Catholic Social Tariffs?

Now in trade relations between the developing and the highly developed economies there is a great disparity in their overall situation and in their freedom of action. In order that international trade be human and moral, social justice requires that it restore to the participants a certain equality of opportunity. To be sure, this equality will not be attained at once, but we must begin to work toward it now by injecting a certain amount of equality into discussions and price talks. (Populorum Progressio, 61)

In a provocatively titled post at the Catholic Herald, Gavin Ashenden dares ask whether Donald Trump’s tariffs are a beacon of Catholic social teaching. The answer is that they are not. In fact, they are so obviously not, and the piece so obviously ignorant of economics, that it motivated me to revive this minor blog after 4 years. I will not pretend that I am not easily riled, because it is apparent that I am, but few things have riled me quite so much with the low level of discourse as this particular piece.

Mr. Ashenden is, I am quite certain, a smart man and a man arguing in good faith, but his apparent ignorance so great that I cannot help but pen a response.

The main thrust of his argument is that tariffs accomplish two simultaneous policy goals: they will help the poor and working class (or at the very least, hurt them least) while simultaneously allowing the United States to climb out of a serious fiscal hole that the government in which the government has found itself, all while dishing back out what other nations have unfairly done to the United States as part of a masterful negotiation tactic by President Trump. On every factual economic aspect, Mr. Ashenden has erred, and I will go further to say that he has erred in moral principles as well.

The Working Man and Tariffs

The Yale Budget Center has a comprehensive analysis of the estimated impact of the tariffs after the April 9th Revision, which is presumably the tariff regime that Mr. Ashenden was advocating. The report is, unsurprisingly, extremely detrimental to his arguments.

At a top level, they estimate that the tariffs will

• Increase price levels (2.9% aggregated pre-substitution effect, and 1.7% post substitution effect)
• Especially hit textiles hard with price impacts
• Proportionately harm poorer consumers as a percentage of disposable income (even if richer consumers will pay more in absolute dollars), thus making this distributionally regressive
• Reduce the US economy by .6% in the long run, reduce the Chinese economy by .6% in the long run, reduce the Canadian economy by 2.2% in the long run, and generally reduce the world economy (although Europe may benefit)
• US unemployment will rise by 60 basis points

All of which are directly opposed to his assertions that the tariffs are deflationary and will have positive employment impacts in the United States. In fact, general economic intuition suggests that at or near full employment, increased job creation sans simultaneous increases in productivity will have an inflationary impact, which is at odds with Mr. Ashenden’s assertions on pure intuition alone. The only way in which I could see the tariffs being deflationary would be if they led to a severe economic slowdown in the United States, which would certainly come with increased unemployment. The way in a nation achieves greater employment and lower prices simultaneously comes, as I just mentioned, when there’s a positive supply shock (e.g. productivity improvements), but tariffs are a negative supply shock.

As with all things, nuance needs to be applied; there is some disagreement within different data sets and specifications about the impact of tariffs, there is a tariff growth paradox that seems to say that post WW2 economic growth aligns more closely with trade theory on tariffs than pre WW1 economic growth, and there are avenues by which tariffs can have negative impacts on long term growth rates in various theoretical models.

I feel confident in saying that this is not the case for the April 9th tariff regime, which is a sudden and severe shock in tariffs across the board with companies having no ability to change capital allocation in any meaningful way.

How is the common man supposed to benefit from all of this?

The Relationship Between the Economy and the Stock Market

This relationship is a noisy one, but there is a relationship. The stock market is a forward looking estimate of time weighted company profits (or something akin to that, anyway), it is not just some magical gambling game where lines go up.

Concerns about distributional inequality aside, the sudden drop in the stock market after President Trump’s tariff regime reflects a decrease of people’s expectations of the real economy. In this way, the stock market is not some overpriced bubble returning to it’s rational norm, but a rational and conditioned forward looking estimate updating based on arriving news. When a company massively decreases in value and is forecasting substantially worse economic conditions, who do you think will bear the brunt? This is why we cannot just dismiss these things as problems only for the rich, because they represent real problems for everyone.

