“White House Trade Strategy Flowchart” — An Investigative Report
The above white-board flowchart entitled “Possible Wikileaks discovery of White House trade strategy” was made public via tweet by Bryan Riley @FreeTradeBryan on 24 July 2018. It purportedly represents the White House’s trade policy, at least as it existed in July 2018. The flowchart is reproduced below.
Based on “Possible Wikileaks discovery of White House trade strategy” 24 July 2018. SOURCE: Bryan Riley.
Bryan is a staunch advocate of free trade. However, in this case he just reported this as a “possible Wikileaks” document (bold added), leaving plenty of room to investigate the likelihood it is a valid if not somewhat dated White House trade policy “document.” This investigation will begin by looking at consistency to see if the flowchart captures Trump’s very unorthodox trade policy, as it existed in mid 2018. Then briefly the authenticity of the flowchart will be considered. We will close out the investigation by considering how Trump’s trade policy has changed since the flowchart.
Flowchart Consistency
The Trump trade policy at the time of the flowchart is easy to spot. It was built on a series of fallacies. The foundational fallacy is the Mercantilist view that exports are good and imports are bad, which leads to the conclusion that when imports exceed exports that is bad. Hence, the large U.S. trade deficit is very bad.
A 1990s quote from Nobel Laureate Paul Krugman nicely captures the initial fallacy Trump fell into. He stated, “Exports are not an objective in and of themselves: the need to export is a burden that the country must bear because its import suppliers are crass enough to demand payment.” All of Trump’s trade policy weaknesses originate from putting exports at the fore and pushing imports to the dustbin, leaving consumers worse off in the process.
By the way, falling into this trap is not uniquely Trumpian. I suspect successful business leaders are more susceptible to this trap than most. They have trained themselves to concentrate on the financials of the deal at hand. Whereas in addition to the financials that apply to the direct participants, an economic analysis needs to include impacts on society generally. Incorporating these societal impacts in the analysis is where the hard part begins.
Trump’s remedy for this perceived trade deficit problem is tariffs and more tariffs, which is yet another fallacy. At best tariffs are blunt, indirect instruments with the most direct impact being disrupting the economy by taxing one group (importers), giving another group (domestic producers) an advantage, all at the expense of domestic consumers, especially middle- and low-income consumers whose incomes are disproportionately spent on consumer goods when compared to wealthier households. Recent research shows that Trump’s trade war is taxing away the gains middle- and low-income households received from the Trump/GOP tax overhaul.
For any flowchart to reflect Trump’s trade policy accurately it has to incorporate the above fallacies. What follows builds the case that Riley’s flowchart succeeds in doing this. Five Items from the flowchart capture Trump’s trade policy, warts and all. They are: (1) Impose a bunch of tariffs, (2) No one will retaliate, (3) Wait for trade deficit to go to zero, (4) Borrow billions from China to bailout farmers, (5) Win. Each will be discussed below.
Item 1 — Impose a Bunch of Tariffs
In a December 2018 President Trump tweeted
Of course, President Trump didn’t point out that most of the billions the government is collecting ultimately comes from U.S. importers and consumers — probably ran out of twitter characters.
While hard to believe, President Trump only began his tariff-imposing barrage in January 2018, but he has been trying to make up for lost time ever since. Keeping track of all his activity is almost a full-time job. Trump tariffs include those levied on washing machines, solar panels, steel, aluminum, $50B on U.S. imports from China, then $200B more, and more still when Trump raised the 10% tariff on Chinese products to 25% this past May, with more possible tariffs on China, and tariffs on imported cars waiting in the wings. And this doesn’t include the threatened tariffs against Mexico if that country doesn’t live up to the “secret agreement” Trump claims the U.S. has with that country. Fortunately, it is only one page long so it may be easy to judge if the agreement is met in spite of Mexico claiming it doesn’t exist.
