Susan Pendergrass and Dominic Pino, the Thomas L. Rhodes Fellow at the National Review Institute, discuss the current state of U.S. tariffs and trade policy, tariffs as a hidden form of taxation, common misconceptions about trade deficits, provide historical context for America’s protectionist tendencies, and more.
Timestamps:
00:00 Understanding Tariffs and Economic Perspectives
02:51 The Impact of Trade Deficits
06:05 The Role of Government in Trade Policies
08:59 The Consequences of Protectionism
12:02 Future Economic Predictions
15:05 Historical Context of Tariffs
18:03 The Confusion Surrounding Current Policies
Episode Transcript
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Susan Pendergrass (00:00) Well, this is going to be interesting. Dominic Pino, thank you for joining us from National Review. Every day feels like a month now, but it was a couple of weeks ago that this all started, and since then so much has happened in our economy. This is a great opportunity for me as a non-economist. I have seen, as many people have, Thomas Sowell out talking about what’s happening in the economy right now and our current economic approach. And it doesn’t seem like he thinks it’s great. What’s your opinion? And can you explain what the potential upside is of how we are approaching tariffs right now?
Dominic Pino (00:34) Yeah, thanks so much for having me on. First thing — I’m not really an economist. I do have a master’s degree in economics from George Mason, but I’m a journalist. I write about economics. Thomas Sowell most certainly is an economist and he is someone we should be taking seriously. His book, Basic Economics, lays out some of the best arguments for free trade that anyone has ever put to paper. He was recently talking, as you mentioned, with the Hoover Institution at Stanford, where he is still located. He was talking about how these tariffs from Trump are not an exception to the rule — they are not a good idea. What the U.S. has been doing is unilaterally, through just the president acting alone under supposed national emergencies that quite frankly don’t exist, imposing tariff rates that are higher than any country in the developed world on basically every other country in the world, for the mere existence of a trade deficit. That is what they think is the problem. The formula they use to calculate those tariff rates is not based at all on other countries’ tariff rates. They try to say it’s a reciprocal thing based on other countries’ tariffs, but that’s not at all what they did. All they did was look at other countries’ trade deficits and say, based on that, there’s a national emergency that we need to solve with unilateral action from the president to raise taxes on Americans. And it’s probably the largest peacetime tax hike in U.S. history.
Susan Pendergrass (02:00) Yeah, so the Show-Me Institute — we’re firmly on the books as being a free market policy think tank. That’s what we do. We talk about free market state policy for the most part, and we are pretty anti-tax and limited government. The idea that tariffs are taxes — why is it such a leap these days? Why are tariffs now seen as not taxes but as a skilled negotiating tool? How did that come to be, do you think?
Dominic Pino (02:22) Mostly because Donald Trump just believes it to be true. And he’s believed it to be true since the 1980s. You can look back — this is a pre-political thing for him. He just thinks that tariffs are a good idea. And he thinks that foreign countries pay them. It sort of sounds that way when you describe it as, say, a United States tariff on Japan — that makes it sound like Japan is the one paying it. But it’s really a tariff on Japanese goods, and that tariff is paid by Americans who buy Japanese goods. The fact that these are a tax increase is not in dispute. And you know it’s not in dispute because even the White House says it’s going to raise a ton of new revenue from these taxes. Where’s that revenue coming from if it’s not a tax? And why are American businesses upset about having to pay this tax if the tax is actually paid by foreigners? It doesn’t make a lot of sense.
Susan Pendergrass (03:13) So then why the trade deficit as the boogeyman? The way I see it — and again, we’re free trade, free market — trade deficits exist because we have a comparative advantage in some industries and other countries have a comparative advantage in others. I want to be able to buy all of it. I want to buy my vanilla from Madagascar. What is the problem with a trade deficit, or how did it become such a boogeyman?
Dominic Pino (03:37) Donald Trump seems to believe that a trade deficit means you’re getting poorer. And I just don’t know how you can get there. The United States is the richest country in the world. We have the world’s largest economy. We have that despite increased competition from China, and China has been slowing down while the United States has continued to plug along. We’ve seen countries that adopted free trade after being protectionist become very rich in a very short amount of time — places like Hong Kong, Singapore, or even those supposedly socialist Nordic countries like Sweden and Denmark. They have very liberal trade regimes, and they do that because they know it makes them richer. For the United States, we should absolutely be embracing free trade. We have actually embraced free trade less than a lot of other countries have, if you look at the proportion of our economy that is due to international trade. We’re in the low 20s as a percentage of GDP when you add up imports and exports. The world average is 63%. Most other countries are much more exposed to trade than the United States is. And we could be even better off if we reduced a lot of our own trade barriers, which there doesn’t seem to be any appetite for the president to do.
