Donald Trump will be the next U.S. president, but it’s less clear how he’s going to lead the new ideological coalition that the Republican Party now represents. Trump is famously more interested in short-term advantages in both foreign policy and economic policy than any kind of long-term strategic thinking. But he will be presiding over a government comprising various different kinds of ideological partisans. The meaning of Trumpism will partly be determined by who wins out in the resulting conflicts.
How intense could the Trump administration’s protectionist trade policies get? How long will the U.S. dollar continue to rise? And what are the economic effects of a major deportation policy?
Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: If we were to take a look at the potential protectionist policies that will be put into place—how intense could this all get? And who would the main victims then be?
Adam Tooze: Everyone right now is just trying to puzzle this through and figure it out, and the short answer is, we don’t know. But what has been mentioned is a blanket tariff of 10 percent or possibly 20 percent on all of America’s foreign trade and then more specifically a 60 percent tariff on Chinese trade. What we don’t know is whether this is just a plan and it won’t actually go anywhere; whether this is actually a matter of negotiation, so whether you slap this tariff on with a view to negotiating with foreign partners; or indeed whether this is really just the way of opening the door to corruption at home, with all the inside lobbying that will go on in Washington.
At a basic level of modeling, we don’t really know what happens in this scenario. I mean, we have some general ideas in economic theory, but we don’t really, of late, have the experience of the sort of scale of trade protectionist shock that would be implied by sticking 60 percent tariffs on $500 billion worth of Chinese imports to the United States. You know, economists will venture a guess—and we will think it’s going to be pretty bad—but we don’t know exactly how bad or how it’s going to work.
And this is very complex. I mean, U.S. trade is shaped by tariffs on about 6,000 different products with 200 different countries. You know, if you were really going to do a blanket trade policy move, it’s important to emphasize just how radical that would be if you were really going to apply a 10 percent or 20 percent tariff. The Chinese bet is in some senses the more conventional side because we’ve been through that rigmarole before. But the blanket tariff really changes the terms of practically everyone’s activity. And it’s not even clear for that where the legislative authority would come from. There’s a bunch of legislation from the 1970s, which has been conventionally invoked. It’s not altogether clear whether Congress would stand by to allow that to be used to provide a universal tariff. And there’s also the possibility of an appeal to the Supreme Court, which might or might not yield pushback. They’ve generally been fairly compliant on trade policy. I mean, one expert that was quoted in the Financial Times said, “We are in that time of life in international trade where strange incredulity is maybe the order of the day.”
But the previous experience shows that the basic Trump promise that you stick a tariff on and a foreigner pays is bogus. All of the econometric evidence from the last round of tariffs under the first Trump presidency showed that what actually happened is that the tariff was passed on to American consumers. Foreign producers did not eat it, did not put it in their profit margin. When you pose the tariff, what they do is they simply pass it on to consumers. What we therefore know is that this will hit hard the worst-off consumers in the United States. And estimates from existing economic modeling suggest that it would be in the order of a $1,500 to $2,000 tax on every household in the United States per annum, which for the lower half of the income distribution could amount to as much as a 3.5 to 4 percent income tax for them specifically. So this is regressive. And if it were used to replace or fund income tax cuts, it would be doubly regressive because you’d be using a regressive tax to finance a further regressive tax cut. And furthermore, there is really very little evidence to believe that it will rapidly stimulate employment or economic growth or productivity or all of that good stuff in the American economy insofar as we have economic models for this.
And folks like Robert Lighthizer and Michael Pettis and the other defenders of tariffs will say, well, in American history, in the 19th century, tariffs were important for driving industrial and economic growth. That’s a story that has a historical warrant, when the United States was in a very different position from the one it’s in today. I don’t think there’s very much econometric evidence. In other words, our best empirical knowledge of how modern economies function will bear out that kind of answer. Certainly in the politically relevant period of the next couple of years, maybe over the very long run, it would shift the balance. But to a considerable extent, this is going to be simply a tax on American consumers.
CA: One economic event that has already taken place since the election is a spike in the value of the U.S. dollar. And to some extent, based on what I’ve read, that’s based on precisely this tariff policy that the Trump administration says it would put into place—the talk of tariffs has led to a higher dollar, as investors imagine some kind of inflationary effects and the central bank responding to those in turn. So, how high could the dollar really go here? And does the Trump team really understand this causality, that tariffs could lead to a higher dollar even though Trump’s preferred policy is a devalued dollar?
