Why Trump Could 'Win' on Tariffs
Going against trade policy advice from his now former chief economic adviser, against pleas from members of his party including key leaders, and against objections from key US political allies, Trump went ahead to impose 25% tariffs on steel imports and 10% tariffs on aluminum imports, excluding temporarily only Canada and Mexico pending the outcome of NAFTA negotiations.
This has left many scratching their heads. You do not 'win' Trade wars. So what exactly is Trump gambling on here? Why might he actually win?
It is surmised that we have here a confluence of good old redistribution politics, a prepped environment, and strategic maneuvering , which combined could see Trump actually 'win' on this. This is perhaps what he is banking heavily on.
There is the strictly political angle, which any political analyst knows about. Trump campaigned strongly on the basis of revamping American manufacturing including steel production, and on protectionism, and won. This is simply a policy nod to his base by fulfilling a campaign promise.
At some level, this move could be a political winner, because while the impact of the tariffs is also expected to affect some other manufacturing industries adversely, so long as costs can be passed on to consumers, these businesses may see no issues with the tariffs.
Further, on the consumer side, there are apparently many Americans who think little or see no relationship between tariff policies and the economy as a whole, so the tariff in effect delivers political net gains.
This tends to be the case when policy is explicitly redistributive. It provides concentrated visible benefits, but spreads the costs throughout the economy. This is usually the case with protectionist policies and this is one such instance.
It is difficult to see any problem, much less to blame anyone for any observable bad outcome, which could very easily be confounded by other plausible explanations: if higher prices are observed, we are not likely to blame it on tariffs but perhaps on a tightening economy etc.
Now couple the preceding with the fact that while we should expect prices to go up as a result of these tariffs, we are also seeing at the same time higher wages from both Tax Reform policy and from the economy operating at full employment levels.
If the prices of goods somehow related to higher steel and aluminum prices are going up, but wages are also going up because the economic environment is pushing them up, consumers may therefore not notice any impact on the purchasing power of their incomes.
This is also true for those businesses which might face higher costs in light of the tariffs. Tax reform by design was overly generous to businesses of all stripes, so whether these are the businesses that use aluminum and steel inputs, or they are the ones exporting products, that might be hit with retaliatory tariffs, the impact of possible higher costs as events unfold will be mitigated by the benefits from tax reform law.
In other words the present environment is already prepped, even if inadvertently, to blunt the negative impacts to be expected from the tariffs.
But there is more. The presumption of a trade war resulting is the expected rational outcome from Trump's tariffs, and all the pundits have focused on this, but we could be in a trickier political situation.
When trade wars are expected to occur, it is known or believed that all sides suffer, and most models even assume that the suffering is symmetric.
In practice this is seen in the standard rhetoric from trade partners that they will retaliate by imposing their own tariffs, and somehow this is combined with the notion that the imposing country is taking those steps with fingers crossed, that retaliation will not happen.