Susan Pendergrass (04:54) So walk me through what would be, from what you can understand of whatever the plan is — let’s say this is a plan — what would be the optimum outcome that the administration gets out of the approach they’ve taken?
Dominic Pino (05:07) Well, from my perspective, the optimum outcome would be that other countries remove their tariffs and we remove ours and we all get along. I think that would be great. There is a case to be made that you can use the threat or imposition of tariffs in this way to do that. That is a thing that we have in law and it makes sense in theory. It’s just not what the administration is actually doing. For example, Israel, in anticipation of these tariffs, removed all of their tariffs on U.S. goods. Now, they basically didn’t have any to begin with because we’ve had a free trade deal with Israel since 1985, but the few that were left — a couple of stragglers on some agricultural products — they got rid of them before Trump made his announcement. Trump comes out and puts 17% tariffs on goods from Israel. So why are we doing 17% if they’re doing zero? That’s not reciprocal at all. And it’s not being used to get a new free trade deal because we already have a free trade deal with Israel. If the administration had exempted the 12 countries with which the United States already has bilateral free trade deals, and the other countries that are part of multilateral trade deals, and said that’s what we want, then you could bring other countries to the negotiating table and say, hey, we want a free trade deal with you too. But if countries are learning the lesson that even having a free trade deal with the United States doesn’t protect you from U.S. tariffs, then what incentive do they have to come to the table in the first place?
Susan Pendergrass (06:38) You may have seen the news today about a potential extra 50% tariff on China, which seems a little impulsive. I’m just going to read what Thomas Sowell said in the last couple of days. He said, “It’s not a bad idea if you’re doing this within a system of rules. If you are the one who’s making the rules, then all the other people have no idea what you’re going to do next. And that’s a formula for having people hang on to their money until they figure out what you’re going to do. And when a whole lot of people hang on to their money, you get the results you got during the Great Depression of the 1930s.” I would say more than anything, we don’t know what’s going to happen next. Wednesday, supposedly the tariffs go into effect unless there’s a pause or some minds get changed. Don’t you think that’s what’s really driving the chaos right now — how unpredictable it is? You open the news and it’s like, maybe 50% more on China. What do you think?
Dominic Pino (07:33) For sure, I think that’s a big part of it, absolutely. This is why the founding fathers put the tariff power in Congress. They didn’t want one president, one guy by himself, to be able to do this kind of thing. They wanted tariffs to have a democratic legitimacy coming from the legislature that’s elected by the people. They wanted it to involve other voices from around the country so that certain regions aren’t left out. And they wanted it to go through two branches of government so that it’s more difficult to change. Congress over the past several decades has given away large portions of its power over trade. There were some good reasons to do that because it was done under the assumption that the president was going to use that power to liberalize trade — there were lots of public choice problems when Congress had control over the trade agenda by itself. And so for several decades, presidents of both parties did use that power to reduce U.S. barriers to trade and to negotiate lower barriers for other countries. That process played out and worked very nicely. Now we’ve had the last two presidents — both Trump and Biden — use a lot of those powers to increase trade barriers. And they’re doing so at a time when polling shows that trade is actually more popular than ever. The Gallup survey has been asking this question for many years: do you believe that international trade is more of an opportunity for the United States, or more of a threat? The number of people saying opportunity is at an all-time high right now, at about 80%. And yet politicians have convinced themselves that Americans are demanding protectionism. Really, it’s good for politicians because when they have the power to determine which exemptions get made, which tariffs apply to which industries, that creates lots of opportunities for lobbyists to come in and say, hey, you should give me that exemption. We’re already seeing that happening. Tim Carney at the Washington Examiner wrote a piece today saying there are about 160 new lobbying organizations that have spawned so far this year to lobby about international trade, and that’s only the tip of the iceberg.
Susan Pendergrass (09:44) So they’re coming in and saying, we want you to exempt our industry, our country, our region. They’re being paid millions of dollars to get the carve-outs. Have any carve-outs happened?
