President Trump’s trade war is a stark departure from traditional U.S. trade policy. His journey off the beaten path has given rise to whispers of a new order of global finance and trade, what some are dubbing the “Mar-a-Lago accord.”
What do we know about that accord so far? For one thing, we know it is the brainchild of the president and two of his top economic advisers: Treasury Secretary Scott Bessent and Stephen Miran, who chairs the Council of Economic Advisers. Indeed, last year Bessent said that he would “like to be part of…Bretton Woods realignments.” But the best snapshot of the Mar-a-Lago accord we have to date is a paper published by Miran last November titled “A User’s Guide to Restructuring the Global Trading System.” In essence, the accord is a program whose intended purpose is to restore American production and employment by devaluing the dollar and imposing tariffs on foreign goods.
Unfortunately for President Trump, the alleged accord is full of contradictions. Right off the bat, the policies of tariffs and dollar devaluation themselves are contradictory. Tariffs would initially raise the value of the dollar by reducing the supply of dollars in international trade. Further, promoters of the accord suggest tariffs will have little to no effect on U.S. prices of tariffed goods. But using Miran’s own example from his paper—Trump’s 2018-19 tariffs on China—we see that this is false. A 2020 Johns Hopkins working paper by Olivier Jeanne and Jeongwon Son suggests that about 53% of those tariffs might have passed through to higher prices for Americans. Indeed, a well-studied and expected effect of a tariff is to raise the prices of both the tariffed goods and the prices of domestic import-competing goods. That is the only reason that a tariff is expected to raise production and employment of import-competing firms.
President Trump, in an effort to provide cover for his protectionist policies and inclinations, has indicated that tariffs on Canada and Mexico are supposedly intended to induce our neighbors to police the cross-border movement of illegal fentanyl. But he also has championed an “External Revenue Service” designed to permanently collect revenue from tariffs. He can’t have it both ways—either tariffs are temporary pressure tactics, or they are permanent sources of revenue.
What about the accord’s intended goal to restore American production? As it turns out, in the long run, tariffs will probably reduce the productivity of America’s import-competing sectors. When tariffs are implemented, they erect a wall against foreign producers, creating the illusion of increased domestic competitiveness. This reduces pressure on American companies to innovate and improve technology to compete with the otherwise more productive foreign workers and their firms. This artificial cover inevitably results in firms delaying or ignoring the necessary changes they require to compete with foreign competitors. In other words, it allows American companies to rest behind a tariff wall.
So, the accord is clearly full of contradictions. In fact, we have seen these contradictions play out in the global arena before. In the 1930s, the U.S. and other countries engaged in competitive attempts to raise tariffs and devalue their currencies in efforts to take demand for goods and services away from foreigners and to their domestic economies. The Smoot-Hawley tariff adopted in 1930 is regarded as the vanguard effort in adoption of these policies. Such initiatives came to be called “beggar-thy-neighbor” policies, and they resulted in shrinking overall world trade, production, and employment, and even prolonged the Great Depression. Their failure ensured that the U.S. would stick to free-trade principles for the ensuing century.
With that said, President Trump is not the first to propose such an accord. The Mar-a-Lago accord is reminiscent of the Plaza Accord of 1985, in which representatives from the U.S., France, West Germany, Japan, and the U.K. met at the Plaza Hotel in New York City to coordinate a depreciation of the U.S. dollar. What was the result? While the Plaza Accord was partially successful (the dollar did devalue), the U.S. experienced a slump in its share of global trade, and its investment, productivity, and output growth in comparison with Europe and relative to its earlier U.S.-tax-policy-related resurgence was much lower.
It seems as though President Trump and his advisers have forgotten all about the ill effects of the United States’ tariff program in the 1930s, as well as earlier ill-fated accords. Unfortunately for Americans, those who forget history are condemned to repeat it.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
Read more:
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- Trump’s tariffs program is based on flawed assumptions about the trade deficit
- Tariffs won’t make America great again: Export-Import Bank’s former chairman and president
- Trump is knowingly steering the economy off the cliff with tariffs
