Krugman on the Japan trade deal:
Earlier this week the Trump administration triumphantly announced that it had scored a big trade deal with Japan. Now the reviews are in, and the deal basically received a 0% score on Rotten Tomatoes. And I’m not talking about the reactions of economists; I’m talking about the reaction from the manufacturing sector, both management and labor, which Trump’s tariffs were supposed to help. [….]
In a matter of months, we’ve gone from a regime of very low trade barriers — achieved through generations of hard bargaining in international trade negotiations — to Smoot-Hawley-level tariffs. Many businesses, however, have taken comfort in the belief that extremely high tariffs were temporary, that they’d come back down as Trump began making deals with other nations.
But Japan has struck a deal — and is left facing a tariff of 15 percent, compared with an average of 1.6 percent BT (Before Trump.) Reports suggest that a similar deal may be coming with the European Union. At this point it looks as if we’re heading for a new normal in which most imports are taxed at 15 percent, while some face even higher tariffs.
Trump claims that foreigners will pay these tariffs, and Trump apologists are pointing to consumer prices, which haven’t yet shown a clear spike, as evidence that he’s right. But they’re looking at the wrong price measure. What you want to look at are import prices — the prices foreign producers are charging America, prices tracked by the Bureau of Labor Statistics.
If Trump were right, we’d be seeing a large fall in import prices, offsetting the tariff hikes. It would look like this:
That is, if you look at the right price measures, foreigners don’t seem to be paying any significant share of the Trump tariffs.
Who is paying? So far, the burden seems to be falling mainly on U.S. businesses, which are definitely seeing a sharp rise in costs…And we’re currently experiencing cost inflation at levels not seen since the summer of 2022.
So far, these costs haven’t been fully passed on to consumers, probably in part because businesses have been expecting tariffs to come down. But once businesses see how high tariffs on Japan and Europe are after they’ve made deals, their willingness to absorb the tariffs rather than passing them on to consumers will evaporate.
According to Krugman, this Japan “deal” has everyone spooked because it’s so stupid that it essentially “tilts the playing field between U.S. and Japanese producers of cars, and perhaps other products, in Japan’s favor.”
You might imagine that making a deal with one of our most important trading partners must have involved a team of experienced, skilled negotiators backed by economic experts. But in reality it was clearly pure amateur hour. Look at the photo at the top of this post, from CNBC. It shows Trump with a card in front of him laying out one much-hyped though probably meaningless part of the deal, a promise by Japan to invest in America. How much? The card says $400 billion, but that number was crossed out by hand and replaced with $500 billion, which somehow became $550 billion in the final announcement.
That’s what we’re dealing with. Trump basically believes that nothing matters except what he says and to some extent, at least, that’s been true about everything. He makes his own reality. So far, businesses and other institutions have gone along with that, apparently assuming that everything will always work out for him — and them. We’ll find out soon if that’s true.