AT: Yeah, it’s super complicated. And this goes to this element of us not really knowing what a world looks like in which you shock hundreds of billions, if not trillions of dollars, of trade with substantial tariffs. But yeah, we would expect all of these feedback loops. I mean, they’re quite tricky because the narrative that you just mentioned, if there were indeed higher prices in the United States, that would tend, in fact, to devalue the dollar. So it’s only if you imagine, by way of the higher prices and the Federal Reserve’s response to those higher prices, that you get higher interest rates in the United States that this works. Maybe the best way to spell this out for our patient listeners is to differentiate two types of effects—trade and the capital account—and then to look at it, to start with, from the trade point of view, from the point of view not of the United States but of the people it trades with.
So, say you’re China, and there is a 60 percent tariff on your exports to the United States. China is a huge economy, but nevertheless it hurts, and it gives you the excuse to do what? Well, it gives you the excuse to think hard about the current value of your exchange rate. And unlike other exchange rates, the Chinese exchange rate is, to a considerable extent, under the influence of the authorities because they have capital account controls and they intervene regularly. So, how would you respond if you were Beijing and your exporters were suddenly hit with this huge tax? Well, the risk, of course, is they become uncompetitive. So one of the things you’ll be tempted to do is to reduce the value of your exchange rate relative to the dollar. And whether the Americans like it or not, that’s a revaluation of the dollar in the upward direction and a devaluation of a major trading partner’s currency, right? So that’s one side of this.
And when that happens, what it does is to offset the anti-competitive effect of the tariff in the United States for the Chinese goods because they now come in on this more competitive exchange rate. And of course, conversely, what it does is to hit America’s capacity to export. And this isn’t even talking about the retaliatory tariffs, which the Chinese will undoubtedly impose on American goods. And wait to see the way in which the American agricultural lobby, notably the soy producers, squeal when this unfolds because China, for them, is a really import market. There aren’t that many American exporters for whom China is an important market, but agriculture is one, right? So that’s one logic. America imposes a trade penalty on foreigners trying to import to the United States, and so they respond. And in the Chinese case, it could be a deliberate policy by lowering the value of their exchange rate. If it’s not a deliberate policy, in other cases it will simply follow from the logic of saying, if you export less, your currency in due course will become less valuable. And so if the policy works, it counteracts itself.
And then on top of this, there is an entire other line that runs by way of the capital account, which is the one that you were invoking when you were talking about the Fed policy. So, say there is a price shock in the United States from the trade policy effect, then the Fed will have to respond to that to contain inflation by raising interest rates—or it’ll feel compelled to do so. And when the Fed raises interest rates, what it does is to suck foreign funds into the United States because people want to invest in American assets with higher interest rates, and that drives the dollar up. Another effect of a similar line would be to say if the idea of a protectionist policy is to persuade people to produce goods in the United States, what do they have to do to do that? They have to invest. And so money that previously might have gone into foreign direct investment in other countries from platforms from which to sell into the United States now goes into the United States. Again, what we get is an effect by which foreigners want dollars to invest, right?
Overall, this then leads people like Pettis, the noted economist who’s based in Beijing and is a regular critic and commentator on these issues, to say, you know, what we actually need to do is control the inflow of foreign money into the United States because it’s that which chronically dries up the value of the dollar and makes American manufacturing increasingly uncompetitive. So either then, to spell out your scenario, we have a clash between the Trump administration and the Fed, where the Fed is responding to inflationary pressures in the United States by raising interest rates, or we have a clash between the Trump government and Wall Street, if they were to even think about going down the route of taxing foreign funds flowing into the United States. This is not a internally consistent policy in its current formulation. And the way that it looks right now does indeed lead to a whole mass of contradictions from which one can infer a whole bunch of scenarios about different types of political clash that might unfold. That’s the drama that we’re going to be watching in the next four years.