Dominic Pino (09:58) For the Canada tariffs, they put a lower rate on energy and on fertilizer than on other things. For some of the auto parts stuff, it’s not entirely clear exactly what’s going on at the moment, but there does seem to be some exemptions made there. But yeah, the exemptions are going to get made, and they’re going to get made not based on what’s best for the country in general — they’re going to get made based on who’s the most politically connected, because that’s how politicians work. That’s their job. That’s what they do. It’s in the name: politics. And so when there’s all this high talk of the national interest and national security — we’re going to bring back defense industry and things like that — it’s all cover for what they’re really doing, which is redistributing profits from companies they don’t like to companies they do like, and destroying a lot of wealth along the way from all the inefficiency that comes about.
Susan Pendergrass (10:48) So where do you see this headed? If you could fast forward to summer, where do you see this going? A lot of experts — Jamie Dimon and others — are talking about what they’re seeing in the tea leaves right now around the economy. What do you think?
Dominic Pino (11:01) I don’t think the stock market is done going down yet. I think traders are still holding out hope that the president is going to see the mistake here and reverse course. I’m not really optimistic that’s going to happen because during the first term there were a lot of voices saying contrary things, a lot of discussion and debate going on. And you also had a vice president in Mike Pence who was much more free market and much more traditionally conservative, and his team did a lot to run the policy decisions that were being made. This time around, JD Vance is an unabashed protectionist — he’s not making any secrets about that. And the people who are close to the president on this are people like Peter Navarro, who just really believes in protectionism. He finally has a chance to achieve his lifelong dream of raising taxes on Americans for having the nerve to buy stuff from other countries. Trump has other advisors who do know better, but they’re not going to be super likely to speak up because quite frankly, a lot of Republicans are just afraid of Trump and afraid of the consequences of speaking out against him. They would really be helping Trump to speak out. Republicans in Congress hopefully will realize this eventually, because these policies are going to be damaging for the American worker and the American consumer, and Trump shouldn’t want his name associated with that. Republicans shouldn’t want their party’s name associated with that. So Republican members of Congress should man up and be willing to override a presidential veto if they need to, to get rid of these damaging policies.
Susan Pendergrass (12:32) They tried somewhat, right? They tried with the Canadian tariffs. Rand Paul did, but it didn’t really make a difference.
Dominic Pino (12:39) Yep, they tried. Four Republicans voted with the Democrats to overturn the national emergency declaration on Canada. That’s a real thing that our federal government has right now. And it’s still in place because the president says so.
Susan Pendergrass (12:53) Yeah, I don’t know why I’m laughing because it’s not funny — a national emergency with Canada. What about this idea that we’re going to quickly move all production of autos back to the United States? During COVID, we were able to quickly ramp up production of masks and PPE. Can we do the same with cars?
Dominic Pino (13:20) It’s a whole lot easier to make a fabric mask than it is to make an automobile. That’s the first difference. The second is, you can look at the investment decisions that car companies make — they always take many years. That’s true of foreign automakers that build plants in the United States, which lots of them have done, and it’s supposed to be the point of this tariff policy. But they’ve done it without the tariff policy, so that should lead you to ask, well, if they were already doing that, why are we trying to make it harder? Those decisions take a long time. They’re reliant on the existence of a skilled workforce, and those skilled workers absolutely exist in the United States, but a lot of them are already employed doing other things. You have to pull them off of those other things to move them into car factories, which in many cases are going to be less productive than the jobs they were doing before, because the jobs they were doing before existed without the government taxing people in order to make them possible. It’s not that the United States doesn’t have a skilled labor force — we have an amazing labor force. They’re just already doing stuff. The unemployment rate continues to be very low, and that’s something we should be happy about. But we’re acting as though we’re in the middle of a depression and need the economy to rebound, when really we just need to build on some successes we already have.
Susan Pendergrass (14:35) Yeah, it’s so perplexing to me because at the Show-Me Institute, we talk a lot about governments trying to use levers to induce people to behave in certain ways — tax increment financing and things like that. If the government just pulled back and stayed out of the way, these things would happen organically. Baseball stadiums would go where the owners think they’re going to make the most money. These things will happen on their own rather than having the government step in and try to make them happen the way it wants. We talk about that all the time. And then this policy to me seems so counterintuitive — the idea that you hurt something so badly that giving a little relief becomes leverage. As a human being that just doesn’t make intuitive sense to me. We’re going to beat this dog, and when we give it a little water it’s going to be so grateful — it won’t be. That dog will hate me if that’s how I treat it. And I feel like that’s what we’re doing. We’re not bringing Canada around to our side.
