Home > Opinion > Columns

Trump takes on economics textbooks

Published: 18 Feb. 2025, 00:02

Suh Kyoung-ho

The author is an editorial writer at the JoongAng Ilbo.

Harvard economist Gregory Mankiw, renowned for his textbook “Principles of Economics” (1997), recently posted on his blog: “Value-added tax (VAT) is not a trade barrier.” His comment came a day after U.S. President Donald Trump signed a memorandum announcing reciprocal tariffs, scrutinizing both tariff and non-tariff barriers imposed by trading partners. Mankiw referenced Trump’s remarks, in which the former president suggested VAT should be considered a tariff, countering, “VAT is a consumption tax applied equally to domestic and imported goods and does not discriminate against imports.”

Mankiw also shared a link to an op-ed in The Wall Street Journal by Dartmouth economist Douglas Irwin, who argued that reciprocal tariffs are meaningless. Irwin cited British economist Joan Robinson’s famous adage: “Just because other countries have rocky coastlines doesn’t mean we should throw rocks into our own harbors.” He labeled reciprocal tariffs as an utterly flawed idea. The United States imports roughly 13,000 types of goods from approximately 200 countries. Applying tariffs to each product and country combination would create an astronomical 2.6 million different tariff rates. Irwin questioned whether the U.S. customs system could handle such complexity.

A conservative economist, Mankiw supported Democratic candidate Kamala Harris in the last presidential election for the simple reason that she was “not Trump.” He is not alone. At the annual meeting of the American Economic Association earlier this year, Trump’s economic policies faced severe criticism. Economists warned that Trump’s protectionism could drive inflation and trigger a global recession. According to economic theory, tariffs do not determine trade deficits; rather, the balance between national savings and investment does. The root cause of the U.S. trade deficit is its low savings rate, driven by excessive consumption. Without introspection or reconsideration, Trump continues to unleash a barrage of tariffs on the world.

Trump once proposed restoring the name “McKinley” to the highest peak in North America, now called Denali, out of reverence for the 25th U.S. president, William McKinley (1897–1901), whom he credits for “making America prosperous through tariffs.” However, Karl Rove, former senior advisor to George W. Bush, pointed out that while McKinley initially championed protectionism, he later emphasized the importance of reciprocal tariff reductions. McKinley even acknowledged that “trade wars are not profitable.” The world has changed since McKinley’s era — when he took office in 1900, federal spending accounted for just 3 percent of GDP; last year, it stood at 23 percent. During McKinley’s presidency, tariffs made up nearly half of federal revenue; today, individual income taxes constitute 48 percent of federal receipts, while tariffs account for only 1.9 percent. Tariffs are no longer a viable way to fill the nation’s coffers.

In “The Art of the Deal” (1987), Trump outlined his negotiation principles: “Think big” and “Use leverage.” His approach remains the same — he starts with extreme demands to unsettle his opponents and gradually expands his negotiating options. While it is essential to prepare for Trump’s tariff assaults, panicking and rushing out government countermeasures could weaken negotiation leverage, making the administration an easy target. Acting President Choi Sang-mok’s inability to secure a phone call with Trump highlights a leadership vacuum. However, persistently chasing after such a call could deplete Korea’s diplomatic and trade resources needed for future negotiations.

Ultimately, American businesses and consumers will bear the cost of the tariff war. Trump argues that while tariffs may cause short-term price hikes, they are worthwhile in the long run. Former Federal Reserve Chairman Ben Bernanke countered that if tariffs are used temporarily as a negotiation tool rather than a permanent policy, inflationary pressure will remain limited. The flip side, however, is that prolonged tariff imposition could destabilize prices and hurt the economy. While Trump claims tariffs will pay off in the long term, Bernanke remains skeptical. Faced with uncertainty, businesses debating whether to increase local production to offset tariff burdens are likely to align with Bernanke’s perspective.

Translated using generative AI and edited by Korea JoongAng Daily staff.