Free Trade Is Flourishing, Just Not in America
The aggressive protectionism of Trump 2.0 will make the country poorer, more corrupt, and globally isolated, warns trade policy expert Scott Lincicome
Earlier this month, The UnPopulist’s publisher, the Institute for the Study of Modern Authoritarianism (ISMA), along with the Institute for Humane Studies (IHS), held a lively happy hour featuring Cato Institute trade policy expert and The Dispatch writer
.ISMA president and The UnPopulist editor-in-chief Shikha Dalmia and IHS’ Matthew Kuchem conducted a live interview of Lincicome, discussing the economic retrenchment and political corruption that protectionist policies in general and Trump’s policies in particular might engender—the special interests they would entrench and political dysfunction they would fuel. They also discussed the geopolitical implications of Trump’s tariffs.
It was a wide-ranging conversation in which Lincicome pointed out how Trump’s second-term has been appreciably more protectionist than even his first—and explored whether authoritarianism and protectionism tend to go hand in hand.
Presented below is an edited Q&A from the event.
Shikha Dalmia: Give us the big picture: What is the status of Trump’s tariff policy—it’s not right to call it a trade policy—and how was the pre-Trump situation different to where we are now?
Scott Lincicome: Trump 1.0 was itself a pretty radical departure from the pre-Trump status quo, which was not (contrary to myth in Washington) some sort of free trade paradise. That period was generally more free trade, but with some managed trade and some protectionism. But the arc of the policy movement was towards more liberalization through trade agreements like NAFTA, multilateral agreements like the WTO, a little bit of unilateral liberalization for developing countries, and smatterings of protectionism throughout.
Trump in his first term upended that by, first, imposing tariffs on steel and aluminum under supposed national security grounds despite the fact that our Defense Department said that we only needed about 3% of total steel production for military uses. Then, we got tariffs on Chinese imports that eventually totaled about half of all Chinese imports—so, hundreds of billions of dollars of tariffs. And we saw the average tariff rate move from about 2% to a little under 4%, which is a lot when you think about where we were and where we are going.
The other thing, though, is that Trump’s first term really was a durable change in the overall rhetoric and policy on trade. Imports were never loved in Washington but were far more demonized under Trump 1.0. Everything became a national security issue, which is kind of a get-out-of-jail-free card for trade agreements, meaning you can violate them with some impunity. We disregarded the WTO and disputed the settlement, and then really became far more isolationist both in terms of actual policy and in terms of geopolitics and rhetoric.
Then we had the Biden administration, which was not some sort of return to normalcy. Biden continued almost all of Trump’s protectionism—he added some of his own, subtracted a little bit, but generally didn’t care much about trade at all. He focused on domestic policy and trade was a bit of an afterthought.
Trump 2.0 has gone back to the trade war—in fact, has really amplified it. And this is the point that people don’t really get: the speed and scope of Trump 2.0’s tariff policy is extreme in any sense. We have imposed about 10 times as many tariffs, in terms of trade volumes and tariff levels, in just a few months as we had in two and a half years in Trump 1.0. Ten times as many tariffs, 10 times as fast, basically.
That all came unilaterally—even though Congress has the constitutional authority over trade. And it came via one law—the International Emergency Economic Powers Act—that has really never been used for tariffs, but has allowed (at least at this point) for the immediate imposition of tariffs. By contrast, last time around you had investigation, you had notice and comment. So it’s really been—in terms of speed, scope, due process, public input, everything—just a radical amplification of the problematic trade policies that we saw back in 2017 and 2018.
Dalmia: You mentioned IEEPA, which has been the most litigated trade policy that has come out of the administration because it was so aggressive and it invoked emergency powers. But those are not the only tariffs he’s imposed. He’s used many different provisions in law. Tell us a little about those.
Lincicome: Right. Going back almost a century, Congress believed it was too irresponsible to have all of the tariff power. And, quite frankly, we had Smoot-Hawley and a lot of cronyism in tariff policy in the late 19th century and early 20th century. So Congress had a point! The president was thought to be potentially the most free-trade of anyone in government; he had a council of economic advisors, he had foreign policy interests that pushed back on some protectionist impulses and insular domestic political influences. So Congress delegated vast swaths of its tariff power under Article 1, Section 8 of the Constitution to the president under the idea that it can’t be trusted with the tariff power—or else you’ll get Smoot-Hawley and other bad things. So it handed that power to the president.
