A Response to Victor Davis Hanson

Answering the "tough questions"

Recently, Victor Davis Hanson wrote a thought-provoking essay where he lists a series of questions. Fox News even covered it, calling them “10 tough Trump tariff questions that critics don’t want to answer.” I have had the great pleasure of listening to Victor Davis Hanson on many occasions and vividly remember him as a wonderfully intelligent man and, usually, a very careful and insightful thinker.

Rather than echo responses by others, I thought it best to take his ten questions and answer them, as if I were taking an exam. I will go through them one by one, though I have taken some liberty to rephrase the questions for brevity’s sake.

1) What do we call the policies of the past half-century by Europe, Asia, China, and others to ensure asymmetrical tariffs, pseudo-health and security trade restrictions, and large surpluses? A trade peace? Trade fairness?

I’m not sure, to be honest. But since that’s probably not an acceptable answer, I’d just call them “other countries’ trade policies” and leave it at that. Insofar as other countries are not retaliating against “Europe, Asia, China, and others” it’s certainly not a “trade war.”

“Trade peace” also seems like an odd and redundant phrasing, since trade is inherently peaceful. I’ve never once gone to the grocery store ready to do battle and I certainly don’t feel like I’m somehow “armed” with cash or credit cards in my wallet. But perhaps I’m shopping wrong?

2) Why do most nations prefer trade surpluses and protective tariffs?

The lived experience is actually very different from what Victor Davis Hanson asserts. According to the World Bank, as of 2023, only 78 countries were running a trade surplus. This was also reported by the United Nations.

As for whether a nation should prefer a surplus or a deficit, the only defensible answer is “it doesn’t actually matter.” As I’ve written about on several occasions now, trade deficits are merely an accounting identity, not an economic one. Their existence is predicated on the “minus imports” part of the equation for GDP. But as anyone who has taken even an introductory economics course can tell you, the reason we must subtract imports (instead of ignoring them entirely, which should make intuitive sense) is because they’ve been added elsewhere in the other components of GDP: consumption, investment, and government spending. When I purchase an iPhone, for example, that purchase would show up twice in our GDP calculations: once as “consumption” as a positive and again as “imports.” Reducing imports would not increase GDP. At best, it would leave it completely unchanged. More likely, though, is that it would lower GDP since we’d be making more things ourselves that would be far more costly, just like Victor’s household (and the US and the world!) would be poorer, not richer, if he switched to farming instead of commenting on the news and writing.

3) Would our trade partners prefer to trade places with us [in terms of their balance of trade]?

I suspect that the answer to that is a resounding YES! The truth is that the trade deficit that Victor Davis Hanson points to (which is real) is exactly offset by a capital account surplus of the same magnitude for the same reason that when we purchase something from the grocery store that costs $20, we get $20 worth of groceries, and they get $20 worth of money. This is an accounting identity, not an economic theory. It is a definition, not an assertion.

When we run a capital account surplus, those dollars we send out come back to us in the form of foreign direct investment. Those factories and such that Trump is excited to be bringing to the U.S.? Those are going to be paid for in U.S. dollars. Where did those countries get the dollars? By selling us goods and services. We use those dollars from abroad to build factories, to purchase federal debt, and everything in between. Given the spendthrift nature of Congress, we can ill afford to give these up as it would be disastrous, especially for American workers.

4) What if wages went up at the rate of the stock market and the stock market went up at the rate of wages?

Since 1980, the stock market has grown a mind-boggling 3,700% after adjusting for inflation. This is an impressive figure. By comparison, median wage growth for persons over 16 over the same period has been an anemic 20%.

However, this is deeply misleading. Average wage growth, when taken over the entire population, is guaranteed to be low if only because older, experienced, and typically higher-paid people are retiring every year while younger, not-experienced, and typically low-paid people are entering the workforce. Experience matters. An individual gains experience over the course of their career and (usually) gets paid more the longer they’ve been in the workforce. But the workforce itself is not gaining experience on average.

If we look at matched worker studies, which follow a wide swath of individual people over the course of their careers, we find much different results.