In a 2015 interview then candidate Trump left little doubt that even before becoming president he was a tariff man. He advocated putting a tariff on cars imported from Mexico, suggesting that the result might be a person purchasing fewer cars over the course of a lifetime to which he proclaimed “who cares.” The major difference between then and now is that he has the power to do something about it.
Click Here for This 2015 Donald Trump Interview
If you think he wouldn’t dare follow up on his interview and add imported cars to his tariff list, think again. In the above interview Tariff-Man Trump makes the case for auto tariffs, and now with a still-secret Commerce Department report in hand that declares auto imports a national security threat he’s inching in that direction.
He’ll probably wait until after the election to move on this one unless he has a really bad news cycle and has to divert attention away from the bad news by dipping into his bag of tricks. He typically tries to upstage bad news with an even bigger and more outlandish story, and a tariff that would increase the price of all new cars, domestic and imported, hundreds and perhaps thousands of dollars would probably do the trick.
Item 2 — No One Will Retaliate
As unbelievably outlandish as this claim seems, it appears the Trump Administration believed that no country would retaliate against our tariff binge. Senior Trade Advisor Peter Navarro led the way in this foolhardy assertion. As the Trump-inspired tariff war was heating up here is what Navarro had to say on Fox News,
“I don’t believe any country is going to retaliate for the simple reason that we are the most lucrative and biggest market in the world. They know they’re cheating us, and all we’re doing is standing up for ourselves.”
Hear it in Navarro’s own words.
Trump echoed this by saying, “If they retaliate, they’re making a mistake,” and then the so-called “mistakes” began to flow, including from China, the EU, Canada and Mexico.
As an example, China’s retaliation against U.S. farm products, including soybeans, has caused the Trump Administration headaches ever since. An interesting example of Trump’s view of how we are winning was his 2018 decision to placate farmers and in particular soybean farmers by doling out $12 billion to help those harmed by Chinese retaliation. He pointed to the increased tariff revenues as the win that allowed these payouts.
Unfortunately, the payouts to farmers exceeded the added tariff revenues up to that point. Oops! Now he is upping the ante with an even bigger farmer bailout. A question to ask is how Trump is going to help the others hurt by the tariffs if he spends all the extra tariff revenue and then some on farmers?
Wonder which country will not retaliate next? Perhaps it will be Mexico if it doesn’t solve the U.S.’s immigration problem. Or, in a possibly more interesting turn of events, the Chinese will have the opportunity to play the Grinch that steals Christmas by playing havoc with U.S. toy and electronic imports just when seasonal shipments are ramping up for the holidays.
Item 3 — Wait for Trade Deficit to Go to Zero
In 2018 for every dollar we sent out to buy goods from China they sent about 22 cents back to pay for goods they bought from us. What happened to the left over 78 cents? Fortunately, our government keeps track of such things and they group the transactions into two broad categories — the Current Account and the Financial/Capital Account.
Imports and exports of goods make up the bulk of the Current Account. From Trump’s rhetoric it appears he is only interested in this slice of our financial dealings with the outside world, which still leaves unanswered where the other 78 cents goes. It turns out that about 10 cents is used by China to purchase services from us (e.g., travel, intellectual property, and transport services) that aren’t paid for by us buying Chinese services. That is, China buys more of our services than we buy of theirs, making up for some of the imbalance in goods trade in the process.
So if we follow traditional convention and lump together trade in both goods and services, then for every dollar we send out China sends back 32 cents, still leaving 68 cents unaccounted for. In past years China used the bulk of this surplus to invest in the U.S. Their investments included purchasing U.S. Government debt, foreign direct investment (FDI), and other miscellaneous investments.
It turns out that historically China has been a big funder of our government’s massive debt. With the Trump/GOP tax cut and large increases in military spending there will be an increasing need for residents in countries like China to purchase our government’s debt. Either that, or we have to fund the government’s budget deficit ourselves, and we’ve shown little desire to do that.
All of this aside, Trump still wants the goods trade deficit to go to zero, and he thinks tariffs are the best way to get this done. There are few economists that share his belief, and probably the bulk of the ones who do already work in the White House.