This worked pretty well for over 70 years. You had the General Agreement on Tariffs and Trade (the predecessor to the WTO), a series of trade agreements, and a general liberalization not just in the United States—with tariffs going from the 20% range to around 2%—but also around the world.
The problem was that in drafting these laws and implementing them, Congress didn’t give much thought to what might happen if somebody like Donald Trump, who is an inherent protectionist and also has zero qualms about exploiting and abusing the law, came into office. Trump will take a law that says that the president can impose tariffs on steel and aluminum because of national security and say, “anything is national security.” I’m not exaggerating when I say that—in a court case back in the first Trump term a judge on the Court of International Trade asked the Department of Justice attorney, “Could peanut butter be a national security threat under your theory of the case?” … and they refused to answer!
So we get tariffs on steel and aluminum imports from our closest allies—Canada, Mexico, Japan, South Korea, the European Union. But we also get a total disregard for timelines and procedures. We had all of these exclusions—the president would threaten to slap tariffs for totally unrelated reasons under national security, and the courts generally sanctioned this. So that was Section 232. The China tariffs came under Section 301, which is another very open-ended law—there’s still some litigation around that, but the courts have generally rubber-stamped it.
Those laws are child’s play when it comes to process and substantive limitations compared to IEEPA, which is—until the court says otherwise, or Congress does something about it—a blank check for tariffs for any reason. In fact, the peanut butter example came up again in the courts, and the Trump administration basically shrugged and said, “Yeah, peanut butter tariffs, sure.”
Dalmia: Even if the IEEPA tariffs are ruled unconstitutional and illegal, what would the effective tariff rate be with the other tariffs Trump has imposed?
Lincicome: So, right now, because the courts have reinstated the IEEPA tariffs, our effective rate is around 17%—[up from 2% pre-Trump]. It could be as high as 20% or more—which would basically mean that we have turned the clock back to the pre-trade liberalization era. If we got rid of the IEEPA tariffs we’d still be at 7 or 8%, but the big point is that Trump could go back to the well and use these other laws that the courts have generally sanctioned. He could, and already has, started several other investigations under that national security law, Section 232, on copper and on wood products—there’s a national security threat from Canadian trees, apparently—and on semiconductors and several other things.
So he could recreate those tariffs without IEEPA. The victory in the courts was temporary. While it’s good to see the courts talking about separation of powers and limitations on executive authority, the reality is that there are other tools in the presidential toolkit that would still impose giant taxes on American consumers.
Matthew Kuchem: When we think about trade and tariffs, the conversation typically moves towards what the economic impacts will be. But it’s useful to back up and think about the impact of trade policy and tariffs on the political system, because this is not a new thing. If you go back to Adam Smith, he warned us about not just the economic folly of tariffs but also the political folly of mercantilism and its corrosive political effects.
Lincicome: Like you said, none of this is new. I mentioned Smoot-Hawley and some of the other tariff policy in the 19th century. But the reality is that we’ve known forever that protectionism is politically intoxicating. It appeals to a lot of our personal biases: anti-foreign biases, make-work biases. Trade and protectionism scratch all of these itches for people, so we think, “Oh, let’s protect existing jobs and go after those cheating foreigners.” But it’s also intoxicating for politicians because the tariffs collected at the border are an easy way to deliver invisible rents to constituents, be they the steelworkers union or anybody else. And you get to talk about fighting for America, and wrap yourself in the flag, while you do it.
“Because the courts have reinstated the IEEPA tariffs, our effective rate is around 17%—[up from 2% pre-Trump]. It could be as high as 20% or more—which would basically mean that we have turned the clock back to the pre-trade liberalization era. If we got rid of the IEEPA tariffs we’d still be at 7 or 8%, but the big point is that Trump could go back to the well and use these other laws that the courts have generally sanctioned.” — Scott Lincicome
That is why Congress delegated that power: because Congress thought its members couldn’t be trusted with that power and would just engage in cronyism. And, again, it worked well enough for a while. The problem is that Trump and our electoral system have simply short-circuited that, and today the president can use—and has used—tariff policy to deliver similar rents to what Congress did a century ago.
Kuchem: Could you give a particular example of how a tariff created rent-seeking or special interests, and how that created corruption and political distortion?