Still, Victor Davis Hanson does point to a serious problem in today’s society: access to the stock market. The stock market still out-performs in terms of its growth in value, and it is certainly true that lower income people have less access to investment opportunities than more affluent people do. Insofar as this is the point Victor Davis Hanson is making, it’s a very good one and I look forward to hearing viable plans to address it from him.

5) Is Wall Street’s panic based on what might happen—or what is happening?

Both. Investors on Wall Street, just like all people, are sensitive to future increases in price. There can be no doubt that tariffs and other trade restrictions this administration is imposing will increase prices. When faced with the question, “should I buy now while the price is low or buy later when the price is high?” good stewards of resources will, to the extent that they are able, purchase now. This is part of why inflation ticked up in December – with Trump announcing that he was going to impose tariffs on the entire world on Day One of his presidency, businesses stockpiled as much as they could before the price increase. This increased current-demand relative to current-supply and resulted in an increase in price. This is also why the inflationary effects in February and March were lower than one might expect given what tariff-skeptics have claimed: at least some of the increased price had already happened.

The capricious way that President Trump has handled these tariffs, and the glaring lack of a coherent and consistent plan for what the Administration seeks to actually accomplish with the tariffs, have both done the American worker and consumer a tremendous disservice. By sowing uncertainty across multiple dimensions, businesses are left somewhat paralyzed; unable to make long-term plans without knowing what the long-term trade policy of the United States vis-à-vis other countries will be.

6) Is the frenzy caused by the Trump economic agenda?

The timing of it is certainly suggestive, but it will be a while before we have sufficient evidence to definitively say one way or the other. The argument that the economy was “overheated” by the spendthrift Biden Administration and that some of the economic downturn was caused by Trump and DOGE curtailing at least some of this certainly has merit.

However, it would seem foolish to assert that none of the economic downturn was caused by the single largest tax increase in at least 100 years. We know that taxes have a chilling effect on economic activity overall. But the question remains whether tariffs have the same effect, especially if we are only concerned with domestic economic activity. On the one hand, tariffs do make domestic producers more attractive. Typically, this will spur additional investment in the protected industry and will lead to job growth. We saw this with the tariffs from the first Trump Administration: about 1,000 jobs were saved in the steel and aluminum producing sectors.

But tariffs also raise prices for these goods. Because of the increased price for steel and aluminum in the US, manufacturing plants that use steel and aluminum were able to purchase less of these materials. You don’t need to be an economist to understand that if you have less material, you’re going to produce less output. Because machines are tough to “fire,” reduced production almost exclusively falls on labor. As a result, we saw about 75,000 jobs lost in manufacturing sector which uses steel and aluminum. And as a 2019 Federal Reserve report agues, “U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment.”

7) What about North American neighbors?

Again, no nation should really care about their balance of trade because it is, after all, an accounting identity. To the rest of the question, it seems clear that Canada would be upset if the US only spent 1.37% of GDP on defense instead of the 2% that NATO requires. Likewise, I suspect that Mexico would be upset if the US were selling fentanyl and opioids to Mexico.

There can be no doubt that providing an appropriate amount national defense and curtailing the sale of illicit drugs are important tasks. And while there is an argument that tariffs can curtail this, there are certainly far more effective means of doing so that do not also come with the destructive side-effects of tariffs. Combatting illicit drug smuggling with tariffs is like fighting a headache with cyanide. If the dose is strong enough, the headache will end. Unfortunately, so too will the patient’s life. It is certainly better to use more effective and less destructive “medicines” such as ibuprofen to combat headaches. Likewise, we can end illicit drug smuggling with tariffs. But we almost certainly will not enjoy the side-effects. We should instead focus on finding the “ibuprofen” of the policy world, not the cyanide.

8) Is the Trump agenda bad economic news?

Not all that President Trump wishes to accomplish is bad news. In fact, his other policies are likely greatly diminishing the negative effects of the tariffs. His efforts at deregulation, at lowering taxes, and at streamlining approval processes are laudable and will, in isolation, help boost the overall US economy. Unfortunately, the chaos and uncertainty sown by the constantly changing tariff policies and inconsistent messaging surrounding the goal of the tariffs by his own inner circle is, quite simply, too big of a negative to overcome through his other, otherwise good, policy goals.

