Trump’s Tariffs: Zero-Sum Thinking in a Positive-Sum World
Trump’s tariffs are far from the worst things he’s attempted to do since beginning his second term, but they are easily among the stupidest. The Mexican tariffs have been at least postponed as of this morning, but it currently looks like the Canadian (25% on everything but energy, 10% on energy) and Chinese tariffs (10% across the board) will go into effect tomorrow. The Canadian response has already started, with retaliatory tariffs on US goods announced and American alcohol products already being pulled from shelves of province-run wholesalers and liquor stores. What makes this trade war so stupid is the fact that it’s based on Trump’s fundamental misunderstanding of the world and of why we trade in the first place.
The most basic idea in economics, dating back at least to Adam Smith, is that there are positive-sum gains from trade. By trade, I don’t mean international trade necessarily — when I go to a local store and hand them some cash, and they hand me a product that I want to buy — let’s say a book — we both end up better off. I’m better off because I valued the book at more than its price. If I didn’t, I wouldn’t have bought it. And the bookseller values my cash more than they value the book, because they can buy the book at a lower price from a wholeseller. We both end up better off than we would have been without the exchange. That’s a positive-sum interaction. We’re collectively better off than if we hadn’t engaged in the trade, growing the whole pie. It’s likely that one of us benefited from the transaction more — maybe I was almost indifferent between keeping my cash and buying the book, where the bookseller really wanted to make the sale because they need the cash to make payroll. Or perhaps I got it on a deep sale, where I felt great about the transaction and the bookseller viewed it as only ever so slightly better than nothing, more in terms of cutting their losses than making a real gain. Either way, while we don’t equally share the gains from the trade (the consumer surplus and the producer surplus aren’t equal, to use the microeconomic terms), we both are better off after the trade than before.
Trump, as far as I can tell, has a zero-sum attitude towards deals. There is a winner (who gains from the deal) and a loser (who would be better off if the deal never happened). That can be true sometimes, but it’s the aberrational case. It’s true when a con artist fleeces their mark, offering nothing or little of value and trading empty promises for actual goods and money. It’s true when two parties engage in a deal for financial assets based entirely on their different opinions of the value of those assets, although even then, they are often both better off because of differing risk tolerances or other factors. But despite these exceptional cases, the standard economic transaction is one where both parties are better off after the trade than before.
When Trump talks about the U.S. being taken advantage of and needing to place tariffs so the U.S. will be better off, he thinks about international trade as being zero-sum instead of positive-sum. For the same reasons that both the bookseller and I benefit from our transaction, both the U.S. and Canada benefit when American builders buy Canadian lumber. The Canadian lumber companies value the U.S. dollars they receive for their lumber more than they value the lumber. The U.S. builders value the lumber more than they value the dollars, because they can use it to build a house that they can sell for more than the cost of land, materials, and labor, but only if they can get the necessary materials. Everybody benefits from the trade — it’s positive-sum. It can be risky to treat interactions at large scales as similar to interactions at small scales — the government’s budget is different from a household budget in many important ways — but with regard to trade, the basic ideas still hold.
International trade can be good for some people in a nation, and bad for others. The availability of Canadian lumber makes U.S. lumber less valuable, and people who used to have jobs making shoes in the United States now generally don’t, because Google tells me that we import 98% of the shoes sold in the U.S. Redistribution and retraining can be important tools in making sure that international trade doesn’t benefit a nation collectively while badly hurting some individual workers. And tariffs can also serve useful purposes — nurturing an important domestic industry for national security reasons or incubating a future engine of economic growth. But in general, trade makes both parties better off. Because Trump has difficulty understanding the concept of a trade that’s good for both sides, he can only understand international trade in mercantilist terms of winners and losers, with tariffs necessary to prevent the U.S. from being taken advantage of and to coerce compliance in other areas or useful political theater.
We may still be saved from economic disaster by Trump’s mercurial whims and desires to claim victories — even when, as with Mexico, he didn’t actually get very much in exchange for rescinding the announced tariffs. But we’d be much better off if we had a president who actually understood that international trade generally makes both parties wealthier and better off, instead of one taking advantage of the other.
