As the US presidential election count continues, it becomes increasingly likely that Donald Trump will win. It appears that the majority of Americans believe that Trump is more trustworthy than Kamala Harris on economic issues, and they say that the economy is their principal concern.
The irony in this belief is that it is the opposite of the real situation, at least if we assume that Trump will carry out the promises that he has made.
David Ricardo, who first propounded the notion of comparative advantage
First, on tariffs Trump has repeatedly promised that he will increase tariffs across the board. While there are various versions of that policy, it is most likely that a Trump administration will impose a 20% tariff on most goods from most nations but a 60% tariff on goods from China.
Americans don’t appear to understand that reintroduction of tariffs would be a bad thing for both the world and US economy. The reason for this flows from the concept of comparative advantage. The world and each individual country will be most prosperous if each concentrates on producing goods and services that they can make more cheaply and/or efficiently than most other nations.
The extraordinary growth in world prosperity from the 1970s until now was in considerable measure a result of most countries eliminating or radically cutting tariffs. Before that time most countries had tariff barriers on most goods, and 20% or so was a fairly typical rate. The belief at the time was that protecting a nation’s economy by imposing tariffs to penalise goods from competitor nations was the best policy. Until the Arab oil crisis of the early 1970s that more or less worked okay, but the explosive economic growth that followed widespread cuts in tariffs indicates that even a relatively modest 20% tariff is a burden on growth.
Trump’s reintroduction of a 20% tariff would not be a complete disaster, although growth would be distinctly suboptimal. The real problem with Trump’s announced policies is with the 60% tariff he has promised to impose on Chinese goods. That would be a complete disaster for the entire world, because China would undoubtedly retaliate and impose similar tariffs on American goods. That would be catastrophic for the world economy. The US and China are the world’s two largest economies and a trade war between them would certainly result in a major recession if not a repeat of the Great Depression of the 1930s. As a nation heavily dependent on trade, Australia would suffer more than most in such a trade war.
This situation would be made even worse by Trump’s announced policies on migration. He has promised to deport millions of undocumented/illegal migrants. That would also be a disaster for the American economy. Americans seem to believe that illegal migrants are taking their jobs. The reality is that they are doing dirty, unpleasant jobs that Americans refuse to do themselves. If significant numbers of migrants are deported, business will be forced to pay Americans much higher wages to attract people to do those jobs. That would result in a resurgence of inflation in the US, which in turn would result in the Federal Reserve increasing interest rates again to curb inflation.
Fortunately, it is probable that Trump will find out that he is unable to deport significant numbers of migrants. Most countries will refuse to accept unwilling migrants arriving by sea or air from the United States.
The bottom line is that a Trump presidency would be a bad thing for both the world and American economy, just as it would be a bad thing for climate change. We should all start praying to whatever deity we might believe in for a late swing to Kamala Harris.