Nitin Pai: Trump’s tariffs serve political ends even if they lack economic logic

Some of Donald Trump’s reasons for imposing tariffs on countries are understandable, even if their fitness for the purpose is debatable. Demanding that Mexico impose tighter border controls, Europe raise defence expenditure and China prevent fentanyl smuggling or else suffer economic punishment is coercive diplomacy. A good threat comprises a promise of punishment if the demand is not met and, importantly, non-punishment if it is conceded. If Washington proceeds to impose tariffs on Mexico, Europe and China despite their concessions, it will not be coercive diplomacy. It will be something else.

Other reasons are dogmatic. Trump has been clear that Europe, Canada, China and the rest of the world have been unfairly benefiting from the global economic system at the United States’ expense. He seems convinced that tariffs will prevent this and make America great and rich again.

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In this view, tariffs are not coercive diplomacy, but a categorical solution to redress the unfairness that the US has been suffering at the hands of the world. He flatly rejects the argument that tariffs will in fact be paid by American firms and passed on to American consumers. He also accepts that the US economy will go through some pain, but says it’ll be worth it. Even if Washington’s struggling officialdom manages to translate Trump’s vision of reciprocal tariffs into implementable policy, it is unclear that he will withdraw this policy if other countries drop their import tariffs.

It is hard to be certain, but I think that the new establishment around Trump is coalescing around a geo-economic agenda that connects tariffs, the US dollar and security in a, well, unconventional manner.

Stephen Miran, chairman of the US president’s council of economic advisors, wrote a manifesto last November arguing that the combination of globalization and the dollar’s global status as a reserve currency has de-industrialised the US, enriched China and allowed the world to free-ride on America’s defence expenditure. In response, he calls for the US to first impose tariffs gradually, but certainly and subsequently devalue the US dollar even if it means losing its reserve currency status.

Like Miran, Robert Lighthizer, a former US trade representative, characterizes trade deficits as a transfer of wealth from the US to China, Europe and other countries. To the argument that the US gets goods for the money it pays, Miran and Lighthizer say that those goods ought to have been produced in America in the first place.

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The powerful dollar and unfairly undervalued renminbi (as well as other currencies) ensure that more and more manufacturing moves out of the US, resulting in lost jobs and slower growth. Meanwhile, as Lighthizer contends, the inflow of foreign capital into the US has contributed to the financialization of the US economy, exacerbating income inequality and the devastation of middle America.

There are a number of questionable assumptions and contradictions in this line of thinking. It is also not clear if the conceptual framework offered by Miran and others is a rationalization of Trump’s pronouncements or their impetus. For instance, Trump has been vocal about maintaining the dollar’s reserve currency status, while Miran makes the case for its dilution. Be that as it may, it is not my intention to debate the economic logic of Washington’s plans. Rather, the point is that we must interpret Trump’s policies not from the lens of economics, but from that of economic statecraft.

Economics is the science of human behaviour. Economic statecraft is about the use of sovereign power in the economic domain to achieve political objectives. An economist will reject a trade war because it is a lose-lose proposition, and the US might lose more—both in absolute and relative terms—than its target countries.

A practitioner of economic statecraft , however, could decide that a trade war is the best option at hand, if other options are costlier. The measure of success is whether or not the political goal is achieved, regardless of the economic costs involved. David Baldwin, a scholar of economic statecraft wrote that “although economic policy instruments may be used to pursue economic ends, their use is not confined to such aims... the distinguishing characteristic of economic statecraft lies not in its goals but rather in the ‘peculiar nature of its means.’”

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It is important for policymakers, economists and analysts in India to understand this. Trump has indicated that if a recession is the price the US has to pay to make America great again, then he is willing to pay it. It is riskier to believe that he will act ‘rationally’ and prevent a recession than to proceed with the assumption that he doesn’t care at this time about market indices and quarterly GDP numbers. His political goals are likely to change in the future when he feels the political consequences of his economic decisions. We will then have to respond accordingly.

The ideal approach for India is to use the upheaval to carry out essential reforms that would otherwise be difficult to do, in a sort of inverse version of economic statecraft. It would then matter a little less where Washington goes with its tariff juggernaut.

The author is co-founder and director of The Takshashila Institution, an independent centre for research and education in public policy