While the U.S. trade deficit was one of Trump’s strongest held complaints, major events did what few thought possible — shut the President up for a while, at least on this topic. These events — release of 2018 trade deficit numbers — also muted administration officials. Both the overall trade deficit in goods and the goods deficit with China set records in spite of or perhaps because of Trump’s trade deficit cutting activities. Oops! It’s little wonder that major economic publications from the Administration hid mention of the records because they don’t fit the Trump narrative.
[If you would like to learn more on Trump’s weaknesses when it comes to international transactions, an excellent place to start is Daniel Griswold’s piece on “President Trump’s Faulty trade balance math.”]
Item 4 — Borrow Billions from China to Bailout Farmers
Not much more needs to be said here other than it’s true. As stated above China has been a big funder of the U.S. Government’s budget deficit. Just prior to the Trump’s Trade War, it appears that China was beginning to favor other uses of the dollars they were accumulating. We were beginning to see increased investment in the U.S. private sector, but the flowchart predates much of this. It will be interesting to see what happens as the trade war unfolds.
Item 5 — Win
Let’s start with what should be but isn’t obvious to the Administration — no country wins a trade war. If the flowchart acknowledged this, we would know right away it’s fake. That’s because President Trump believes just the opposite. Trump’s official Twitter stance is:
And now he is citing data to support his contention. Firstly, as mentioned above the President keeps pointing to the government’s increased tariff revenues as evidence of winning. Of course, what a politician claims as a win can sometimes be confusing to us mere mortals. Unfortunately for Trump’s argument, it has been firmly established that domestic importers and consumers are paying the bulk of those extra tariff revenues [see here, here and most directly here.]
Trump also touts the jobs his tariffs have created. Unfortunately, these jobs have come at a high cost to the economy. For example, steel industry jobs resulting from the President’s steel tariffs are estimated to cost the U.S. economy about $900,000 per year for each job created. Also, the jobs created by Trump’s washing machine tariff are estimated to cost about $815,000 per year per job (p. 5). Part of this cost is job loss in other sectors of the economy. A problem with using tariffs to create jobs is that they are blunt instruments that have job unfriendly side effects not the least of which is driving up consumer prices, causing them to scale back their shopping.
And when the Chinese Defense Minister General Wei says, “On the trade friction started by the US: if the US wants to talk, we will keep the door open. If they want to fight, we are ready” it’s time to pause and ask where is this trade war going? Ask yourself how China would respond if the U.S. Secretary of Defense said something similar?
A major flaw in Trump’s thinking on the benefits of tariffs is claiming wins without balancing any gains against the losses imposed on the domestic economy that made the “wins” possible. Unfortunately for Trump, there is plenty anecdotal evidence and research pointing to significant losses. Even as far back as September 2018 Scott Lincicome identified 202 companies hurt by Trump tariffs, and at that time Trump was just getting warmed up.
Both GM and Ford estimate their added costs/losses from Trump’s steel and aluminum tariffs are in the billion-dollar range. [To be fair GM’s added costs also include other factors, but Ford’s losses are on profits, which may be more serious than just an impact on costs.] Ford’s CEO stated, “The irony of which is we source most of that (these metals) in the U.S. today anyway.” This brings up a point about tariffs. They don’t just result in an increase in import prices. Domestic producers see an opportunity to cash in on the misfortune of their foreign competition by raising their own prices, compounding consumer losses.
Flowchart Authenticity
After establishing that the flowchart is consistent with reality it is time to consider if it is authentic. Given the likelihood the Administration will assert Executive Privilege if asked to produce the white board or comment on its authenticity, this investigation will focus on the likelihood the Administration would use flowcharts in this manner. Remember the famous tweeted 2017 photo of Trump’s then senior advisor, Steve Bannon, in a White House meeting with a rabbi? In the background of the photo was a white board listing Trump campaign promises/administration policy objectives. So even from the early days of the Trump Administration, at least one white board figured prominently in articulating administration policy.
