Tariffs have their day at the U.S. Supreme Court.
The Supreme Court of the United States hears oral arguments on Wednesday in one of the biggest cases of the post-World War II era involving the economic powers of the president. There are more than a handful of explainers out there that can walk you through the questions at hand, the genesis of the case, where economists and businesses fall, and what the likely outcome is. (Spoiler alert on the last point: No one knows!)
Our organization did not take a position on the case or file an amicus brief. That is not to say we are not interested. I am particularly interested in one of the questions that may be raised by justices on Wednesday: Does the trade deficit constitute an emergency? Because that is the rationale President Donald Trump provided when he imposed tariffs on a wide array of nations under the International Emergency Economic Powers Act (IEEPA).
Setting aside the questions of whether tariffs are the right tool to address the trade deficit, or the legality of their utilization under IEEPA, many pundits and economists have dismissed the trade deficit itself as even a matter of concern.
I am here to tell you that they are wrong, as economists often are on international trade dynamics and impacts.
One of the most compelling arguments Trump has is that others have raised the trade deficit as a matter of grave concern. Congress in 1998 passed a law creating a commission to study the trade deficit. While the commissioners weren’t unanimous on how to address it, they all agreed that large and growing trade deficits are not sustainable.
Warren Buffett, the most highly respected private investor in America, developed a proposal to reduce or eliminate the trade deficit in 2003. The headline of his piece, which appeared in Forbes Magazine, was America’s Growing Trade Deficit Is Selling the Nation Out From Under Us. Here’s a Way to Fix the Problem—And We Need to Do It Now.
In 2007, Chairman of the Federal Reserve Ben Bernanke also raised alarms about the trade deficit and growing international imbalances taking shape. The Associated Press headline was Ben Bernanke urges a trade imbalance fix.
If the U.S. Congress, Warren Buffett, Ben Bernanke, and many others, I might add, raised urgent concerns, why wasn’t anything done? Because the solution is not terribly easy. To lower the trade deficit, a government would need to seriously devalue its currency, or find ways to lower the consumption of imports, and boost the production of goods for consumption in the U.S. and abroad. Tariffs are among the bluntest instruments available, but over time, they could be effective. No president has been willing to utilize them as much as Trump, which is one of the reasons it has taken until now to declare the trade deficit an emergency.
It is easy to dismiss this declaration because we have normalized living in and with this emergency while the factors contributing to the deficit have introduced a persistent level of background economic insecurity into American life. Millions of Americans have had their working lives upended in recent memory by import shocks.
Goods trade deficits that have grown steadily over the past 40 years have hollowed out the U.S. manufacturing base, closed factories, and triggered job losses. They have impeded the establishment of critical supply chains and hamper our ability to scale up important emerging manufacturing industries. You have heard someone say, “We don’t make anything here anymore.” That is an exaggeration, but we have seen it play out with shortages of PPE, semiconductors, critical minerals, single-source providers of key products, and more. The trade deficit represents the erosion of our industrial base and continuing to tolerate it is an economic and security mistake.
The evidence says it is a national emergency that has grown more dire by the day for decades. We maintain these trillion-dollar goods trade deficits in an increasingly volatile global economy, which has been routinely disrupted by geopolitical tension, technological competition, and black swan events like pandemics. We should also consider that these deficits are not solely self-imposed; they have also been caused by systemic disadvantages in international commerce, like the World Trade Organization’s faulty dispute settlement process, as well as predatory foreign practices. The most glaring examples are found in the current workshop to the world, China, a mercantilist state that deeply subsidizes its exports. The U.S. has maintained an annual China goods trade deficit worth hundreds of billions of dollars for 20 years. As such, we have allowed ourselves to become deeply reliant on that country for any number of critical materials and products.
In this environment, the U.S. must maintain the capacity to produce its own essential goods, whether it is steel, medical devices or specialized electronic equipment. Failure to do so leaves the country exposed to new shocks and limits our ability to respond to them. And that is what Trump’s emergency declaration is: An attempt to claw back our industrial capacity.
Leave it to the courts to determine the legality of the president’s declaration. But our trade deficits are indeed a national emergency. They are a risk we should not continually afford.