Lincicome: Sugar and steel are great examples. Sugar is a quota, and the fact is that the United States has some of the highest sugar prices in the world. Sugar protectionism benefits a very influential group of people—some in Florida but also sugar beet farmers in the Midwest and corn growers, because we use high fructose corn syrup since sugar is so expensive. So you get this toxic mix of cronyism that keeps sugar quotas around—and not just keeps them around, but they can actually get worse over time. There was a slight chance of reforming the sugar quota a few years ago in the House, a recent study showed. The sugar lobby went after every single person who voted for it, and we ended up with more onerous sugar policy overall.
Steel, today, is another important example. Steel protectionism has effectively captured the entire U.S. trade policy apparatus. So much of our trade policy is driven by this, even though the steel industry employs maybe 100,000 people. It’s a tiny sliver of our economy and it’s not a huge national security issue or something that we have a massive comparative advantage in. But there’s a congressional steel caucus; U.S. Steel and others donate a fortune to keep all of this in place. It’s just protectionism 101.
Dalmia: One thing that separates Trump’s tariffs from the standard rent-seeking protectionism that you just described is that typical protectionism is targeted at a few industries that enjoy special connections. But what he’s doing is across-the-board tariffs that aren’t targeted at specific industries to protect them—these tariffs are allegedly protecting the whole economy. Is the kind of political corruption that can emerge from this different from the kind of corruption that comes out of that typical rent-seeking?
Lincicome: You’re right that there’s almost a categorically different situation now, because the president has imposed blanket tariffs under IEEPA and then has the ability to grant exclusions. So, Apple goes to Washington and says, “Hey, my smartphone company is going to get crushed by your tariffs,” and you get this little quiet exemption to the China tariffs that just shows up in the customs instructions when the China tariffs were implemented. I wouldn’t say at this point we have clear evidence of more corruption this time around, but it certainly lays the groundwork, because if everything has a tariff then you can exempt anything. And, of course, everybody runs to Washington.
“Protectionism has long been, again, an intoxicating kind of populist message for authoritarians. If you look at Argentina, for example, protectionism goes hand in hand with big state, big government regimes. Free trade by contrast is usually not employed by authoritarian regimes. Before Russia invaded Ukraine, the Russian government actively decoupled itself from the global economy to insulate itself from potential blowback.” — Scott Lincicome
We know that this stuff happened last time around. Trump 1.0, even though it is in scope and speed child’s play compared to what we’re dealing with right now, is a textbook we can learn a lot from. And during Trump 1.0 there was an entire exclusion system set up for steel and aluminum, for Chinese imports under Section 301, and what economists found was that if you donated to Republican politicians, you had a far better chance of winning your tariff exclusion than if you donated to Democrats. And so now that’s the entire goods-trading economy.
Dalmia: It’s been described as rent-extraction rather than rent-seeking, in that Trump will extract rents by exempting industries from the tariffs. So it’s a Trumpian twist to the whole situation.
Lincicome: Right, you’re already seeing a little of this. It’s hard to know somebody’s intention, but, the other day, GM moved from being adamantly opposed to U.S. auto tariffs to getting an exemption and having their CEO praising tariffs. So the opportunity to get corporate titans to scramble to Washington and beg the president for something, and then trumpet his trade policies, is a problem.
Kuchem: What are two myths that you see being promoted by tariff advocates right now that need to be dispelled?
Lincicome: The number one myth is that tariffs are good for American manufacturing. This is a myth that maybe made sense when we were trading lumps of iron and woolen jackets, but today it’s just nonsense. There are a few numbers I use to explain this. This first is 50: about 50% of our imports are industrials imports used by American manufacturers to make other stuff. So when you apply tariffs to those goods, you’re actually harming downstream manufacturers. When we put tariffs on steel and aluminum, we maybe generated/saved/created a thousand jobs; we lost 70,000 jobs in manufacturing. We maybe had an extra $2 billion in steel output; we lost $3 billion in manufacturing output. And these downstream manufacturers tend to be more complex: they’re making aerospace equipment, planes, or cars—not making lumps of steel.
The second number is 33: about one-third of all trade today is intra-firm trade. It is Airbus in South Carolina trading with Airbus in France. When you apply a tariff to aircraft equipment, Airbus doesn’t run down the street to the aircraft store and go buy American. It simply imports from its affiliate abroad, because that’s a highly specialized piece of equipment. Airbus is just going to pay the tariff—you’re not getting any benefit from that at all. We’re just screwing over our own U.S.-based multinationals and benefitting European supply chains and Asian supply chains.
