Donald Trump has a tenuous grasp of economics, at best. Six of his business ventures ended in bankruptcy, and a couple were deemed fraudulent. He has appointed a very mixed cabinet, largely based on perceived loyalty to him, and willingness to follow his right wing ‘America First’ agenda.
The US economy performed well under Joe Biden, but domestic inflation pushed up some prices which did not return to historic levels (they rarely do.) The cost of eggs and ‘gas’ (petrol) being the most frequently cited in interviews. Trump’s answer to ‘gas’ prices was “drill baby drill”, exhorting oil extractors to increase production and lower prices. They won’t. Oil sales are international, and extraction is expensive. Investors do not support increased production because that would lower prices.
Trump’s approach to trade
A political commentator could write a substantial thesis on what the new administration has done so far, largely following the Project 25 plans of which Trump claimed ignorance, but the world beyond the US is most keenly interested in its trade policies.
Trump is a protectionist, but a naive one. Protectionism is allowed under World Trade Organization (WTO) rules, provided it is applied universally, for example to protect a nation’s defence industry or strategic infrastructure. Trade agreements inherently have an element of protectionism, with agreed areas of trade and often quotas, with both sides seeking to benefit. Such trade deals exist between the US and Canada, and the US and Mexico.
Other factors may inhibit trade, again applied universally, to protect health and safety standards pertaining to the goods and materials imported. The EU believes the standards it upholds for the health and safety of workers has a cost that should not be undercut by imports from nations with lower standards, and applies corrective tariffs on the goods concerned. Hostile tariffs applied to a nation are rare because they are destabilising and can cause economic damage to the country imposing them, particularly if they are mirrored by the other nation, as they usually are.
Why is Trump imposing tariffs? In his view, the US should always have a trade surplus with any large country, or at least no trade deficit. He and his cabinet are populists. They do not use facts or statistics. Their arguments are rhetorical. Simple solutions for complex problems. An election can be won by simple slogans. Governing is a different matter altogether.
Dealmaking for dummies
Professor David Honig of Indiana University explains Trump’s simplistic approach well:
“If you’ve read The Art of the Deal, or if you’ve followed Trump lately, you’ll know, even if you didn’t know the label, that he sees all dealmaking as what we call ‘distributive bargaining’.”
Distributive bargaining always has a winner and a loser. It happens when there is a fixed quantity of something and two sides are fighting over how it gets distributed. Think of it as a pie and you’re fighting over who gets how many pieces. In Trump’s world, the bargaining was for a building, or for construction work, or subcontractors. He perceives a successful bargain as one in which there is a winner and a loser, so if he pays less than the seller wants, he wins. The more he saves the more he wins.
The other type of bargaining is called integrative bargaining. In integrative bargaining the two sides don’t have a complete conflict of interest, and it is possible to reach mutually beneficial agreements. Think of it not as a single pie to be divided by two hungry people, but as a baker and a caterer negotiating over how many pies will be baked at what prices, and the nature of their ongoing relationship after this one gig is over.
The problem with Trump is that he sees only distributive bargaining in an international world that requires integrative bargaining. He can raise tariffs, but so can other countries. He can’t demand they not respond. There is no defined end to the negotiation and there is no simple winner and loser. There are always more pies to be baked.
Further, negotiations aren’t binary. China’s choices aren’t (a) buy soybeans from US farmers, or (b) don’t buy soybeans. They can also (c) buy soybeans from Russia, or Argentina, or Brazil, or Canada, etc. That completely strips the distributive bargainer of his power to win or lose, to control the negotiation.
A self-defeating strategy
The support for Trump’s tariffs comes from some people who believe that it will encourage companies to produce within the US (‘onshoring’). Japan set up manufacturing in the UK to avoid quotas on cars and electronic goods, for example. This may work in some cases, but not than many.
You cannot onshore crop growing, mineral extraction (including precious metals required for high technology) and much of what is imported cannot be economically produced in the US. Apple has been moving iPhone and laptop production to India rather than China, but nobody could move volume production from the far east to the US. Even with a 25% tariff, it would still be far, far cheaper to manufacture in China or India and accept the loss of some sales, or reduced profit margin.
Trump is in the process of trying to deport thousands of South Americans. The US agricultural sector heavily relies on migrant labour for planting and harvesting. Of course, populists have to have an ‘other’ to blame, and in the US it is in large part the Latinos. Most of the US’s oil extraction is from fracking. The oil must be blended with another oil to produce petrol, derv and jet fuel. Some 62% of the oil used in refineries is from Canada. Somehow I cannot see the price of oil coming down soon. Or anything else for that matter. But Elon Musk and Trump’s billionaire friends will be just fine.
