This week, while the BRICS countries meet in Russia, the International Monetary Fund and the World Bank hold their annual meetings in Washington, D.C. According to Reuters, the meetings
are scheduled to draw more than 10,000 people from finance ministries, central banks and civil society groups to discuss efforts to boost patchy global growth, deal with debt distress and finance the green energy transition.
However, Reuters explains,
the elephant in the meeting rooms will be the potential for a Nov. 5 election victory by U.S. Republican presidential candidate Donald Trump
The reason why IMF and World Bank meeting delegates are concerned about a Trump presidency is the misperception that he will, as Reuters puts it, “upend the international economic system” by imposing new trade tariffs.
Similar worries are coming from the European Union. From Politico:
Asked about Trump’s repeated threats to double down on tariffs in a second term, European Central Bank President Christine Lagarde said the U.S. should stay true to its traditions and continue to stand up for open trade, rather than bringing down protectionist shutters.
This is nothing short of a lie. To begin with, tariffs have been used for as long as there has been international trade, and they have been used for a variety of purposes without ‘upending’ any economic system whatsoever. But more important is the fact that Trump’s tariffs—should he be elected president—are simply meant to level the playing field between the United States and other countries.
Writing for Newsmax, finance professor Michael Busler explains it well:
free trade must be fair, meaning that any tariffs that are imposed by one trading partner will exactly equal the tariff imposed by the other.
In short: tariff neutrality. So far, so good—nothing controversial here. But now we get to the point that the critics of Trump’s tariff proposals universally forget to mention. Busler again:
During President Trump’s first term, he examined all trade agreements that the U.S. had with trading partners. Every agreement was slanted in favor of our trading partner … It led to massive trade deficits.
Just how slanted were those trade agreements?
When a car was produced in Europe and sold in the US a 2½% tariff was charged. However, when a car was manufactured in the U.S. and sold in Europe, the EU charged a 10% tariff. Worse was the trade agreement with China.
A vehicle being shipped west across the Pacific was tariffed by the Chinese at 25%, while the tariff on a vehicle going the opposite way would be the same as on a European car exported to America.
These tariff imbalances are not there to promote free trade. They are import subsidies handed out by the U.S. government to foreign businesses exporting their products to America. As Michael Busler points out, if the U.S. government levels the playing field by matching foreign countries in their tariffs on U.S. exports, all that happens is that we move international trade closer to free trade.
Equality in tariffs is not free trade per se, but the best we can get so long as other countries, China in particular, insist on putting tariffs on U.S. exports. Notably, the aforementioned Politico article also reports ECB President Lagarde as acknowledging the need for tariffs under some conditions. Alluding to EU-China trade relations, she explains that the conditions of trade “have to be fair.”
All other things equal, the only impact that Trump’s tariffs would have is to reduce America’s trade deficit by means of reduced American imports. In short, U.S. consumers and businesses will choose more made-in-America products.
The substitution will not be massive, but it will in all likelihood be measurable from a macroeconomic viewpoint.
But wait—there is one more aspect to this. When Americans buy more products made domestically, it does not mean that foreign companies will lose out entirely. On the contrary, the higher tariffs could very well stimulate foreign direct investment in American production. In a study from 2022 for the American Compass, Wells King and Dan Vaughn Jr. analyze the effects of import quotas on Japanese automobiles in the early 1980s. The quotas were ‘voluntary’: threatening formal quotas, President Reagan made the Japanese an offer they could not refuse. King and Vaughn summarize the effects accordingly:
In the near term, the quota reduced the sales of Japanese cars by 20% and raised prices for consumers by an average of 8%, costing American consumers an additional $5.1 billion. But within the decade it had prompted nearly three times that much in foreign direct investment.
In other words, by building cars in a factory in Lexington, Kentucky, instead of in Japan, Toyota could sell as many Camrys as American car buyers wanted to buy. The real effect of the import quotas was therefore to increase competition in the U.S. automobile market—in other words, to reinforce the free market system.
The same thing is likely to happen if Trump imposes new tariffs. It is worth remembering that there are no tariffs on foreign direct investment, the financial tool that brings a foreign company’s resources into the U.S. economy. Therefore, higher tariffs on imported products are, in effect, an indirect subsidy to foreigners who choose to make direct investments in the U.S. economy.
In short, the IMF and its meeting participants need to think again before they criticize Trump’s tariff plans.
With that said, they do have a point when it comes to the budget deficits. In addition to worries about tariffs, Reuters also reports concerns—presumably among meeting participants—about U.S. government borrowing. On this point, I can only agree with those who criticize our federal government. Congress must work with the next president, be it Kamala Harris or Donald Trump, on putting an end to our endless budget deficits. A fiscal crisis in America—unlike the proposed trade tariffs—would have serious ramifications for the global economy.
