OPINION:
The world has changed since President Trump was first elected in 2016.
China is emboldened by global dominance in manufacturing. With a sophisticated Navy and an axis with Russia, Iran and North Korea, Beijing is more confident about standing up to Mr. Trump’s threats and asserting its interests.
Still, China’s reliance on exports to sustain growth, a thin safety net, excessive domestic savings and a burst property bubble have left it at risk of deflation.
After a generation of overregulation and underinvestment, Europe is stuck in listless growth.
America stands alone in the West, enjoying promising growth prospects and a strong currency, but in a foul mood. The election reminded us that voters have zero tolerance for politicians who preside over inflation.
Mr. Trump’s tariffs and broader fiscal policies must accommodate all this to succeed. Otherwise, he will fail miserably at reducing the trade deficit to create more domestic demand for U.S. manufacturers and enable the next wave of liberal Democrats to seize control in the midterms and next presidential elections.
Macroeconomics
Mr. Trump’s tax cuts and President Biden’s free spending swelled the federal budget deficit from 2.9% of the gross domestic product in 2016 to nearly 7%. Along with private investment in industry, commercial real estate and housing, that deficit more than expires in U.S. business and household savings.
With the dollar as the world’s dominant currency and America’s strong position in artificial intelligence, we can run large current account deficits, sell Treasury securities abroad and attract prodigious amounts of foreign investment to finance all this.
Conversely, China exports more than it imports, runs more modest national government deficits and enjoys a current account surplus of about 2% to 4% of its GDP.
Without reducing the federal deficit or putting the skids on U.S. investment and growth, Mr. Trump can’t reduce the trade deficit with just tariffs.
Tariffs targeted at China — 60%, implemented in steps — could work if he uses the proceeds to reduce the federal deficit. Otherwise, most of China’s lost exports would shift to places such as Vietnam, Malaysia and Mexico.
Wider tariffs on trading partners Canada, Mexico, Europe, South Korea and Japan will weaken their economies, encourage retaliation, drive them into accommodating arrangements with Russia and China and ultimately leave America isolated with reduced markets for our technology products and growth prospects — a poorer America.
Extending expiring provisions of the 2017 Tax Cuts and Jobs Act is not a tax cut but merely sustaining the fiscal status quo. Any new tax breaks not financed by spending cuts, revenue from tariffs on Chinese goods or curtailing some of the Tax Cuts and Jobs Act’s benefits would merely expand the budget and international trade deficits and stoke inflation.
Mr. Trump can repeal the law of gravity sooner than change those macroeconomic realities.
Economic statecraft
Economists have piled up mountains of studies allegedly showing that Mr. Trump’s first-term tariffs on China had negative consequences because they began with the premise that the current state of trade is based on comparative advantages and maximizes economic efficiency.
China protects its domestic market while subsidizing virtually every major export industry in one form or another and forcing its trade surpluses on the current accounts of other major economies. Save a few resource exporters such as Australia, it mines the West’s industrial base and research and development and taxes Western growth. Full stop.
Economic statecraft — trade measures, industrial policies and other sophisticated measures — has displaced free trade policies in every major economy worldwide.
A coordinated Western approach to China would better serve U.S. interests. It would limit China’s capacity to support Russian and Iranian aggression and further build its navy to bully neighbors and seize control in the South Pacific.
Instead of bullying our allies with tariffs, Mr. Trump should encourage them to impose similar measures by applying a 60% levy on the Chinese content of imports from third countries.
Geo security realities
Making a deal with Russia on Ukraine, as hardheaded security analysts suggest, would embolden President Vladimir Putin.
Reams have been written about how sanctions are hurting his economy. Prairie Muffins!
Mr. Putin has the wartime economy he wants because he has adopted the Julius Ceasar approach to foreign policy: power and prosperity through conquest.
The European economy can’t recover with Germany’s unraveling with an auto sector unable to compete with Chinese electric vehicles and uncompetitive energy prices now that it lacks access to Russian natural gas.
If Mr. Trump cuts a devil’s deal with Mr. Putin, how long before the practical Germans conclude they need cheap gas for their economy to succeed and turn to a pro-Russian Alternative for Germany government?
U.S. economic success is now tightly bound to AI that runs on chips designed in America but fabricated in Taiwan with equipment made solely in the Netherlands.
America must hold the line on Mr. Putin in Europe to succeed economically.
• Peter Morici is an economist, emeritus business professor at the University of Maryland, and a national columnist.
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