President Donald Trump’s threat to levy tariffs on Mexico has triggered a political war in Washington, and not the usual partisan kind. Some Republicans are girding to fight their own president, rightly finding it absurd that he would take out his frustrations over immigration by increasing the cost of trade. As Senator James Lankford (R-Okla.) told POLITICO, the White House “is trying to use tariffs to solve every problem but HIV and climate change.” Trump supporters like Senator Marco Rubio (R-Fla.), meanwhile, don’t see many options. “[W]hat alternative do my GOP colleagues have,” he tweeted, “to get Mexico to secure its southern border… & act on intel we provide on human traffickers?”
Much as it pains their colleagues—and as hard as it is for Washington to process this—Trump and his backers have a real point. Not about his immigration policies, which are part of a harmful cultural war and stand a real chance of inflicting long-term damage on the American economy. But the administration’s use of tariffs to push its foreign policy goals is not as irrational as Trump’s enemies make it seem. It shouldn’t be this way, but in 2019, if the United States wants to fix some of the big policy arguments it has with its trading partners, it has left little leverage besides the blunt tool of tariffs.
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For that, the blame lies with Democratic and Republican administrations alike, including Trump’s predecessor Barack Obama, who collectively have let U.S. economic policy shrink in ambition—a battle fought on a narrower and narrower field, leaving us with so few weapons that tariffs have become the most useful last resort.
A nation as powerful as the United States would traditionally be expected to have a fully developed economic and industrial policy, one that integrates incentives and priorities on the domestic front with carrots and sticks for foreign partners. In that universe, Mexico’s own immigration enforcement might be part of a much wider package of goals negotiated between the two nations, one that creates strong incentives for Mexico to comply, without hurting American consumers and companies the way tariffs would.
This fuller agenda, which some experts call economic statecraft, has been the norm for much of the country’s history. But unlike America’s competitors, the United States has largely shelved this kind of economic thinking. President Obama, for instance, pitched the Trans-Pacific Partnership trade agreement as a way to ensure that America, rather than China, would write the rules of the global economy. But under the hood, it was never a very compelling economic argument for the United States: The rules that China negotiates in its own trade deals overlapped considerably with the American proposal, meaning that the TPP was more a matter of diplomatic gamesmanship than a real plan to advance workers here at home
To politicians like Obama, raised in the heyday of global free-market consensus, government industrial policy is a thing of the past, and trade relationships are really just a matter of opening as many markets as possible—regardless of whether the benefits actually outweigh the losses for a given country. The evidence now strongly suggests that consensus has been wrong. To take just one problem, the magnitude of corporate tax evasion made possible by modern trade agreements should make all of us question whether the traditional lifting-all-boats assumptions of trade efficiency still hold up.
With Trump’s election, it’s now acceptable to at least name the problems the U.S. has confronted on the world stage, ranging from coercive Chinese requirements over our manufacturers to corporations invoking their global supply-chain decisions as a reason we can’t fundamentally rethink U.S. trading rules. But Trump’s solutions to those problems suffer just as much from an absence of creative ambition. For instance, the administration pitched steel tariffs as a way to rebuild manufacturing communities. Months later, steelworkers showed the hollowness of this strategy when they went on a massive strike, complaining that tariffs had raised steel company profitability without any of that money trickling down to workers. The solution to their problems wasn’t just an industry-friendly trade policy; they needed good collective bargaining agreements as part of the deal.
The threat from China makes these issues even more urgent. With the launch of its “Made in China 2025” industrial strategy for which China pledges to attain dominance in key industrial sectors, the U.S. faces a major competitor that does not feel bound by postwar liberal market norms. In a relatively high-tariff environment, such as the global economy of the mid-20th century, the U.S. could dangle market access as a carrot in order to entice other countries to get on board with U.S. foreign policy goals. In the low-tariff America of 2019, there’s little leverage to be had.
So there is a certain logic to Trump’s jacking up of trade duties in order to fashion new bargains. The problem is, the Trumpists also struggle to develop new ideas on how to do it, starting with a slim menu of tariffs and tax cuts. In February, Rubio put out an 80-page report that dutifully catalogues China’s illiberal plans for industrial supremacy, and rightly notes that “The critical policy consideration, then, is not whether states should organize their economies, but how they should be organized.” Rubio deserves credit for breaking with Washington orthodoxy. But the proposed response falls short: defensive measures like tariffs, along with revenue-depleting tax cuts and traditional small-business programs. With a state diminished by those cuts, who will pay for the reorganization of the economy?
This disconnect is not surprising. For the past few decades, policymakers have embraced neoliberalism, a broadly open-market political philosophy whose effects have been to redirect more power toward the economically powerful and marginalize the economic majority. Things may be changing. Leading academics, public intellectuals on both the right and the left, and even the International Monetary Fund are calling for a return to a robust domestic industrial policy. On Tuesday, Senator Elizabeth Warren released the latest missive in this debate. Warren’s Plan for Economic Patriotism suggests we can learn from how other countries have made globalization work for their populations, offering a fuller range of tools. These include requirements for companies that benefit from federal research and development dollars to invest their proceeds back at home, across the country as a whole (not just in coastal cities).
Former Vice President Joe Biden has promised to tackle Chinese competition, while Senator Bernie Sanders (D-Vt.) has pointed to a long record of opposition to trade deals. In academia, a new generation of scholars is applying the latest econometric tools to understand how and when industrial policy is likely to deliver broadly shared gains.
All of this ferment marks a welcome pivot in America’s long turn away from more comprehensive economic approaches. It is time to acknowledge that the threadbare 58 manufacturing programs across 11 federal agencies that the U.S. has at present are unlikely to cut it. A more coordinated push would privilege middle-class wage growth over the profit margins of pharmaceutical and technology companies, cultivate green industries of the future and slow or even reverse the financialization of the economy, which has been America’s de facto industrial policy of the past 30 years.
Critics love to dismiss such coordinated approaches as command-and-control socialism, but in fact these ideas are deeply American, harkening back to an earlier economic planning tradition in American politics that extended from Alexander Hamilton to Franklin Roosevelt to Richard Nixon.
Instead of helping steel or cars in isolation, the way Trump’s tariffs ham-handedly do, policymakers could look at them as part of a whole system that needs rules to ensure industry and manpower delivers for the country as a whole. This is a break from progressive trade rhetoric of the past, which often puts its faith on international rule-making bodies like the TPP or World Trade Organization. If only China could be made to follow the rules, the story went, then all would work out well for the U.S. worker.
There is no such complacency in the new thinking on industrial policy. In truth, it is the responsibility of each nation to develop its economic strategy and rules. While this need not be zero sum, it also doesn’t magically sort itself out.
In short, tariffs may be a part of the package to solve America’s economic woes, but not necessarily, and not necessarily the most effective. There is no substitute for rebuilding the social contract that knits together workers, corporations and their government—creating a stronger platform for the United States to face the challenges of an increasingly competitive global economic environment.