Mr. President, I am aware that the steel and aluminum tariff announcement was hastily pulled together, but before you pull the trigger that starts a trade war, you might take a minute to consider what it would do to your business.
Let’s first imagine a hypothetical country, say Rusher, that is “winning” vs. the U.S. in the form of a $10 billion trade surplus. As this imaginary country is an oil and gas exporter, many of those extra dollars end up in the hands of a few oligarchs, and they just don’t have any need for more U.S. exports. So instead of buying more U.S. exports, they could travel to New York and purchase some very expensive properties, making property developers much better off.
This shows one of the key facts about trade deficits, that the money earned from exports does not have to be matched by imports but can come back to the United States in the form of investments such as in high-end properties.
And as a global property developer, it is also important to consider how these deficits could benefit properties you might own abroad. Let’s imagine another hypothetical country, call it Canalia, that also uses dollars as a currency. The oligarchs might use some of their surplus dollars to purchase some high-end real estate in Canalia, and the developers of those properties would also benefit greatly. This shows that money flows between any pair of countries do not have to balance, as those extra dollars can be used to buy real estate in a third country, or alternatively be put in a German bank.
Maybe the impacts of a trade war on your own businesses are not foremost on your mind now that you are president, and you are focusing on the broader benefits to the nation, but the news here is even worse. Not only will the tariffs lead to higher prices for consumers, a trade war undercuts your largest legislative accomplishment and threatens the 10-year streak of solid improvement in the U.S. labor markets.
As it turns out, surpluses by real nations create more widespread benefits than those from the hypothetical nation of Rusher. For example, China invests large amounts of its surplus dollars in U.S. investments such as Treasury bonds, and those purchases help keep interest rates — and the cost of financing the U.S. budget deficit — low. It is not a great time to shut off those foreign purchases given the massive budget deficit projections created by the recent tax cut, as that would leave U.S. citizens to cover the entire budget deficit, and the result would be much less money left for investments in factories, roads, education and other productive investments.
The United States’ largest export destination, Canada, also runs a surplus with the United States, and it sends a good portion of its surplus dollars back to build plants and equipment in the United States. As it turns out, Canada and other U.S. trading partners’ foreign investment in the United States is responsible for a considerable share of U.S. jobs, and foreign firms also bring technology and manufacturing methods that increase productivity in the United States, something that makes Americans better off.
The drop in the U.S. stock market following your announcement was a quick indication of the impact of tariffs on the private sector, but that is likely to be small compared to what might happen in response to a formal announcement of unilateral tariff increases.
Of course, all these effects occur even without the inevitable retaliation that U.S. trading partners will impose on U.S. exports, and our trading partners will precisely target exports that are painful for the members of Congress and U.S. workers. If trade wars were easy to win, there probably would have been a lot more of those in the last century, but instead we have had numerous rounds of trade liberalization and the fastest productivity growth the world has ever seen.
So whether you reconsider this trade war for the benefit of your own properties or for the good of the nation as a whole, it doesn’t matter as long as you don’t pull the trigger. There are winners and losers from the existing pattern of trade surpluses and deficits, but there are only losers from a trade war.
Loren Yager
Loren Yager, Park City, formerly served as the chief economist of the Government Accountability Office, the investigative arm of Congress.