Has the Outbidding on Trade Protectionism Finally Ended?

Kamala Harris is not great on trade, but she's sooooo much better than Donald Trump.

Photo by Alexander Grey on Unsplash

One of the situations that always worried the hard-working staff here at Drezner’s World is when Democrats and Republicans engage in outbidding on an issue because they believe that politics dictates it. Republicans promise to get tough on China — well, Democrats promise to get really tough on China!!! Oh, Democrats promise to get really tough on China — well, Republicans promise to get super-tough on China!!

Last year’s balloon incident — and the bipartisan hysteria it generated — was a wake-up call to the White House that outbidding can cause some serious policy ramifications if left unchecked. There is such a thing as being too hawkish on China. To the Biden administration’s credit, they course-corrected soon afterwards, establishing productive lines of communication with China.

I bring this up because the other area where the two parties have been outbidding has been on trade and openness to the global economy.

The post-neoliberal turn in political economy has caused both parties to start bragging about how they think tariffs are nifty and industrial policy is awesome. There was a recent Chris Murphy profile in the New York Times Magazine about how “a middle-of-the-road Democratic senator…. [came to understand how the version of liberalism we’d adopted — defined by its emphasis on free markets, globalization and consumer choice — had begun to feel to many like a dead end and to come up with a new vision for the Democratic Party.” Last month the New York Times’ Ana Swanson concluded, “both… parties are increasingly embracing tariffs as an essential tool in protecting American manufacturers from Chinese and other global competitors.”

Maybe, just maybe, however, we are starting to see an end to the outbidding on protectionism. And in a perverse way, this is due to Donald Trump leaning even harder into his economic bat-shittery.

Trump has been a big fan of tariffs for a long time. He imposed some in his first term, which might have helped tip the U.S. manufacturing sector into a mild recession in 2019. Undaunted, Trump proposed imposing even more early on in this election cycle. In recent months Trump has mused about cutting taxes and massively hiking up tariffs to make up for the revenue shortfall.

This past week, Trump addressed the Economic Club of New York and doubled down on the power of tariffs to solve any economic and social problem. Think I am exaggerating? Here’s the New York Times’ Jonathan Weisman’s writeup of the event:

The titans of finance who gathered on Thursday at the Economic Club of New York may have hoped to hear how former President Donald J. Trump would take the nation into the era of artificial intelligence, private space travel and self-driving electric cars.

Instead, they were treated to an extended discourse on the glories of William McKinley and the power of tariffs to cure all that ails what Mr. Trump called a nation nearing economic collapse. Rather than new policies for the 21st century, the former president often harked back to the end of another century, the 19th.

“In the words of a great but highly underrated president, William McKinley, highly underrated, the protective tariff policy of the Republicans has been made — and made — the lives of our countrymen sweeter and brighter,” he said on Thursday during a rambling speech billed as a major economic address….

“You can call it what you want; some might say it’s economic nationalism,” he said after name-checking some of Wall Street’s richest men, such as Stephen A. Schwarzman, the chief executive of the Blackstone Group, Jamie Dimon, the chief executive of JPMorgan Chase, and John Paulson, the famed hedge fund manager. “I call it common sense. I call it America First. This is the policy that built this country, and this is the policy that will save our country.”

His solution for the deficit? Tariffs. The crisis for middle-class families struggling with child care? The economic growth he said would be spurred by things like tariffs. A complicated international supply chain that has the wings of military aircraft manufactured in one country and the tail in another? Tariffs.

This past weekend Trump went further, pledging he would levy a 100 percent tariff on any country that tried to diversify away from reliance on the dollar.

