffs. Both US tariffs on Chinese goods and Chinese tariffs on US goods are permanently higher after the trade war than before. According to Dr. Chad Brown of the Peterson Institute for International Economics, before the trade war, US tariffs on Chinese goods were approximately 3% while Chinese tariffs on US goods were approximately 8%. Following the trade war, Chinese tariffs on American goods were approximately 21% and American tariffs on Chinese goods were about the same. Furthermore, approximately 1% of American exports to China were subject to tariffs before the trade war. After the trade war, that percentage rose to 58%. If the trade war was meant to open China to American firms, it failed miserably.*
Second, the renegotiation of NAFTA has been lambasted by Trump. He stated that it allowed Canada and Mexico to take advantage of American manufacturers. “Who would sign something like this?” he asked. He would sign something like that. The USMCA was signed and championed by Trump in his first term. In Trump’s eyes, his own negotiated deal failed. Of course, the bizarre thing is that the USMCA is actually a pretty good deal. It’s essentially NAFTA; relatively little was changed. But in Trump’s eyes, it failed.
So, Trump’s trade negotiation track record, both by-the-numbers and in his own estimations, is abysmal. What to make of all this?
The weird thing is: Trump can actually be a good negotiator. In his first term, he scored some major diplomatic coups. For example, the Abraham Accords normalized relations with Israel and many Arab countries. But he often lets his emotions rule his reason. In trade, that seems to be the case, doubly so. If Trump could show some restraint in trade negotiations, he might be able to reduce tariffs and increase trade. But he also fundamentally misunderstands trade. He is openly and shamelessly mercantilistic. He is utterly obsessed with trade deficits and thinks trade is something one can win. One cannot negotiate when one does not fundamentally understand the topic at hand; it’s like negotiating to buy a car without understanding what a car is supposed to do.
*Decoupling (i.e., removing US firms and trade from China) is sometimes given as a reason for this trade war, but that has failed too. There was almost no decoupling following the trade war.