Incidentally, this is part of the explanation for the first Trump Administration’s economic successes. The net effect of all the policy changes was positive and resulted in improving business conditions. The deregulation and tax cuts (both positives) were sweeping and the imposition of tariffs (a negative) was narrow. A big positive shock plus a small negative shock will still yield a net positive shock.

Unfortunately, at this moment, it seems like the positive shocks of deregulation and making the tax cuts permanent are being offset by the negative shocks of constantly vacillating (and wide-ranging) tariff policy. The result here is a net negative.

In both of his terms, the message should be clear: while his overall effect may still yet be positive this term as it was in his first term, it could have been more positive by avoiding the negative effects of tariffs.

9) Was the Biden record preferable?

Far be it from me to weigh in on this directly, as I am certainly not qualified to do so, but I find it hard to understand why this question is relevant.

Accepting the premise that the Trump administration is better than the Biden administration is in no way, shape, or form relevant to the discussion surrounding tariffs. For example, I am currently embarking on a weight-loss journey. I have cut out going to fast food restaurants for lunch and instead make lunch at home. Not only has this resulted in me losing 10 pounds this year but it has also saved me quite a bit of money. However, I still snack at night when I clearly do not need to. It would be foolish to conclude that my “snacking at night” is good or somehow wise.

Likewise, we can acknowledge that Trump is better than Biden just like we can acknowledge that my current diet is better than my previous one. But Trump’s tariffs are like my snacking: both of us would better accomplish our overarching goals if we eliminated them.

10) Why the negotiations and why now?

There are very compelling reasons to believe that Trump’s tariffs brought countries to the table for negotiations. Insofar as this is true, then the Trump administration can claim some amount of victory. Indeed, Adam Smith wrote about this all the way back in 1776.

However, how you get to those deals matters. Surely, Victor Davis Hanson would agree that a thief, pointing a gun at someone and saying, “your money or your life” is not exactly bargaining, even if they do end up with the money in the end.

The administration’s approach to securing these deals is alarmingly similar. By threatening nations into lower their trade barriers, Trump may succeed in securing more free trade deals. In doing so, however, we risk turning our friends away. In fact, this is already happening. Canada’s Trade Minister, Mary Ng, continues to pursue a trade diversification strategy and has been meeting with nations around the world securing new trade deals with them. She’s even encouraging Canadian firms to find alternative, non-US sources for “[parts] or whatever it is that you need for your business” and to instead trade with the growing number of nations “where Canada has a trade agreement.” The Trans-Pacific Partnership, which Trump withdrew the US from in 2017, is looking to add as many as nine new members, including China and Taiwan. Additionally, China and the European Union are looking to secure new trade deals in response to the “punitive tariffs” imposed by the US. All the free trade deals in the world mean nothing if other countries simply do not want to trade with you anymore.

The alternative approach, and one pursued beautifully by President Reagan, is to offer a quid-pro-quo in the form of bilateral reductions in trade restrictions where you can and unilateral reductions in trade restrictions where you cannot. Trump could, for example, offer to lower our tariffs on Japan in exchange for them lowering their trade restrictions against US made cars. For a President touted as a wildly successful businessman, who, by his own dsecription is capable of finding deals and delivering where nobody else could, this would seem to play right into his strengths.

Conclusion

The simple truth is that tariffs are a rotten deal for the American people. They do not lead to a renaissance of new jobs being created; they stifle job creation. They do not bring prosperity back to America; they inhibit it. And they harm our standing on the world stage, especially at a time when the rise of China and their abusive trade practices represents a very real threat to the overall world economy. If we are to stand up to China, we will need allies. Unfortunately, we have pushed them away.

It is time to end the failed experiment with tariffs and focus on other policy reforms with a proven track record. Trump should focus on deregulation and lowering taxes (especially on manufacturing for export) and provide long-term benefits through continuing education reform by returning that power to the states, where it belongs.