Now, just to be super-clear, Trump’s proposed policies are insane. Back in May the Peterson Institute for International Economics’ Kimberly Clausing and Mary Lovely analyzed Trump’s tariff proposals from earlier in the campaign and concluded:

Together, these policy steps would amount to regressive tax cuts, only partially paid for by regressive tax increases. The tariffs would reduce after-tax incomes by 3.5 percent for those in the bottom half of the income distribution and cost a typical household in the middle of the income distribution about $1,700 in increased taxes each year. If executed, these steps would increase the distortions and burdens created by the rounds of tariffs levied during the first Trump administration (and sustained during the Biden administration), while inflicting massive collateral damage on the US economy.

In June, Kimberly Clausing and Maurice Obstfeld expanded on this theme, writing:

It’s a deeply problematic idea for several reasons. For starters, it would cost jobs, ignite inflation, increase federal deficits, and cause a recession. It would also shift the tax burden away from the well off, substantially increasing the tax burden on the poor and middle class. If pursued, this policy would antagonize US allies and partners, provoking worldwide trade wars, damaging global economic welfare, and undermining national security. It would also likely destabilize the global financial system.”

More recently, Clausing and Lovely crunched the numbers on Trump’s new “replace taxes with tariffs” idea and concluded, “We find that imposing a 20 percent across-the-board tariff combined with a 60 percent tariff on China would cost a typical US household in the middle of the income distribution more than $2,600 a year. That’s up from the $1,700 loss in after-tax income that would result from his earlier plan.”

So this all sounds really bad. It would be even worse if the Harris campaign tried to outbid Trump in this area, proposing even more draconian tariffs and penalties. This is especially true given the evidence that Trump’s tariffs made the U.S. economy materially worse but were a political plus for him.

So it is noteworthy that Harris has not done that. In a speech prior to the DNC, Harris said that Trump’s proposed tariffs were tantamount to a “national sales tax” on everyday goods that would hit middle-class U.S. families hard. This prompted the Financial Times’ Alan Beattie to observe that while Harris is no neoliberal, neither is she willing to jump off the protectionist cliff:

Having watched Joe Biden retain most of the tariffs he inherited, America’s trading partners have been fond of complaining the US president is “continuity Trump” and wondering whether Kamala Harris will be continuity Biden. The first epithet was never entirely fair: Trump’s focus was on closing trade deficits and gaining negotiating leverage, Biden’s mainly about industrial policy. Now Trump is threatening a massive and damaging escalation of trade protection, Harris only has to keep Biden’s policies in place, as she probably will, and she will look positively free-trade Clintonesque (Bill not Hillary) in comparison….

The consumer-focused critique is not new from this administration — Biden made similar comments about Trump’s 10 per cent across-the-board proposal — but it does illustrate the gulf in policy and messaging opening up with the Republicans. It also has the virtue of being somewhat accurate. The various academic estimates of the impact of past Trump tariffs on the US economy vary somewhat, with at least one finding that the hit was absorbed by American companies rather than passed on in prices. But most conclude that US consumers suffered, including by having to buy more expensive substitutes than the taxed imports. One estimate of the impact of Trump’s 10/60 per cent proposal suggests it will cost less well-off households 3.5 per cent of their after-tax income.

Let’s be clear: Harris hasn’t repudiated the trade and industrial policy elements of Bidenomics, and is unlikely to. But the Democrats are at least charting a steady course that balances their desire to protect industries they deem strategic with the need to hold down economy-wide inflation. Meanwhile, Trump is sailing off towards areas of the trade policy map marked “Here Be Dragons”. Clear blue water is emerging between the Republicans and Democrats, and the idea that second-term Trump trade policy would resemble that of a Harris administration is rapidly receding.

If Trump wins in November, all bets are off with respect to foreign economic policy. The political outcome will encourage a return to outbidding. If, however, Harris wins after making it clear that Trump’s brand of protectionism is a tariff too far, then maybe the U.S. can preserve some sanity in its policymaking.

The past decade has been rough for advocates of trade liberalization. It is tempting to look at Harris and Trump and declare a pox on both parties. Over the last month, however, it has become clear that there are real differences in their foreign economic policy. For those of us who are nostalgic for hyperglobalization, the choice is increasingly clear.