What is the current state of the American economy? A quick summary could be “expanding, with bottlenecks.” And some of these bottlenecks reflect the chaos caused by Donald Trump’s trade policy. Where we are now: Employment is growing at a rate not seen since 1984. The same will probably happen with GDP, although we still do not have official estimates for the second quarter. However, we are experiencing shortages of many items, which is posing a problem for production in some areas and causing sharp price increases in others.
The shortage is being resolved in part. For example, two months ago, wood cost almost four times what it was before the pandemic. Since then, its price has fallen more than 50%. Other obstacles, on the other hand, seem more persistent. Global trade is held back by an inadequate supply of standard-size containers, those ubiquitous boxes that carry almost everything because they can be lifted directly from ship decks onto rail cars and truck beds; and experts expect the shortage to last until the end of this year.
And there is another bottleneck that can be an even bigger problem than the lack of containers: the global shortage of semiconductor chips. As is known, today almost everything contains silicon chips. That is why an insufficient supply of integrated circuits is a problem not only for computers and smartphones. Almost all durable goods carry chips, including appliances and, crucially, cars.
Consequently, the shortage of these components has had wide and perhaps unexpected ramifications. The lack of chips is limiting car production, as a result of which some people are buying second-hand cars. And the rise in second-hand car prices is a surprising contributor to inflation. In fact, in May it accounted for about a third of the rise in consumer prices.
Well, what is the reason that we are facing a shortage of semiconductors? Part of the answer is that the pandemic has created a strange business cycle. Since people couldn’t go out to eat, he renovated the kitchen, and since he couldn’t go to the gym, he bought exercise bikes. So while the demand for services remains depressed, that for goods has increased. And, like I said, practically all physical goods have a chip inside them. But, as Chad Brown of the Peterson Institute for International Economics shows, the Trump Administration’s trade policy made the situation much worse.
When Trump led us into a trade war with China, it was obvious that there were many things in world trade that he and his advisers did not understand. Among others, they did not seem to understand that modern commerce consists not only of simple exchanges of goods, but of complex supply chains in which the production of a given item often involves activities spread across the globe.
Given this fact, the structure of Trump’s tariffs was, outright, stupid. Customs tariffs were mainly focused on intermediate inputs such as semiconductors and capital goods that US companies need to compete in the world market. Numerous studies have found that the result was that, for practical purposes, tariffs reduced employment in the United States manufacturing sector.
But Trump’s trade policy wasn’t just ill-conceived. It was also erratic. No one knew which products the new rates would apply to, or whether the rates it had imposed would be maintained. And in high-tech, especially semiconductors, the former president began to impose export restrictions again erratically.
As I wrote at the time, the problem was not so much that Trump proclaimed himself a “tariff man” as that he was in a capricious and unpredictable way. And that ruined business planning, especially in semiconductors.
Consider the foreign producers selling to the US market. These producers had little incentive to increase their capacity as, from what they knew, they might suddenly find themselves faced with high tariffs. But American producers also had little incentive to invest, since, as far as they knew, perhaps the tariff protection on which they depended would disappear overnight, or they were unexpectedly prohibited from selling to foreign markets.
Basically, international supply chains don’t work very well when the policies of one of the world’s key economies are governed by the whims of a leader getting his ideas out of cable television. Note that I am not being a stickler for free trade. There are good reasons for a government interventionist policy to ensure reliable supply chains, and the Biden Administration is moving in this direction. However, it is important that these measures are designed by people who understand the subject and that the rules of the game are clear enough to allow companies to plan.
In other words, we need a political decision-making style that is the opposite of what we had under the previous government. For what it’s worth, I don’t believe that bad politics is the main cause of the bottlenecks we are facing, nor that those bottlenecks prevent a rapid economic recovery. But Trump’s tantrum-based trade policy did real damage, and we’re still paying the price.
Paul krugman He is a Nobel Prize in Economics. © The New York Times, 2021. News Clips translation