CA: I’m curious about the economics involved in a big push for deportation of immigrants in the United States. First, what are the direct costs involved? I’m thinking here about, you know, spending more on security forces necessary to round people up, setting up camps to house people before they get deported, even maybe bribing countries to take migrants back. And then more broadly, what are the macroeconomic effects of this kind of deportation pus—could this, in itself, fuel inflation in the United States and in what ways?
AT: Yeah, this is really a sordid story because there is an interaction between the Immigration and Customs Enforcement (ICE) authorities that are responsible, under the Department of Homeland Security, for border enforcement, detention and deportation, and private business. And it’s a story that goes back to the 2000s and the 2010s. There’s a couple of firms. The two that stand out are the GEO Group and CoreCivic, which started out as private prison providers and then, as politics moved against private provision and, in fact, banks became unwilling to finance them, they moved increasingly into the less politically sensitive area of migration management and detention of undocumented arrivals in the United States. They are medium-sized big businesses. They have turnovers of a few billion dollars; half of that, in the case of the GEO Group, comes from contracts with ICE. They operate facilities that are able to house tens of thousands of people collectively. They also operate a variety of enhanced surveillance systems, which are ways of monitoring undocumented migrants without confining them to prison-like detention centers. And they are really just in an absolutely wildly ecstatic state right now. On the so-called earnings calls, they’re talking about, you know, “The Geo Group was built for this unique moment in our history and the opportunities that it will bring,” is the quote from the CEO days after Trump’s election. So there really is a direct connection here between the interests of particular businesses and this punitive agenda of deportation.
From an economic point of view, every liberal in the United States—and by that I mean a market liberal—should be screaming about the implications of this because it’s estimated that about 8 million undocumented workers supply a key component of the U.S. workforce. That’s, you know, 5, 6 percent. It’s difficult to be too precise about this workforce for obvious reasons. They play a very, very important part in the construction workforce, the low-end service sector, and in parts of manufacturing. And if you take that out, it’s just a giant supply shock to the American economy. Now, to be fair to the Trump people, the idea is to deliver that supply shock and then what you hope for is an adjustment in wages, which in turn then pulls some fraction of the currently underemployed American working class, in particular men that we’re thinking of here, into the American workforce and offsets. But the balance of workers and the choices of employment that they’re in are deeply entrenched social equilibria. Collective decisions by millions and millions of people structure who works and what they work for and where they work and how they live. The model appears to be the ghastly “wetback” program of the Eisenhower era—so-called, this is one of the pejorative, racialized slurs that are used against Mexican workers in the United States. This seems to have been the model that deported 1.3 million people. The administration seems to like the idea of deporting a million a year.
The consequence of that is basically a series of rolling shocks to a large part of the U.S. economy. It will again drive wages and prices up. This might be to the benefit of some American workers, but the price effect will be felt across the U.S. economy. It will interrupt production, and you could say, fine, we want that because we want to squeeze very low wage and productivity out of the U.S. economy. But if that’s the project, why not start with investment rather than this strategy of punitive deportation? And as if to confirm this, the GEO Group recently found itself being ordered by a Washington state Supreme Court to pay millions of dollars in compensation to the detainees it had kept in its camps. And it had been paying them a dollar a day to do laundry, wash dishes, run the barbershop, operate the library in a state where the minimum wage is $16 per hour. And the court ordered the prison of this detention corporation to pay compensation and offer those workers the minimum wage.
So, you see, at some point, the sort of brutal commercial logic of private detention facilities eating itself with a liberal American court intervening to say: This is outrageous. It’s a violation of local work norms. People should be paid in the same way as other workers in the United States at the time. If you’re going to employ them, if these are the people you choose to employ doing this kind of low-end service work, then they should be paid the minimum wage. And that’s obviously what a progressive politics of leveling up would look like. It would not consist of a punitive and racialized discrimination, disenfranchisement and expulsion of foreign workers in the United States. It would look to ensure that everyone, whether documented or undocumented, was being paid at least the minimum wage and offer a path to legalization to everyone currently in the United States. This is, after all, a population that is disproportionately active in the workforce, that disproportionately contributes to production relative to the existing population of the United States and so in every way is earning its keep and contributing to American society in the broadest possible sense.
The post The Economic Impact of Trump’s Planned Tariffs and Deportations appeared first on Foreign Policy.