Dominic Pino (15:38) No, not at all. And Canada was already on our side. They’re a NATO ally, they are our number one trading partner, and we basically have the world’s largest unguarded border with them. And it works fine — it’s great. There’s really no issue. The trade deficit issue there is also crazy. Even if you think trade deficits are bad — which, to be clear, they aren’t — but even if you do, the only reason the United States has a trade deficit with Canada is because of cheap imported Canadian energy. Canada has the thick tar sand oil out in Alberta, and it’s very difficult to refine because of its chemical makeup. The United States — the richest country in the world — has the best petroleum engineers and the best refineries in the world. We have some of the only refineries on the planet that can refine that type of oil. Canada is willing to sell it to American refiners at a discounted rate below the global price because that’s the only way they can get it out of the country. Then the United States refines that oil and turns it into a valuable product, because crude oil by itself is not very useful — you can’t run a car with it, you can’t make plastic with it. You have to refine it. And then we export the refined products out of the Gulf of Mexico, out of Louisiana, and it creates all sorts of economic value for the United States the entire way. And for some reason, that’s the reason for our trade deficit with Canada. How is the United States losing there? How is Canada losing there, for that matter? Both countries are better off. Canada can sell their oil, we can sell the refined products, everybody’s better off.
Susan Pendergrass (17:06) Yeah. I know there are some smart people around the president, and I think I must be missing something. I must have a blind spot. To me, this mostly seems crazy and damaging. So when I read Thomas Sowell and I listen to you and others, maybe I’m not crazy. I just assume there’s some big master plan that I’m not privy to. And all of this is starting to make sense of why I had to give up 15% of my retirement savings when I’m really close to retirement age. Maybe there’s some big plan, but I feel like I hear you saying there may not be a plan.
Dominic Pino (17:50) I’m not seeing one, unfortunately. And it’s not an encouraging sign when you can’t even get the administration to be on the same page with itself when talking about these things.
Susan Pendergrass (17:59) Yeah. What is the base rate? They’re all over the map. I think there was a leak today that there was going to be a pause, and then the White House said there’s not going to be a pause. They don’t even seem to know what page they’re on. Do you think we are heading towards a recession?
Dominic Pino (18:18) I don’t know that, but it’s certainly not going to help our GDP growth. We still have decently strong GDP growth — we have since COVID, and we had before COVID too. COVID was sort of an aberration. We’ve been growing at around two and a half percent a year since about 2018, give or take, which is pretty solid for a developed country as advanced as the United States is. So we still have some room before we get into recession territory. But it’s not going to make GDP growth do better, that’s for sure. And once people start to lose jobs from this, once people start paying more at the store, you’re going to see a lot more backlash. Quite frankly, if you have a recession that you can pretty clearly attribute to one person — which is Donald Trump, because again, he’s doing this unilaterally — it’s going to be hard to argue to voters that it wasn’t his fault.
Susan Pendergrass (19:11) Yeah, and I think it’s interesting that people used to use gas prices as a gauge because you just drive by them and see them every day. But now we all have our bank accounts and our 401ks on our phones, and we’re not waiting for a quarterly statement to find out. We see it going up and down like gas prices. And I believe that’s causing more of the backlash, the anxiety, the angst — we can just see it in real time.
Dominic Pino (19:35) Yeah, for sure. The guys from Americans for Tax Reform talk about how market research shows that people who are actively engaged in the stock market are much more likely to be Republicans. And that’s not just true of rich people — that’s true across the board. Even casual retail investors are more likely to be Republicans than Democrats. So in more ways than one, this is hurting Trump’s own voters.
Susan Pendergrass (20:01) Yeah, that’s perplexing. I know you’re probably in high demand now because people want information about what’s going on. Tariffs — it’s just not a word I ever thought I’d be saying so much. I think of them as very much a thing of the past. Anyone who knows about Smoot-Hawley knows that’s a long time ago. Just give us a little refresher course on what happened in the 30s.
Dominic Pino (20:24) Sure. In the 1930s, there was a big stock market sell-off that spurred a recession that then became the Great Depression over time. In large part it became that way because of government policies — including the Federal Reserve making some terrible decisions on monetary policy that guys like Milton Friedman and Anna Schwartz have written entire books about. The federal government made some bad decisions, including New Deal programs that were basically make-work jobs that were drags on productivity. But also the Smoot-Hawley Tariff Act didn’t help things either. The theory at the time was: we need high tariffs to protect America from unfair foreign competition, and once we rebuild our domestic economy we can go out and engage with the world again. It was completely wrong. Not only was it completely wrong for the United States, but it spurred a global wave of retaliatory tariffs that really helped to wreck free trade that had been growing as a global norm. This happened right between World War I and World War II — obviously not a happy time in world history and not a time we should look back on fondly. It was really bad.
