The case for tariffs as a $3 trillion bargaining chip
New York
CNN
—
President-elect Donald Trump views tariffs as a not-so-secret weapon, one that can be deployed to pressure friends and foes alike to address issues from drug trafficking and illegal immigration to threats to the dominance of the US dollar.
Trump once dubbed himself "Tariff Man" and recently celebrated these import taxes as "the greatest thing ever invented."
Trump's love of tariffs, and, more specifically, the threat of tariffs, reflects a high-risk, high-reward strategy that's designed to build maximum pressure on other nations, forcing them to come to the negotiating table.
And there is a case to be made for using tariffs as a potent bargaining chip, albeit one that risks raising prices on consumers already hurting from the high cost of living.
The United States imports about $3 trillion worth of goods each year. The specter of tariffs can create real leverage with nations whose economies would be crushed if they suddenly couldn't sell goods to Americans because Trump just imposed a 100% tariff on them.
"If we couldn't trade with Mexico, we would survive. But it would be the end of the world for Mexico. That does give us leverage. And leverage is everything when you're negotiating," Stephen Moore, a former senior economic adviser during Trump's first term, told CNN in a phone interview.
Moore, who used to unabashedly favor free trade, said Trump convinced him that tariffs can be used as a negotiating tool.
"It's a dangerous game, one that could work," said Moore, author of "The Trump Economic Miracle."
"In his first term, President Trump instituted tariffs against China that created jobs, spurred investment, and resulted in no inflation. President Trump will work quickly to fix and restore an economy that puts American workers by re-shoring American jobs, lowering inflation, raising real wages, lowering taxes, cutting regulations, and unshackling American energy," Karoline Leavitt, spokesperson for Trump-Vance Transition, told CNN.
‘A win-win'
Christine McDaniel, a trade official under former President George W. Bush and a senior research fellow at George Mason University's Mercatus Center, agrees that tariffs can be used to threaten other countries and persuade them to reach deals with Washington.
"It can be effective, but it needs to be a legitimate threat, and it needs to be big. And it's risky," said McDaniel.
Trump's recent threat to impose a 25% tariff on all imports from Canada got the immediate attention of Ottawa.
Within days, Canadian Prime Minister Justin Trudeau was pictured at Mar-a-Lago, where he said he had an "excellent conversation" with Trump. (He did not mention that Trump joked that Canada should join the United States as the 51st state if it couldn't handle US tariffs).
During his first term, Trump threatened to impose tariffs on imported automobiles, a threat that got the attention of Japan, a nation whose economy depends on selling cars to Americans.
Trump later reached a deal with Tokyo that farmers lauded because it opened Japanese markets to US agricultural goods.
"It was a win-win," said McDaniel, who added that the only reason the deal was necessary was because Trump pulled the United States out of the Trans-Pacific Partnership and that caused a "big loss" for US agriculture.
It's possible that Trump 2.0 uses tariffs, or at least the threat that he'll impose tariffs, to get Mexico, Canada, China or other countries to address legitimate issues such as drug trafficking.
"Using tariffs as a weapon to encourage other countries to keep drugs from coming to the United States could save lives," said Moore, a senior visiting fellow in economics at the Heritage Foundation, a conservative think tank.
Stephen Moore, a Trump economic adviser, told CNN that the president-elect is "wrong" to threaten tariffs on BRICS nations to protect the dominance of the US dollar.
Samuel Corum/Getty Images/File
Real concessions or photo-ops?
It's also possible that the concessions Trump touts are less than meet the eye.
For instance, in 2019 Trump touted a Phase 1 trade agreement with China as a big win for farmers because Beijing promised to sharply increase its purchase of US agricultural goods.
However, China fell very shy, to the tune of more than $200 billion, of its commitment to buy US goods and services, according to a Commerce Department report.
"He makes a massive tariff threat, folks scramble to find a way to give him a win that doesn't require them to do much," said Erica York, senior economist and research director at the Tax Foundation, a right-leaning think tank. "They offer something that sounds nice on paper and makes for a good photo op. The tariffs never go into effect and Trump gets to declare he's the master negotiator."
York is skeptical that tariffs are really an effective bargaining chip, especially because just the threat of tariffs can hurt the US economy and the stock market and depress business investment.
"It's more for show, and that show harms the economy by heightening uncertainty," York said.
There's also another potential cost of using tariffs as a bargaining chip: a loss of trust from friends and allies.
Dean Baker, co-founder of the left-leaning Center for Economic and Policy Research, said Trump could score some short-term wins by threatening to "beat up" Mexico and Canada with massive tariffs.
"I'll bet you anything that Mexico and Canada will try not to be in that situation again. It's not a very good long-term strategy," said Baker. "It's like breaking a contract. You could do that, but then no one will work with you without paying in advance."
Tariffs to protect national security?
Another way that tariffs can be used is to target national security weaknesses.
For instance, President Joe Biden cited national security in his decision this past May to ramp up tariffs on $18 billion of imports from China, including batteries, critical minerals and electric vehicles.
"Concentration of critical minerals mining and refining capacity in China leaves our supply chains vulnerable and our national security and clean energy goals at risk," the White House said at the time.
However, York cautioned that it's "very easy" for national security to be "abused" as a justification for tariffs. She pointed to how Trump used national security as a reason for slapping tariffs on steel and aluminum from close allies including Canada, the European Union, Japan and the United Kingdom.
‘You can't outrun them'
Trump has also tried to use broad tariffs to protect factory jobs, including in Rust Belt communities hollowed out from decades of the declining US manufacturing sector.
While this makes sense from a political standpoint, Pennsylvania, in the heart of the Rust Belt, was the biggest battleground prize of the last three presidential elections, many economists are dubious that it's smart policy.
McDaniel, the former trade official under George W. Bush, said tariffs can buy some industries more time, but they end up costing consumers.
"It can be a very short-term gain for a very small group of people. But you end up hurting more people than you help, and it's only temporary," said McDaniel. "Sooner or later, the global market conditions catch up with you. You can't outrun them."
Baker agreed, arguing there is a "myth" that factory jobs are still good-paying jobs that are worth saving.
"The manufacturing wage premium has largely disappeared. What's the point of trying to save jobs that aren't particularly good jobs, and making everyone else pay more?" Baker said.
Tariffs worsened the Great Depression
Last month, Trump threatened to slap a 100% tariff on Brazil, Russia, India, China and South Africay, the BRICS nations, unless they abandon efforts to create a rival currency to the US dollar.
Yet that threat left many scratching their heads, in part because they don't believe the US dollar's dominance really is at risk.
Besides, countries should want to use the dollar because it's the best currency and it's backed by strong institutions and a dynamic economy, not because there is a gun to their head.
Even Moore conceded that using tariffs to threaten BRICS nations is a "very, very flawed strategy" by Trump. "He's wrong on this BRICS thing," he told CNN.
No matter the rationale for threatening tariffs, there is a danger that it all gets out of hand by reigniting inflation, spooking the stock market and sparking a full-blown trade war.
US tariffs invite retaliation from other countries. During Trump's first term, everything from US autos and soybeans to whiskey were targeted with retaliatory tariffs.
Moore noted that history shows this can all end badly, pointing to how the Smoot-Hawley tariffs of 1930 and ensuing retaliation intensified the Great Depression.
"You don't want to get into a tit-for-tat situation," Moore said.
