Americans who support Donald Trump are celebrating his victories in the trade deals with the EU, Japan, South Korea and others. Meanwhile, many in those economies are angry at what they see as their leaders’ unilateral surrender.
Both of these views reflect the same mistaken mercantilist thinking that motivated the US president to launch his extraordinary tariffs in the first place. The settlements leave us in the second worst of all worlds, but at least avoided the very worst: a full-on global trade war of escalating tariffs on all sides.“Winners,” “losers” and “concessions” are all misnomers when it comes to trade policy. The US has now raised the average tariff rate from about 3 per cent to about 20 per cent. The result will be that US consumers will benefit less from imports, while American exports will also shrink.
The problem the rest of the world faced was that it was negotiating with a man who either did not understand this or did not care. The issue is that levying tariffs is like a person simultaneously shooting himself and another person in the foot. If the other person responds by shooting both himself and the original person in the foot, that would leave both unable to walk.
The only argument for Europe, Japan or the other economies levying comparable tariffs on the US would have been if it led to a settlement in which the latter dropped its tariffs on them. The best outcome for Europe or Japan would be near-zero average tariffs on both sides, which is about where things were in January. But if the US was going to hurt these economies with tariffs, as Trump has clearly been willing to do, it was wise of them not to compound the harm with more tariffs of their own.
In fact, Canada — which has pursued a different strategy — might suffer more from its retaliation against the US than it does from the American tariffs themselves. Moreover, countries that made deals will benefit from some trade diversion because what matters for exports to the US is not the absolute level of tariffs but how they compare with those faced by other countries.
But why did the EU, Japan, South Korea, Vietnam and others go even further and make what are widely called “concessions”? These should be thought of not as a price they paid to appease Trump but instead as a benefit they received while appeasing Trump
Sure, there was an argument that other countries should have continued to harm themselves by imposing tariffs in order to gain leverage for an even better deal in the future. I was not close enough to the negotiation to know, but I am sceptical — and as an economist I can merely offer the observation that the “concessions” were generally in the interests of the countries that made them.
So the bottom line is that the US will be poorer because of its tariffs, while Europe, Japan, South Korea and other deal makers will be better off. And China will continue on its current course undeterred by the divisions in the rest of the world. But I suppose it could have been even worse.
By: Jason Furman
The writer is a professor at Harvard University and a former chair of the White House Council of Economic Advisers
Posted by -Maestral-
2 Comments
and this is why its bad for democrats.
As addition to this article there’s bloomberg one by Clive Crook that goes along the same lines. Here’s the [archive link.](https://archive.ph/FvAkZ)
I felt urge to open this as a separate thread given the discourse in few previous threads like [this (EU to suspend US tariff countermeasures for 6 months)](https://www.reddit.com/r/neoliberal/comments/1mhos3i/eu_to_suspend_us_tariff_countermeasures_for_6/) and [this (Europe’s summer of humiliation)](https://www.reddit.com/r/neoliberal/comments/1mdvb18/europes_summer_of_humiliation/).
It’s hard for me to gauge weather people are just game theorying these negotiations or have they truly adopted mercantilism, but it seems to me that overwhelming consensus is that EU and rest of the world lost while US won. At the same time, what I belive is economic science consensus, is that both lost, with US being the biggest looser.
I think Furman and Crook make valid points. First and foremost that Trump (*and his economic advisers Lutnik and Bessent in my opinion*) always intended to raise tariffs. Tariffs are intended to fund recently passed tax cuts as well as help paying off the debt.
As a counter factual, people usually focus on collective action scenario, where all US trading partners would refuse to negotiate and maximise the pain for US (and neccessarily for themselves) in order to cause them to back down.
This is very unlikely scenario to me as US does not mind tariffs, high inflation and economic downturn might scare US of drastic actions, but they can always set for the first goal untill they’re ready to pursue higher rates (something that’s happening with China and Mexico).
At the same time geopolitical situation, first and foremost conflicts with Russia and China leave first order countries exposed. EU depends on US willingnes to sell weapons to Ukraine, US might have withdrawn funding, but Trump can at any point refuse to sell EU funded weapon purchases, intelligence sharing etc. for Ukraine. Moreover US willingness to pursue sanctions against Russia is important and any escalating trade conflict with EU could cause US to abandon pressuring Russia.
On the other hand while defence of Taiwan seems to be fading prospect, Asian countries probably do not want to give Trump griveance cause to support isolationism when it comes to Chinese expansionism, something escalating trade tensions can cause.
To conclude, it seems to me that rest of the world knew what cards everyone was playing at and decided to cut loses.