Making tariffs corrupt again

In normal times, Donald Trump’s announcement of tariffs on $200 billion worth of Chinese goods, bringing us closer to an all-out trade war, would have dominated headlines for days. Things being as they are, it was a belowthe-fold story, drowned out by all the other scandals underway.

Yet Trump’s tariffs really are a big bad deal. Their direct economic impact will be modest, although hardly trivial. But the numbers aren’t the whole story. Trumpian trade policy has, almost casually, torn up rules America itself created more than 80 years ago—rules intended to ensure that tariffs reflected national priorities, not the power of special interests.

You could say that Trump is making tariffs corrupt again. And the damage will be lasting.

Until the 1930s, U.S. trade policy was both dirty and dysfunctional. It wasn’t just that overall tariffs were high; who got how much tariff protection was determined through a free-for-all of horse-trading among special interests.

The costs of this free-for-all went beyond economics. They undermined U.S. influence and damaged the world as a whole. Most notably, in the years after World War I, America demanded that European nations repay their war debts, which meant that they had to earn dollars through exports—and at the same time America imposed high tariffs to block those necessary exports.

But the game changed in 1934, when FDR introduced the Reciprocal Trade Agreements Act. Henceforth, tariffs would be negotiated via deals with foreign governments, giving export industries a stake in open markets. And these deals would be subject to up-or-down votes, reducing the ability of interest groups to buy themselves special treatment.

This U.S. innovation became the template for a global trading system, culminating in the creation of the World Trade Organization. And tariff policy went from being famously dirty to remarkably clean.

The creators of this trading system knew that it needed some flexibility to remain politically viable. So governments were given the right to impose tariffs under a limited set of circumstances: to give industries time to cope with import surges, to respond to unfair foreign practices, to protect national security. And in the U.S. the power to impose these special-case tariffs was vested in the executive branch, on the understanding that this power would be used sparingly and judiciously. Then came Trump.

So far, Trump has imposed tariffs on about $300 billion worth of U.S. imports, with tariff rates set to rise as high as 25 percent. Although Trump and his officials keep claiming that this is a tax on foreigners, it’s actually a tax hike on America. And since most of the tariffs are on raw materials and other inputs into business, the policy will probably have a chilling effect on investment and innovation.

But the pure economic impact is only part of the story. The other part is the perversion of the process. There are rules about when a president may impose tariffs; Trump has obeyed the letter of these rules, barely, but made a mockery of their spirit. Blocking imports from Canada in the name of national security? Really?

Even the big China announcement, supposedly a response to unfair Chinese trade practices, was basically a putup job. China is often a bad actor in the international economy. But this kind of retaliatory tariff is supposed to be a response to specific policies, and offer the targeted government a clear way to satisfy U.S. demands. What Trump did instead was to lash out based mainly on a vague sense of grievance, with no end game in sight.

When it comes to tariffs, as with so many other things, Trump has basically abrogated the rule of law and replaced it with his personal whims. And this will have a couple of nasty consequences.

First, it opens the door for old-fashioned corruption. Most of the tariffs are on inputs into business, and some businesses are getting special treatment. Thus there are now substantial tariffs on imported steel, but some steel users—including the U.S. subsidiary of a sanctioned Russian company—were granted the right to import steel tariff-free. (The Russian subsidiary’s exemption was reversed after it became public knowledge, with officials claiming that it was a clerical error.)

So what are the criteria for these exemptions? Nobody knows, but there is every reason to believe that political favoritism is running wild.

Beyond that, America has thrown away its negotiating credibility. In the past, countries signing trade agreements with the United States believed that a deal was a deal. Now they know that whatever documents the U.S. may sign supposedly guaranteeing access to its market, the president will still feel free to block their exports, on specious grounds, whenever he feels like it.

While the Trump tariffs may not be that big (yet), they have already turned us into an unreliable partner, a nation whose trade policy is driven by political cronyism, and which is all too likely to default on its promises whenever it’s convenient. Somehow, I don’t think that’s making America great again.