Yesterday’s tariff announcement was long expected, yet its details came as a surprise. In one regard it was less bad than it could have been: The baseline tariff of ten percent was less than the 20 percent widely touted. But the methodology of the “reciprocal tariffs” added to the baseline tariff was dismaying and not one many practicing economists had considered. The effects of this announcement are likely to be disadvantageous to Americans and may risk economic disaster. They will also have geopolitical effects that future American administrations will rue.

To begin with, the reciprocal tariffs are supposed to represent the sum of tariff and non-tariff barriers imposed by the foreign nation on American exports, plus factors like Value Added Taxes (which are not trade barriers). However, the administration says it calculated this based on the assumption that “the trade deficit that we have is the sum of all the unfair trade practices, the sum of all cheating.” This assumption essentially says that all American trade deficits are the result of unfair trade practices, whereas economic analysis says differently (they are caused by differences between the nation’s capital account and current account). So, the initial assumption is faulty.

This leads to absurd situations. Small, poor countries that cannot afford to buy many US goods are penalized harshly. Even uninhabited islands are subject to the ten percent minimum tariff. But so are countries like the UK that has its own trade deficit with the United States (one might ask if this is the result of US “cheating”). Moreover, this applies only to trade in goods. Trade in services, where the US routinely runs surpluses, are not mentioned.

As CEI analysts have argued until they are blue in the face, these trade barriers will be harmful to American consumers. They will also cause problems for American producers, and have already led to factory closures and the loss of manufacturing jobs. Global stock markets are reacting badly, and the dollar is falling. All of this was entirely predictable, and it is likely to continue. A recession is not out of the question.

Full Post with more analysis by Iain Murray @ Competitive Enterprise Institute https://cei.org/blog/an-economic-constitutional-and-geopolitical-disaster/