Squaring the Trump Circle: Free Markets and Tariffs

How does one account for the seeming contradiction that the Trump administration is the most free-market, small-government administration since the Coolidge administration, yet tariffs are the core of its economic policy? How can key Trump economic advisors, like Kevin Hassett, a traditional Republican free-market advocate, be such strong tariff advocates?

Traditionally, free marketeers have advocated for market forces to determine the terms of trade both between national economies (e.g., totally free trade with all nations) and within economies (e.g., limited regulations, no government programs to help industry, and a tax code that is neutral between industries and activities). Both are uniquely bizarre concepts, especially when taken to the extreme, as so many on the right are prone to do.

In his own way, President Trump embraces this framework. Certainly, for trade within the United States, Trump wants to slash regulations, have a tax code that raises less money and is neutral between activities and industries, and get rid of “industrial policies.”

For trade between countries, Trump rightly sees that market forces are not the dominant force: Other nations’ mercantilist protectionism is a major factor, too. So, Trump sees tariffs as an across-the-board global price reset, wherein the market, not the government, selects the firms that succeed behind America’s tariff wall. Since other countries are cheating, either implicitly or explicitly, the market-neutral way to respond is with a market price signal: a tariff.

And if the winners turn out to be pork producers, steel mills, and furniture producers, fine. The firms and industries that succeed behind the tariff wall will be the ones that market forces enabled. And any exemptions to the tariffs, such as those given to iPhones and related imports from China, are not strategic responses, but rather political ones: The White House knew consumers would hate paying double the price for their iPhones.

This framework also explains why Trump has attacked existing policies and programs directed toward advanced industries, including the CHIPS Act, science funding, NIST’s Manufacturing Extension Partnership program, the Inflation Reduction Act’s tax incentives for clean energy production, and more. Unlike neutral tariffs, these pick winners.

The problem, of course, is that there is a difference between potato chips and computer chips. Some U.S. industries and firms are critical to national defense and techno-economic power—and blanket tariffs are likely to hurt them. If a firm in an industry driven by advanced technology produces in America and sells a lot globally, but relies on imports for a significant part of its supply chain, it will likely lose global market share as tariffs drive up its production cost. Similarly, if a firm in an advanced industry sells most of its output in global markets, but other nations engage in tit-for-tat tariffs, it will end up with less global market share. And U.S. firms that operate globally might just decide to move production outside of America to avoid the tariffs.

Trump’s tariffs are like upturning a table of puzzle pieces and reassembling them in a new way, but with the knowledge that you will end up with 5 percent more pieces because of the hoped-for reduction or elimination of the U.S. trade deficit. But we have no idea what these new puzzle pieces will be. If we gain 20 percent more low-tech commodity output and lose 15 percent of our high-tech, advanced output, that’s just Ricardian comparative advantage. America might in fact be destined to be the soybean wonder of the world. For Trump, it’s all about reducing the trade deficit. It’s not about restructuring the U.S. economy around critical industries.

This gets to the core challenge of the Trumponomics. If Bidenomics was all about green equity, Trumponomics is all about free-market protectionism. The former model focused on clean energy production and economic distribution. The latter focuses on radically shrinking the size of government, while eliminating the trade deficit with tariffs. The economy these policies produce will be, by definition, suboptimal.

Neither Bidenomics nor Trumponomics will cut it in a world in which America is fighting for its very existence against China’s increasingly advanced economy. The model we need instead is national developmentalism, which, among other things, rejects and replaces the neoliberal doctrine that values all industries equally with a new doctrine that prioritizes some industries as critical.

It’s beyond the scope of this piece to lay out a national developmentalist approach to tariffs, but suffice to say it would be much more targeted toward key bad actors in the global economy (as opposed to penalizing allies like the United Kingdom), and it would be concerned with certain components of advanced-industry production.

But until we have a Congress and administration that more widely and deeply rejects both free-market fundamentalism and green equity in favor of national developmentalism, tariff policy will be in the service of free markets, not on preventing the catastrophic eventuality of losing our strategic industries to China.