The Tariffs and US Debt

Mr. Ashenden makes two very brazen assertions here: first, he asserts that the US’ debt is unsustainable and secondly, the plan is lower interest rates for the purpose of restructuring the US’ obligations.

His assertion that the US ought to get it’s deficit under control is one I’m very sympathetic to, but his brightline is when debt exceeds 100% of GDP, asserting that at that point, a nation moves “into banana-republic territory”. The great irony here is that there is only a singular nation that I would describe as “banana republic territory” within the set of nations with debt to GDP ratios over 100%, namely Venezuela. There are some nations that could have historically had better governance (Italy, Greece), but there are also very well governed nations in that set (Belgium, US, UK, Canada). There is, to my knowledge, no set link between debt to GDP and a breakdown in state capacity. In fact, the most famous paper on this topic, Reinhart and Rogoff’s “Growth in a Time of Debt” was subject to serious data issues and the results disproven.

My more specific concern, and one that I think he will likely agree with, is that given the current political climate in the United States, increased debt and increased Treasury interest rates will continue to lead decreased freedom in discretionary spending as revenue stays constant and interest outlays continue to increase.

This could be resolved in many ways however; the most obvious would be programs targeting the long term stability of Social Security or revenues intended to boost the tax receipts of the United States. On the other hand, recent proposals coming from the Republican dominated Congress would lead to a large increase in that very same debt to GDP ratio that Mr. Ashenden so seems to dislike. Even if this is a masterstroke of fiscal responsibility meant to stave off an inevitably bad future, this would be a matter of the discipline of the left hand empowering the poor behavior of the right.

On that note, it is also obvious that Mr. Ashenden is pitifully wrong on this as a tool for renegotiating US debt; as of writing, 10YR Treasuries have a yield of 4.494%, the largest in a month. Far from driving investors to treasuries as a safe haven as the stock market drops, the uncertainty of the whole debacle seems to have caused a disengagement from treasuries. Whether this is a result of foreign actors or investors spooked by the apparently arbitrary nature of US trade policy in this administrations is not yet known, but it is known that if this was his intention, then we have not seen any fruits.

And on that note, Mr. Ashenden once again betrays his lack of economic knowledge when he thinks a simple stock market bear market will force the Federal Reserve’s hand; a situation with elevated price levels and elevated unemployment puts the Fed is quite a pickle and it’s not at all apparent how the Fed will react. Contrary to his belief, the Fed is not a magic stock market protection racket, so it is not obvious it would lower rates (nor is it obvious that it wouldn’t; it would depend on forward views of impacts on unemployment and inflation). The Federal Reserve, after all, kept raising rates despite the bear market under Joe Biden, out of a desire to tame inflation.

President Trump: Master Negotiator?

Despite the bluster that people take Trump too literally and this is all just part of a higher dimensional chess game and the “Art of the Deal”, nothing seems further from the truth.

President Trump undercut his own Secretary of the Treasury only a few minutes after he declared that the tariff pauses had nothing to do with the bond market when President Trump instead said he did so because the bond market got “yippy” and that he was acting “instinctively”. This comes after a week of denying there would be any pause in the tariffs and uncoordinated messaging from members of the administration as to the exact purpose of the tariffs. Were they for reshoring? Revenue collection? Restructuring the debt? It seems that if this had been a planned negotiating tactic, the least President Trump could have done would have been to clue his key economic advisors in on the plan.

Instead, the best case scenario is that even if this had been a plan, Donald Trump showed the world his weak spot; push Treasury yields higher and he’ll fold. He revealed his hand, and for nothing in return! There were no real substantively better deals offered than the pre-trade war status quo.

