The real danger to the US economy in Trump’s trade policy

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Gary Cohn resigned on Tuesday as director of the National Economic Council. His departure came in the wake of losing the policy argument over sweeping new taxes on imported steel and aluminum. Cohn’s surprise resignation is a valuable reminder that the real risk with this Trump initiative isn’t the tariffs themselves — it’s what happens next.

Trump is now going to find himself in the middle of a multifaceted international dispute with varied diplomatic and economic repercussions. And since on trade policy he has decided for once to try to actually govern the country rather than outsource the work to congressional Republicans, he will need to make some difficult choices. He’ll be doing so without a strong base of personal knowledge on the relevant questions, and with a White House team that appears to be disintegrating before our eyes.

One very plausible outcome of this chaos is that the administration will simply be paralyzed and unable to do much of anything. Given the particulars of the situation, that would probably be a good outcome. But it’s also possible that things will slip entirely out of control, with severe negative consequences for the global economy.

Tariffs matter less than what happens next

Very few people work in metal-producing industries in the United States, so the upside to steel and aluminum protectionism is tiny. By the same token, while essentially all of us consume products made of steel and aluminum, these raw materials simply aren’t a particularly significant share of the overall American economy.

What’s more, the coming retaliation from America’s trade partners is more political than economic.

European Union Trade Commissioner Cecilia Malmström spoke Wednesday morning of new taxes on agricultural products including bourbon, cranberries, peanut butter, and orange juice. The goal here is to put political pressure on Trump to recognize that while he cares about steel country in Western Pennsylvania, he also has loyal constituents in Kentucky, Florida, Wisconsin (America’s No. 1 source of cranberries), and Georgia (the land of peanuts). At the same time, the Europeans are deliberately trying not to strike at the heart of the global trading system here. Most people on both sides of the Atlantic simply won’t notice very much.

But Trump has threatened to respond to retaliatory tariffs with a new set of countermeasures, including taxes on European automobile exports.

Car tariffs would be a bigger deal than steel tariffs, and would naturally prompt a new round of retaliation from Europe. We could easily find ourselves in an uncharted situation of multiple rounds of tit-for-tat tariffs that wind up meaningfully reducing living standards in the nations on both sides of the trade war.

Trump is weirdly optimistic about “trade wars”

The core risk here is that without a disciplined policy process or knowledgeable advisers, Trump is left to rely on his own instincts on this subject, which are strangely unsound. His view, as articulated both on Twitter and at Tuesday’s press conference with Swedish Prime Minister Stefan Löfven, is that trade wars are good for the United States — in fact, “good, and easy to win” — because we currently run a trade deficit.

There is a reasonable — though controversial — argument that this kind of logic applies when much of the world has fallen into recession. (Paul Krugman made the case in 2009.)

But with unemployment generally low, a wave of reciprocal tariff increases is simply going to be disruptive and inefficient. The US-based automobile factories that benefit from taxes on imported cars will suffer from the impact of taxes on imported steel. Wisconsin agricultural communities that lose from reduced global cranberry sales may gain from barriers to imported European cheese. But the net impact of all of this is simply going to be higher prices — and a slightly higher pace of interest rate increases from the Federal Reserve.

No president takes office familiar with all the issues at hand. The point of building a competent team and a coherent process is to help the chief executive deal with those problems. The difficulty America now finds itself in is that while Trump’s understanding of the trade issue is extremely poor, he does seem to realize that — and he has neither a competent team nor a coherent process to help him navigate the situation.

Trump is governing in a vortex of ignorance

To say that Trump doesn’t understand trade policy correctly sounds almost redundant, as he doesn’t appear to understand any aspect of federal policy correctly. A critical difference with trade is that a protectionist viewpoint is something Trump has clung to strongly over the years even as much of the rest of his political “thinking” has evolved.

Unlike health care or financial regulatory policy, in other words, this is not an arena in which Trump is willing to simply defer to congressional Republicans and their allies in Congress.

Trump, meanwhile, is losing Cohn during the ascendancy of Peter Navarro, whose thinking on trade policy is dominated by a kind of basic error that would get you flunked out of a freshman economics course.

And Chief of Staff John Kelly seems to have lost control over the process, to the extent that even the joint efforts of the secretaries of state and defense couldn’t convince Trump to avoid making the totally bogus argument that reliance on foreign steel harms American national security.

The first year of America’s experiment in electing a president who had no idea what he’s doing went a lot better than I expected. But the second year is off to a rocky start so far. And the current trends are not encouraging.