In an economic smackdown, who would trust more, Donald Trump or Milton Friedman. This would be a delightful verbal cage match.
In one corner, we have President Donald Trump, a man who likes a good tariff. His beliefs about tariffs and trade wars are as simple as his other policy beliefs. Tariffs will work because he said they will work. Period. So, for now, there is a new tariff in town.
In the opposite corner, we have Economist Milton Friedman, a man who made multiple arguments against the imposition of national tariffs. In Friedman’s mind, the market ultimately sorts out trade imbalances and tinkering with the markets is not true capitalism.
Admittedly, I’m no Milton Friedman. Nonetheless, I can call on Milton Friedman, the consummate economist and 1976 winner of the Nobel Peace Prize in economics, for feedback on the notion of a “balance of trade” and trade deficits.
When people talk about a favorable balance of trade, it’s taken to mean we export more than we import. But from the point of our well being, that’s an unfavorable balance. That means were sending out more goods and getting fewer in. -Milton Friedman
Friedman’s logic is the diametric opposite of Donald Trump’s. The President makes his case for tariffs on the very basis Friedman warns us about, calling the notion of sending more out than we take in “an unfavorable balance” of trade.
In Friedman’s mind and logic, “Each of you in your private household would know better than that…you don’t regard it as a favorable balance when you have o send out more goods to get less coming in.”
Trump’s tariff policy was one of his strident 2016 campaign promises…so, I guess it doesn’t need to make sense or jive with the likes of Milton Friedman. The President rode into the White House denouncing most of America’s trade deals as negotiated by “stupid politicians” and therefore, bad for the American worker. I will not argue that far too many politicians are in fact, stupid.
In time of war we blockade our enemies in order to prevent them from getting goods from us. In time of peace we do to ourselves by tariffs what we do to our enemy in time of war. – Henry George, Progress and Poverty
In the campaign crosshairs of then-candidate, Donald Trump’s targeted cars, solar panels, appliances, steel, and yes, aluminum. His recent unilateral announcement of the imposition of tariffs on aluminum (10%) and steel (25) have riled the EU, Mexico, and Canada. He has since back-peddled and said he would consider exempting Mexico and Canada, considering the renegotiation of NAFTA.
Trump spared no words in blistering the EU over trade imbalances.
If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!
— Donald J. Trump (@realDonaldTrump) March 3, 2018
The global free markets will never march to the drumbeat of tariffs and sanctions. Capitalism and all economies are driven by human motivations and the value equations of products and services, not only between individuals but nations. Tariffs, if only temporarily, delay innovation and are forms of capital welfare paid to production sectors within the economy.
Of course, the political benefits of having a new tariff in town are immediately obvious. The long-term economic consequences are obscured and unpredictable.
Is a trade deficit always a bad thing? Is it even possible to create balanced trade, whether between individuals, communities or nations? I think not. In the real world of productivity, exchange and buying power, setting up an artificial barrier to favor a small market segment is a false economy.