Even worse, today saw the announcement that smartphones and computers are now exempt from tariffs, ostensibly because it will hurt big businesses like Apple, and there’s been no movement from China on this at all. In short, Trump has backed down from a pretty major part of the tariff regime and the Chinese government hasn’t even offered a reciprocal pullback, much less a better benefit.

In fact, when it comes to describing President Trump’s negotiations, I dare say that if any action can be rationalized to be “the art of the deal”, then there is no meaningful difference between President Trump and a truly insane man. I, myself, am inclined to take President Trump at his word here; he has consistently been opposed to international trade for the last four decades, and in light of that, everything that has transpired over the last week and a half looks like a massive series of unforced errors of an administration that has consistently shown itself to be disorganized in many matters of governance. So tell me, what is more likely: President Trump has a masterful negotiation tactic that will pay off somehow at some as of yet to be determined point in time or that he genuinely wants onerous tariffs and got spooked by the market reaction?

Other Nations and Tariffs

I’ll be extremely brief: Mr. Ashenden asserts that Trump was simply responding in kind to barriers of trade other nations have imposed on US exports.

This is not true, as a cursory glance at weighted average tariffs will tell you. To the best of my knowledge, the EU is charging an average tariff of somewhere in the neighborhood of 2% (just as an example).

President Trump instead chose a formula that scaled the tariff rate directly with the trade deficit as a percentage of imports, apparently endorsing the proposition from Peter Navarro that as many (if not outright all) bilateral trade flows should be surpluses. I can easily contrive general equilibrium models under which this will not be and should not be the case, but it seems fair to say (a) bilateral trade deficits can easily arise out of heterogenous productivities, heterogenous endowments, and heterogenous preferences and (b) the stated policy was implicitly assuming that bilateral trade deficits could only result from trade barriers.

So what we got was a massive overreaction and the announcement of far, far greater trade barriers than had existed before. This is not some equal tit-for-tat strategy, it is some demented stochastic grim trigger.

Moral Principles at Play

Trade represents a fundamental component of international economic relations, making a decisive contribution to the specialization in certain types of production and to the economic growth of different countries. Today more than ever, international trade — if properly oriented — promotes development and can create new employment possibilities and provide useful resources. The Church’s social doctrine has time and again called attention to aberrations in the system of international trade, which often, owing to protectionist policies, discriminates against products coming from poorer countries and hinders the growth of industrial activity in and the transfer of technology to these countries. The continuing deterioration in terms of the exchange of raw materials and the widening of the gap between rich and poor countries has prompted the social Magisterium to point out the importance of ethical criteria that should form the basis of international economic relations: the pursuit of the common good and the universal destination of goods; equity in trade relationships; and attention to the rights and needs of the poor in policies concerning trade and international cooperation. Otherwise, “the poor nations remain ever poor while the rich ones become still richer” (Compendium of the Social Doctrine of the Church).

For all the braying about the “financial barriers” that other nations impose upon the US, we ought ask ourself: are we actually abiding by Catholic social teaching when we put in place protectionist policies meant to specifically target outsourced manufacturing to low wage nations? There are ethical concerns we could raise about the current state of trade, but I don’t think “We outsourced all of our jobs in textiles to Vietnam, and I don’t want them doing that” passes muster. In fact, I dare say the public rhetoric that President Trump has posed very much is at odds with the sentiments echoed above.

Conclusion

Mr. Ashenden gets the facts wrong and endorses a policy that will harm the working man, will not ensure fiscal stability, and is exactly the sort of protectionist policy that discriminates against poorer countries that the Church warns us about. It seems eminently more logical to accept that President Trump erred and is slowly working to walk back the error upon realizing it’s magnitude while also attempting to save face than to accept that this is plan (which changes by the day) will hurt to stock market but magically bring about manufacturing jobs and deflation through an admittedly as of yet unknown final target regime of tariffs. I exhort you, dear reader, to take some time and really ask yourself whether you think the facts of the matter and the espoused principles reflect Catholic social teaching or the apparently daily disarray of the second Trump administration.