The U.S. Supreme Court will soon decide whether or not President Trump’s tariffs will stand. On September 3, Trump’s Solicitor General asked the court to expedite its review of the case “to the maximum extent feasible” because the case’s presence on its docket was interfering with international negotiations.
In a Labor Day news conference, President Trump’s top trade and manufacturing policy advisor Peter Navarro discussed the upcoming case. The key issue will be whether Trump’s tariffs qualify under the International Emergency Economic Powers Act (IEEPA). Navarro argued that Trump has been using tariffs to address not just one, but three different emergencies:
- Trade deficits. The huge U.S. trade deficits of $1.3 trillion per year which threaten America’s economic future.
- Smuggling of opioid drugs. The poisoning by smuggled-in Fentanyl has already killed hundreds of thousands of Americans.
- National security. The reestablishment of key supply chains which will be needed for the production of weapons.
In this commentary, we will address the first of Navarro’s three arguments, the trade deficits that we have been writing about in our books and articles.
Are Trade Deficits an Economic Emergency?
Since 1500, three countries have failed to address their trade deficits through timely tariffs and thereby lost their industries, economic growth, and military power:
- Spain. After the discovery of America, Spain was the richest and most powerful country in the world. But then it lost its industries to English and French tariffs. First its economy faltered; then its military power. The failure of the Spanish Armada’s attempt to invade England in 1588 illustrated its decline.
- Dutch Republic. In the mid-1600s the Dutch Republic was one of the most powerful and innovative countries in Europe. But its failure to respond in-kind to European tariffs caused it to lose its industries, its power, and its colonies (including its North American colony when New Amsterdam became New York).
- Britain. Due to the industrial revolution of the early 1800s, Britain became the fastest growing, most innovative, and most powerful country in Europe. But its failure to impose tariffs in the late 1800s led to its loss of industries. Both World War I and II occurred due to the vacuum which resulted from declining British power.
The Role of Economists in these Disasters
Economists have been slow to recognize the importance of balanced trade. Most failed to realize that tariffs are helpful to economies that have large trade deficits. Take David Ricardo, whose 1817 theory of comparative advantage has been used as an argument against tariffs.
Unfortunately, Ricardo failed to point out that his examples only applied when trade was balanced. Ricardo’s ancestors had left the trade-deficit Dutch Republic for trade-surplus Britain where his anti-tariff theory became quite popular.
Or take Alfred Marshall, Britain’s premier economist of the 1890s. His opposition to tariffs when Britain had become a trade-deficit country prevented Britain from enacting timely tariffs that could have saved many of its industries. His 1890 Principles of Economics textbook went through eight editions that were widely used in the trade-surplus U.S.
Forty years later, Britain’s premier economist was John Maynard Keynes. In contrast to Marshall, he got trade-deficit Britain to enact tariffs which, by 1934, had quickly pulled the country out of the Great Depression. In his 1936 magnum opus, The General Theory of Employment, Interest and Money, he explained the importance of trade balances:
[A] favorable [trade] balance, provided it is not too large, will prove extremely stimulating whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)
When World War II was coming to an end, he was the chief negotiator for the British government at the Bretton Woods negotiations. His goal was to set up an international system that would keep world trade in balance. Unfortunately, his American counterpart, Soviet agent Harry Dexter White, first exhausted him, then triumphed over him, and finally set up the impotent International Monetary Fund instead.
Does the President Have Authority?
Even though a lower court has just found that Congress cannot delegate its authority over tariffs, Congress has been doing so for decades. Whenever it wants, Congress can end a presidential emergency declaration by passing a joint resolution.
Presidential authority over trade policy stems from several delegations of trade power by Congress. Beginning with the Reciprocal Trade Agreements Act (1934), Congress has delegated substantial authority to Presidents over tariff policy. The Trade Act of 1974 gave the President the authority to “take all appropriate and feasible action within his power which the President determines will facilitate efforts by the domestic industry to make a positive adjustment to import competition and provide greater economic and social benefits than costs.”
The IEEPA, under which Trump imposed his tariffs, grew out of the Trading with the Enemies Act (TWEA) of 1917 which had previously been used to impose tariffs. The non-partisan Congressional Research Service noted that Congress explicitly did not soften Presidential power over tariffs, despite testimony from economists who wanted to see presidential authority weakened. Instead:
Congress maintained the language of Section 5(b)(1)(B) of TWEA in Section 203(a)(1)(B) of IEEPA. Additionally, Congress gave the President the explicit power to impose temporary import surcharges in response to balance-of-payments issues in Section 122 of the Trade Act of 1974.
The ballooning U.S. trade deficit is very precisely a balance of payments issue. Trade deficits occur when trade does not balance -- when the amount purchased abroad exceeds the amount exported, forcing borrowing or asset sales to make up the difference.
The Future of the U.S. and the World is at Stake
All recent presidents, except for Trump, have tolerated the growing U.S. balance of payments crisis. This toleration has converted the U.S. from a global creditor to a global debtor. In 1988, the last year of the Reagan administration, the U.S. was owed $21 billion more than it owed. By the end of the Biden administration, Americans collectively owed the world $26.5 trillion more than the world owed Americans. Trump’s actions have already begun to turn the tide, with the net international investment position improving to -$24.6 trillion in the most recent data.
President Trump is finally addressing the huge U.S. trade deficits which have shipped American industries abroad since 2000, preventing the growth in median U.S. income (which only grew during Trump’s presidency). This economic decline fueled by toleration of trade deficits is fueling distrust of democracy and capitalism in the United States and abroad. If the United States is to survive without turning toward self-destructive socialism, it needs the strong and prosperous middle class that Trump’s tariffs and trade negotiations aim to revive by bringing trade toward balance.
Trump’s tariffs are also bringing more than $2.6 trillion of promised direct investment to the United States which would enhance America’s future productivity and power. In contrast, if the Supreme Court takes tariffs away from Trump, it would be condemning the United States to the economic and military declines experienced by Spain, the Dutch Republic, and Britain, trade-deficit countries that failed to impose timely tariffs. The vacuum caused by the U.S. economic and power decline could lead to World War III.
The stakes could not be higher. Trump’s tariffs would produce a strong middle class, prosperity, and peace. Taking them away would produce socialism, economic decline, and war. It is now up to the U.S. Supreme Court to decide.
The Richmans co-authored the 2014 book Balanced Trade published by Lexington Books, and the 2008 book Trading Away Our Future published by Ideal Taxes Association.
Image: Matt Popovich