Outside of Trump’s inner circle, nearly everyone seems to understand the destructive nature of tariffs, even Keynesian economists and Trump voters. After the election, the stocks of dollar stores immediately sold off on concerns the industry would face higher costs in a trade war with China, no doubt passed on to their lower- and middle-income customers. Investors, at least for now, are downplaying these risks.
The problem is that the very essence of Trump is that of a pragmatic, businesslike interventionist who thinks trade is “negotiable” and “reciprocal.” In a sense, he
is right: trade is mutually beneficial, but to the parties involved, its terms are negotiated by the parties involved and each gives up something to get something in return. However, when a third party, in this case the government, interferes, it can only interject its own wants and needs. It does so through violence, i.e. it gives up nothing and benefits at the expense of those who would otherwise trade with each other. While the state gains power, both parties to the trade are made poorer.
Protectionism prevents a nation’s consumers from securing the best products at the lowest prices around the world. It also denies producers and distributors the cheapest inputs and best deals. Trade and peace go hand in hand. A healthy global economy and rising living standards require expanding trade, specialization and the division of labor. Protectionism moves in the opposite direction, towards self-sufficiency, nationalism and ultimately impoverishment.
When Trump threatens 100% tariffs on anyone who refuses to trade in U.S. dollars, he is playing with fire. In response to the Smoot-Hawley tariff of 1930, global trade plummeted 65%, plunging the world into depression and laying the groundwork for nationalism, authoritarianism and world war.