The last number is 80: 80% of American manufacturing workers today, the folks we’re supposed to be protecting, work at firms that trade imports and exports. So starting trade wars hurts the very people you’re trying to help.
The second myth is difficult to convey, particularly right now: that tariffs can somehow improve the trade balance. First, it’s a myth that the trade deficit is necessarily bad. I won’t get too much into the weeds of that, but you’ll find very few economists who will say that the trade deficit is per se a bad thing. But you’ll find zero economists—at least, real ones—who will say that tariffs can remedy that and tariffs can turn you from a trade deficit to a trade surplus. The reasons for that are simple: beyond hurting American exporters, there are currency effects and other reasons why it just does not work. Going back to your question about the big debate in Washington: this is a settled debate in economics. This is Econ 101 stuff, and here we are having these very vigorous debates.
Dalmia: You mentioned the Smoot-Hawley taxes, and then afterwards Congress gave away its tariff power to the president, hoping that we wouldn’t get into a trade war again that those tariffs had triggered. The other lesson that the U.S. learned from that time was that the way to avoid mutually destructive trade wars was to move to a rules-based international order where countries that had disputes could settle those disputes according to the rules that they had agreed on beforehand. The U.S. became an (imperfect) champion of free trade and led the way to the GATT agreement and then the WTO. Trump on the other hand has gone fully unilateral. What are the prospects of a new trade war coming out of what he is doing?
Lincicome: Baked into that question is an important point: that a lot of the trade liberalization in the United States wasn’t about economics at all—it was about geopolitics. So, Secretary of State Cordell Hull, who championed the GATT, had experienced two world wars in part fueled by rival trading blocs and discrimination among countries. And the idea in creating the GATT was not to have real free trade, but to avoid discrimination and rival trading blocs to at least temper conflict.
As for trade wars, it’s a hard question to answer what, exactly, is a trade war. Right now, we have 55% tariffs on half or more of all imports from the second largest economy on the planet. Is that a trade war? We’re threatening 28-50% tariffs on the E.U., another massive trading partner. We have tariffs on stuff from Canada and Mexico. Pick an ally, there are tariffs there.
So are we already in a trade war? Well, no. And this gets to a bit of the optimistic side of things—that other countries have not fully retaliated. There’s some political incentive for those countries to retaliate, and they have retaliated a little bit, but they’ve largely kept their powder dry. Now, that might change, but so far they realize how destructive this stuff is. And they’re entering into lots of trade agreements with each other. There’s lots of free trading still happening, just not involving the U.S.
In the summer, when tariffs snap back, will that change? Will it change when countries realize there’s no point in negotiating with Donald Trump, or when there’s an election in these democracies? I don’t know. But the reality is that the U.S. is already in almost uncharted waters—you have to go back to the 1920s and 1930s for comparable tariff rates—and you have a lot of discrimination against American exports and investment going on, either overtly or covertly. So it’s more a matter of degree than of snapping your fingers and suddenly being in a trade war.
Audience: When the “Liberation Day” tariffs hit, there was a lot of talk about how the political backlash would be fueled by empty shelves and huge disruptions in everyday lives. Since then, we’ve had stock market shocks, we’ve had five-alarm fires from business confidence, we’ve seen import volume at the ports drop off, but it hasn’t yet hit grocery stores. Is that just lag time? Is there stockpiling? Why is that taking longer than people thought?
Lincicome: So there are a few things going on. A lot of people were predicting an economic catastrophe last May, and that’s not going to happen. There are a few things that are mitigating the damage, at least right now. The first is inventories. If you talk to any large importer, they saw the writing on the wall in November, and imports have been wildly elevated since then. One of the reasons the trade deficit has expanded is that imports just went nuts, and this was a lot of retailers getting stock on shore, and manufacturers stashing auto parts in warehouses. The CFO of Levi’s said they had enough jeans onshore to last them through the end of the year. So somewhere in the United States there’s a Fort Knox of blue jeans that is mitigating some of the near-term damage. Experts say we have maybe three months of inventories before things get dire.
