Keynes and Trump Tariffs

This article was first published by me on Talkmarkets:

It is important to look at the arguments for tariffs in the Great Depression era of the 1930's if we are to understand the full danger they bring to the world.

In modern times, the basic argument against tariffs is of course, the complexity of the world we live in. Something labelled made in America may have parts from different nations. Same holds true with something made in Mexico. But in the days of the Great Depression, the complexity did not exist.

But in the Great Depression, the issue was a simple one. Tariffs are difficult to roll back. They cannot be applied temporarily. Of course, the argument that they could be applied temporarily was made by John Maynard Keynes, British economist, and the most influential economist of his time. keynes was a free trader who saw the need to modify his views as the Great Depression became to wear on.

Yet he was opposed to trade deficits and viewed tariffs as a means to offset imbalances in trade. Keynes preferred devaluation over tariffs, and the turmoil caused by his rejection of free trade soon became a non issue. From the article cited above:

Keynes did not have an extended opportunity to respond to critics because the tariff debate was soon cut short and rendered moot by events. He had endorsed tariffs under the assumption that an alternative option, devaluation, had been ruled out. As it happened, just days after his September 1931 newspaper article repeating his call for tariffs, the British government abandoned its commitment to the gold standard and sterling depreciated sharply on foreign exchange markets. In a letter to the Times shortly thereafter, Keynes promptly dropped his call for a tariff... 

So, back to modern times, we can see that it is difficult to read investors in their reactions to tariffs. Stocks have been weakened but there has been no wholesale flight away from the market. That could come, but it is likely that investors are waiting for a signal that Donald Trump seeks long term tariffs. That may turn out to be the case, but National Association of Manufacturers President Jay Timmons has said:

Manufacturers certainly have concerns that tariffs will cause more problems than they solve, but we also recognize that the administration may intend to use them as a negotiating tactic to bring China to the table and achieve larger goals.

US Exports to China slowly on the Rise but in Danger. OECD, "Main Economic Indicators - complete database", Main Economic Indicators (database), on 6/26/2018)
Copyright, 2016, OECD. Reprinted with permission.

It appears that Timmons is speaking to Trump's desire to work out bilateral agreements. Those agreements fragment our trading partners and give the USA more leverage. As of the writing of this article, the stock market shows us that most investors continue to buy into this strategy.

Keynes had said, in making the case for British tariffs, that the risks of not being able to reverse tariffs as overblown, because they can be reversed and used for short term gain. Negotiations can bring these to a halt, if the trading partners of the USA are willing to negotiate and make a deal with Trump.

But the situation has been complicated by Trump and his trade advisers making harsh and insulting statements towards our allies, even moreso than made toward China.

Since the beginning of June, there has been little word on negotiations. It can't be assumed that there are no negotiations or the market would have been in urgent decline by now. The key is how the market reacts in the next few weeks and months. If negotiations fail, the stock market could become a slow moving train wreck, which wrecks all the same.

With Keynes, Britain devalued the pound sterling. With China, the threat of devaluation of the Yuan is great. So, the indicators are clearly devaluation of currency and how stocks behave. Those who are not privy to information regarding the negotiations should either get out of stocks now or have a plan in place to get out soon.

Keynes believed that tariffs work best if there is large unemployment. Certainly, in the USA, there are not a large amount of people out of work. And Trump has called for illegals, many of whom are working, to be immediately sent packing, which would reduce unofficial unemployment further.

In the Great Depression, deflation was the wolf at the door. So, from the point of view of the great economist we read again from the article, Keynes and Protectionism:

With the backdrop of unrelentingly high rates of British unemployment in the 1920s, Keynes came to argue that import tariffs could help to boost aggregate output and employment. The younger Keynes would have agreed that tariffs could increase employment in protected sectors, but at the offsetting loss of employment in other (probably export) industries. Keynes now held that tariffs could expand total employment when all labor was not fully utilized.
John Maynard Keynes did not make the mistake of applying tariffs because the government devalued the currency before his policy was implimented. The current POTUS may make the mistake of applying tariffs as other nations devaluate, which will limit their effectiveness. And, unlike in Keynes situation, without a suitable workforce to grow the economy (without importing workers), the timing of these tariffs could actually slow the economy, as the price to produce goes up! There could be nothing or little to show for it in economic and employment growth! 


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