A Less Noticed Implication of Trump Tariffs
Prabhat Patnaik
DONALD Trump’s tariffs are being discussed in the media in a routine manner without considering their specific context. This context is one where the US government is unwilling to spend the revenues accruing from higher tariffs on buying goods and services – a matter that is explained below. Other countries that may be losing the US market owing to the consequences of Trump tariffs are also unable to compensate for this loss by enlarging their own domestic markets. Such enlargement can occur through larger government spending only if it is financed either by a fiscal deficit or by a tax on the rich; but both these are anathema for globalised finance capital whose writ must be obeyed by the nation-state under the prevailing neoliberal arrangement. American protectionism therefore entails a shrinking of overall world aggregate demand and hence an accentuation of the crisis of neoliberal capitalism. This fact, namely that the Trump tariffs, even if they raise domestic output and employment within the US, worsen the world capitalist crisis and hence reduce the level of output taking both the US and other countries together, has received scant attention. Let us see how this reduction in world aggregate demand happens.
Tariffs raise the prices of imported goods in the domestic market relative to money wages, which is what makes possible, at least in part, the replacement of such imports by domestically-produced goods. Tariffs do not of course lead to all imports being eliminated, but some clearly are. On the imports that continue, the government collects a tariff revenue that is paid for by the consumers, who are predominantly the working people, through the higher prices that tariffs cause. Tariffs in other words, to the extent that they do not succeed in eliminating imports altogether and hence do garner some tariff revenue, entail a redistribution of purchasing power from the working people to the government.
Since the working people spend almost their entire purchasing power on goods and services, any such redistribution from their pockets to the coffers of the government would not reduce the level of aggregate demand within the tariff-imposing country, if its government too spends this tariff revenue on buying goods and services; but if it does not, then there is a reduction in the level of aggregate demand in the tariff-imposing country. And this is exactly what would happen in the US, since the tariff revenue generated by the Trump tariffs is not going to be spent on goods and services.
The Trump administration has been giving huge tax concessions to the rich and the tariff revenue would be used to bring down the fiscal deficit arising from such tax concessions. The tariff revenue in other words is supposed not to be spent at all but to bring down the fiscal deficit, which means that every dollar of tariff revenue raised by the government lowers the level of aggregate demand within the US. Since government expenditure in the rest of the world does not go up to offset this reduction in demand in the US, this means that taking the world as a whole, the level of aggregate demand goes down, accentuating the recessionary condition in the world economy. Within the US, despite the reduction in aggregate demand, domestic output may go up at the expense of imports. In other words, recession within the US may get ameliorated because of the tariff, but taking the capitalist world as a whole, that is, the US and the rest of the world together, there would be a reduction in the level of activity.
This is more than simply a case of “export of unemployment” by the US, that is, more than simply a case of “beggar-thy-neighbour” policy being pursued by the US. It is a case where if domestic output within the US rises by 100 owing to tariffs on goods, then the output in the rest of the world shrinks not by 100 but by more than 100, by, say, 120 or 150, so that in the world as a whole there is a shrinkage in the level of output. It is a case in short of actually reducing the level of activity in the world as a whole while increasing the level of activity in the US.
This conclusion is not altered one iota if other countries retaliate against American tariffs. In fact, to the extent that these other countries also use their tariff revenue, that is raised at the expense of their domestic workers, for reducing their fiscal deficits or for making tax concessions to their rich who consume only a small part of what is given to them, the overall effect is an even greater shrinkage in world aggregate demand. Retaliation by other countries against American tariffs in other words, while shifting demand and hence output away from the US back to their own economies, make matters even worse for the world economy as a whole; the crisis of neoliberal capitalism gets further accentuated.
The routine discussion on tariffs completely misses this last point. It sees tariffs merely as a means of shifting demand, and hence output, away from other countries to one’s own. But if tariffs are being imposed in a situation where the tariff revenue, raised at the expense of the working people, is not spent by the government at all but simply adds to government savings, then tariffs have the additional effect of shrinking the level of demand and output in the world as a whole, that is, of compounding the crisis of neoliberal capitalism.
The US role in the context of this crisis is particularly noteworthy. As the leader of the capitalist world, it was expected according to liberal bourgeois opinion to take the lead in working out a concerted approach by the advanced capitalist countries to overcome the crisis. This is what liberal bourgeois economists would have suggested; indeed, such a concerted action by advanced capitalist countries is what J M Keynes actually had suggested during the 1930s Great Depression. What is happening today in contrast is that the US is seeking to extricate itself alone from the crisis while making things even worse for the capitalist world as a whole. Trump in other words seeks to “make America great again” (MAGA) not by taking the lead in proposing some way for the capitalist world as a whole to overcome the crisis, but by arm-twisting the rest of the capitalist world, especially the countries of the global south, into accepting even greater misery so that the US alone manages to extricate itself from the crisis.
This action on the part of Trump is not because he is either evil or stupid, and hence shuns an “enlightened” way out of the crisis; it is because what he is doing conforms to the nature of capitalism, unlike the rosy situation imagined by the liberal bourgeois intelligentsia. Since capitalism is not a planned system it is not amenable to any “rational” solution to the crisis it faces; the US therefore is simply looking after its own interest in this crisis.
The US effort to extricate itself from the crisis, while sinking the rest of the world, especially the global south, even deeper into it, is evident from the demands that it is making in its various trade negotiations. It threatens very high tariffs against countries to start with, but is willing to settle for lower tariffs than it threatens, if the negotiating country accepts a variety of American goods at zero tariff. Indeed it has reached agreement in trade negotiations with several countries along these lines.
This however can have disastrous consequences for the countries of the global south. For India for example it would mean accepting without restrictions a variety of goods such as American dairy products, fruit and nuts and so on, in order to get some concessions on the American-announced tariffs on our main exports to that country, comprising textiles, gems and jewellery, and pharmaceuticals This would bring distress to millions of Indian farmers who would not be able to withstand the competition from imported goods, not because American farmers are more “efficient” but because they are heavily subsidised by the US government, subsidies which the World Trade Organisation has unreasonably and invidiously excluded from the list of proscribed subsidies.
Neoliberalism has brought the country to a pass where the choice before it is to sacrifice the interests either of the farmers or of those engaged in producing pharmaceuticals, gems and jewellery, clothing and such like. The way out however is not to make any such choice but to transcend the very system that forces the country to make such a choice, that is, to transcend neoliberalism itself.