“Right now … other countries have not fully retaliated. There’s some political incentive for those countries to retaliate, and they have retaliated a little bit, but they’ve largely kept their powder dry. Now, that might change, but so far they realize how destructive this stuff is. And they’re entering into lots of trade agreements with each other. There’s lots of free trading still happening, just not involving the U.S.” — Scott Lincicome
The second issue is that there are a lot of exclusions, and Trump dialed back some of the tariffs. You’re not dealing with 130% tariffs on all Chinese imports, or with tariffs on absolutely everything. So that gives you some leeway as well.
The third issue is that, believe it or not, tariffs are economists’ preferred form of protectionism. Why is that? Well, because unlike a quota or a ban, you can still import—you just have to pay the tax. So you’re still getting imports, and there still is trade.
And then, finally, there’s the basic dynamism of the American economy. I’m always hesitant about saying something is going to lead to economic catastrophe. What it really means is that we’ll be a little poorer, we’ll grow a little less, we’ll be a little less dynamic. And that’s bad enough. And of course, it being a self-inflicted wound for no good reason imposed unilaterally by the executive—there’s a lot of reasons to hate this stuff that doesn’t involve another Great Depression.
Audience: Is there any linkage between authoritarianism and tariffs in principle? If you look around the world, there are plenty of authoritarian regimes that have promoted free trade over the last 50+ years, and have enabled that economic growth to enhance their control on power. And is there any thinking inside the Trump administration that it doesn’t want to push the tariff narrative too far because if prices get out of control, then it’ll get blamed?
Lincicome: The administration likes having corporate America and others kind of cower before them, and be afraid to criticize. Companies are—it’s almost comical if it weren’t sad—really hesitant to blame tariffs for price increases. And they’re finding creative ways to raise prices—like no longer offering free shipping—to do what they need to do economically without offending the president or his supporters. So, certainly from a theoretical perspective there is a linkage between the ability to pull the levers of power and manipulate.
Protectionism has long been, again, an intoxicating kind of populist message for authoritarians. If you look at Argentina, for example, protectionism goes hand in hand with big state, big government regimes. Free trade by contrast is usually not employed by authoritarian regimes. Before Russia invaded Ukraine, the Russian government actively decoupled itself from the global economy to insulate itself from potential blowback.
As a means of rent extraction, tariffs are also very attractive to authoritarians.
China is a bit of an exception to that, but even there, not really. Even in China, some amount of economic nationalism is baked into that policy. I’m not aware of any study that tries to link tariff rates to levels of authoritarianism, but it would not surprise me if it’s out there.
Kuchem: Where do you see us going from here? Part of the Art of the Deal is being totally unpredictable, but assuming he continues to pursue tariffs to some extent, how far does it go before there’s a political whiplash?
Lincicome: Let’s start with the bad news: I see zero chance of us returning to a pre-Trump status quo in the next few years. Trump likes tariffs. Even if the courts get involved, I expect that to take a while. We can expect reasonably higher tariff rates, and a lot of this chaos, for the foreseeable future.
Now the good news: First, individuals are the ones who trade, and we still love trade globalization. Inflation-adjusted imports were at an all-time high last year in the U.S. The global economy is still the global economy, and the bottom-up desire for global connection and global trade is still present and very powerful. People might say they want to buy American—and maybe they do a little bit—but they still very much like their foreign-made goods. And outside of the U.S., there’s really been no buy-in from foreign governments to embrace Trumpian populist-nationalist economic policy. Trade agreements continue to be signed; even places like India that are notoriously protectionist are signing freer trade agreements. There’s an understanding around the world that our abandonment of free trade is going to harm a lot of American companies and benefit these governments. So, bad for us, but good for globalization and the global economy.
Finally, it does seem as if we might be having a hot-stove moment for the American public. If you look at the history of trade policy—and we don’t have to go back as far as Smoot-Hawley—we tried a lot of automotive quotas and other kinds of stuff in the 1980s. And politicians and the public realized that doesn’t work. The history of U.S. trade policy is trying everything else and then realizing, “I guess we have to do free trade, because the rest of this stuff didn’t work.”
If you look at the Democratic Party right now, some Democrats are straight-up free-traders, and not just because that’s anti-Trump. Some of them are having a change of heart. So maybe we’re getting back to a more liberaltarian Democratic Party. And a lot of Republicans on the Hill aren’t super big fans of this either, but because it’s Trump, they keep their mouth shut.
So maybe at the end of this we come out a little poorer, but on the upswing.
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