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Trump figures out tariff, trade war’s political risks

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Trump and Juncker
President
Donald Trump meets with European Commission president Jean-Claude
Juncker in the Oval Office of the White House.

AP/Evan Vucci


  • President Donald Trump appears to have realized the
    political limitations of trade battles on various
    fronts.
  • His sudden change of judgment, capped by a vague deal
    with Europe on Wednesday, could spare us from the worst of a
    trade war.
  • If the lessons Trump learned in the last two weeks
    stick, we might see fewer unilateral tariffs and more whining
    about Fed policy.

President Donald Trump’s two high-profile, trade-related actions this
week
suggest he has started to understand how his trade
strategy — whatever he believes its
substantive merits to be
— poses political risks for him and
the Republican Party.

He has floated plans to pay $12 billion in additional farm
support payments
to offset crop price declines driven by the
tariffs he has imposed on China and the retaliatory tariffs they
have imposed on us.

And when European Commission head Jean-Claude Juncker came to the
White House, Trump and Juncker announced an airy, vague agreement on trade
— mostly an agreement to talk about having more talks, though
Juncker made an assurance that Europe will buy more soybeans. And
Trump, crucially, said there will be no new tariffs, for now,
while the US and Europe talk.

We will even try to “resolve” our disputes over metals, though
that is just a specific form of agreement to talk about talking.

With these vague public announcements, Trump is sending a
message: I understand my tariffs are hurting some Americans, I
have a plan to offset some of that pain, and I’m trying to find a
way forward to a future with fewer trade barriers instead of
more.

I don’t think any of this signals a change of heart. But it may
signal a favorable change of political judgment that spares us
maximum trade war escalation.

This week’s policy is good only in comparison to the auto trade
war we thought Trump might start

As many Republican members of Congress have pointed out, creating
an economic problem and then handing out subsidies to offset it
is a much worse approach than not
creating the problem in the first place
.

And while damaging tariffs on automobile
imports
— which would both raise consumer prices and disrupt
employment in the automotive industry, because of likely
retaliatory tariffs — are being avoided for now,
ill-considered tariffs on steel, aluminum and other products are
still very much in place.

And residents of farm states have good reason to doubt the added
subsidies will last as long as the trade war does.

And, of course, Trump could change his mind next week. A few
months ago, Trump seemed to be at a trade detente with China,
too. The auto tariffs he is reportedly itching to impose might
still come, later, when he gets frustrated that Europe isn’t
actually buying enough soybeans — or whatever.

Still, it is good that the president has shown that he
understands his tariffs have economic and political costs — and
that he decided a good way to deal with that was at least a
gesture toward ceasefire on tariff escalation.

There’s another reason for Trump to cool it with the tariffs for
now

Trump’s remarks last week criticizing the Federal
Reserve
reflect a fact about trade that may be dawning on
him.

Trump criticized the Fed for raising interest rates, nothing that
doing so tends to raise the trade deficit. This is true.

What’s unspoken is that Trump cannot reduce the trade
deficit by raising tariffs, because tariffs (which reduce
imports) lead to retaliatory tariffs (which reduce exports) and a
stronger dollar (which increases imports and reduces exports).

Since Trump seems to view “winning and losing” in trade as a
matter of the size of the trade deficit — if you sell me
more than I sell you, I’m losing — maybe he has realized he
should be worried less about tariffs and more about exchange
rates and monetary policy.

Unfortunately for Trump, he has much less direct control over
monetary policy than he does over tariff policy. If the lessons
Trump learned in the last two weeks stick, we might see fewer
unilateral tariffs from him and more whining about Fed policy.

I’d consider that a fair trade.

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