Susan Pendergrass (21:35) It was 100 years ago too. We should have learned from it.
Dominic Pino (21:40) Yeah. But the average tariff rate under Trump’s plan is now higher than the average tariff rate under Smoot-Hawley. So if the tariffs stay in place for any extended period of time, you can expect — and I’m not promising another Great Depression — but it’s certainly not going to be good.
Susan Pendergrass (21:54) Yeah. I think one thing I can say confidently is that people’s impatience is escalating. The “don’t worry, we have a plan” response is wearing very thin. This idea that it’s going to work and you just have to take your medicine — when you haven’t really asked people to step up and sacrifice for a policy that most people don’t even really understand or want to get behind, that’s starting to really wear down. Republicans and — well, Democrats clearly don’t like it — but even some Republicans are coming around. If we were in a war and we all had to get blackout curtains, that’s one thing. But asking everyone to sacrifice their savings for something that no one has explained very well is not going to last. I think there’s going to be backlash.
Dominic Pino (22:50) And that style of argumentation is one that Democrats use all the time. They use it when they talk about clean energy and the transition to green energy. They say, yeah, there’ll be higher energy prices for now as we transition, but it’ll be better in the long term because we’ll have zero emissions and it’ll all be domestically made. They say it’ll help us get off foreign oil, and so on. Now, when Democrats make that argument, Republican voters recoil — and they vote for Republicans. But now Republicans are in office making the same kind of argument. It’s not about the environment, it’s about the global trade system, but the structure is identical: sure, in the short term there’ll be some higher costs, but don’t worry, the government has a plan. That’s just a Democrat style of argument. This is a situation where I actually wish there were a little bit more partisanship — Republicans just having the instinct to say, wait a minute, that sounds like what Democrats say when they’re talking about green energy.
Susan Pendergrass (23:48) Yeah, and another thing I wonder: people I know who are defending this approach — at what point is somebody going to say the emperor has no clothes? I’m a little bit dialed in, but I think most people are seeing it and wondering why people are going on the news every night and defending this approach. It’s confusing. It’s just confusing.
Dominic Pino (24:11) Yeah, absolutely. It’s confusing to all of us. And it’s confusing too because the justifications that get trotted out by different supporters can’t be true at the same time — and this is really the giveaway that it’s nonsense. For example, if the point of the tariffs is to bring back manufacturing jobs, to benefit domestic producers by allowing them to charge higher prices because they don’t face foreign competition, then the tariffs need to stay in place permanently. They can’t go away after negotiation. Similarly, if the purpose of the tariffs is to raise revenue to pay for other tax cuts — which is something the president has been talking about — that means the tariffs have to stay in place not just for now, but for 10 years, because that’s the budget window. So that would mean it’s not a negotiating tool. Now, if it is a negotiating tool, then you need to be willing to remove them. But if we’ve already made a commitment based on projected revenue over 10 years, we can’t remove them now because that would blow up that part of the plan. And if it’s a negotiating tool, it can’t protect domestic industry either, because if we remove the tariffs and foreign goods keep coming in, domestic industry will be right back where it started. The fact that these justifications can’t all be true at the same time should help you understand that there’s actually not a plan here. What’s unfortunate is that I think the administration is taking the keep-them-in-place-for-a-long-time strategy, because they’ve been talking much more recently about how it’s not a negotiation, how it’s going to raise revenue, and how the purpose is to restructure global trade. Those are their words.
Susan Pendergrass (25:47) Yeah, so it’s going to raise $6 trillion over 10 years — the amount they need to extend the Tax Cuts and Jobs Act, basically.
Dominic Pino (25:55) Yeah, $6 trillion. So we’re going to do the largest tax increase in American history to pay for keeping the tax rates the same. Because again, extending the TCJA just means keeping the rates what they are right now.
Susan Pendergrass (26:09) So to do that, we have to raise taxes. That’s incredible. Well, Dominic, thank you so much for coming on and talking to us. I do understand it better now. I’m still perplexed, but I wake up every morning, look at the headlines, and think, now what’s happened? The chaos factor is getting on my nerves, but I appreciate you coming and explaining it in such a concise and clear way.
Dominic Pino (26:32) Good, I hope it helped. And if it makes you feel any better, I’m probably just as confused as you are.
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