Of course, in reality we all know the truth — Bryan Riley was pulling our leg. However, he did it in a consistent way by cleverly capturing the essence of Trump’s trade policy up to mid-2018 in an elegant flowchart. Now let’s bring things up to date.
How Trump’s Trade Policy is Morphing
While Mr. Riley’s flowchart does a great job capturing Trump’s mid-2018 trade policy, it’s probably worth discussing the zeal with which Trump latched onto the concepts in the flowchart. Trump has had a long-standing hate of trade deficits, and to him tariffs are the tool to conquer these deficits. The flowchart captures this trade phobia very nicely, but Trump has discovered another use of tariffs that broadens his objectives for these blunt instruments — Foreign Policy generally. To him tariffs have become “the greatest negotiating tool in the history of our country.”
Recent presidents prior to Trump used trade policy in a more targeted manner. Now don’t misunderstand me, Presidents Obama and Bush the Younger tried to change behavior with targeted tariffs, economic sanctions on foreign individuals, and development of soft power through growing U.S. influence but not as a wholesale foreign policy bludgeon aimed at allies and foes alike the way Trump is doing now.
It appears President Trump has figured out how to adapt his primary business tactic and use it as the heart of his foreign policy. In short, President Trump’s approach to trade, tariffs, and diplomacy may represent the biggest area where he is growing into the job — Trump Style. By Trump Style I mean his hard-nosed approach to business. One of the biggest arrows in his business quiver is the threat of legal action. Historically, he frequently threatened to sue over a business deal and sometimes he did. He has now duplicated this arrow in the form of tariffs and placed it in his foreign policy quiver. He has threatened, imposed, increased, decreased, and removed tariffs to achieve policy goals that sometimes are not directly or even remotely related to the threatened tariffs. Threatening tariffs on Mexico over immigration is one of the recent cases in point.
To capture the Trump-Style “growth” perhaps the flowchart needs to be updated as follows:
So where does this leave us? Under recent past presidents, trade policy represented the use of soft power to gain influence that benefitted all the parties involved. For example, President Obama worked to put pressure on China via the Trans Pacific Partnership (TPP) (see here and here). The aim was to bring Pacific Rim countries into a trade alliance that would entice/pressure China to be a better neighbor by tapping into the expanded business and diplomatic ties cooperation offered. Along the way, Obama built into TPP a much-needed revision of NAFTA, which had been left behind by new technology.
Trump’s response? Rip up TPP and criticize NAFTA as the worst trade deal ever with a healthy dose of criticism of President Obama along the way. His solution? Verbally attack Mexico and Canada, impose tariffs and demand a new NAFTA agreement, which he got in record time which sounds like a tremendous achievement. How did he do it so fast? Negotiators started with the existing NAFTA agreement, adapted numerous of Obama’s already negotiated NAFTA reforms contained in the TPP, and topped the new agreement with a few changes from Trump’s team. The result is a modified, but not overly modified, agreement that doesn’t disrupt the apple cart very much. That is, Trump got his glitz and Canada and Mexico escaped significant harm with approximately the agreement they had already made with Obama. Now comes the hard part — getting the agreement through the democratically controlled House.
However, we must realize that Trump’s tactics invite unintended consequences in healthy doses. First, world leaders don’t like to be bullied. While leaders are always looking for an advantage, they are likely to look even more diligently when they are being bullied. The retaliations against Trump’s tariffs and threats of tariffs are examples. Second, Trump has yet to confront some of the unintended consequences that will begin to surface as retail prices begin drifting upward and businesses figure out how to avoid more completely the consequences tariffs have caused. (Here is an excellent article well worth reading on possible unintended consequences.)
Where do we go from here? President Trump seems to follow a cliffhanger story line. Each new episode has to be more daring and “out there” than previous episodes. So the best advice I can give is fasten your seat belts and hold on! You may also want to grab an airsick bag.
