Despite being a proud member of the University of Virginia School of Law Class of 1992, I’m an economist, not a lawyer. Yet had I chosen upon receipt of my JD degree to “do law” rather than return to teaching economics, I certainly would have steered clear of constitutional law. Mastering the subtleties of that branch of jurisprudence requires a mind more supple than my own.
Still, one need not be a Randy Barnett, Richard Epstein, or attorney for the indispensable Institute for Justice to grasp some basic concepts of America’s constitutional order. Crucial to this order is the separation of powers, not only between the national government and state governments, but also among the three different branches of the national government.
One clear passage of the Constitution has been in the news lately because of President Trump’s many executive orders imposing (and often delaying) tariffs. The Constitution’s passage is this: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises.” This passage from Article I, Section 8 is universally and correctly interpreted to give authority to impose tariffs exclusively to Congress. Neither the executive branch nor the judicial branch have tariff-making authority.
For better or worse, however, the courts have long allowed Congress to delegate to the executive branch many of Congress’s legislative powers. The principal impetus for such delegation came in the early twentieth century from ‘Progressives’ who insisted that our increasingly complex modern society renders the Founding Fathers’ worries about the potential abuse of government power quaint and insubstantial beside the purported need for a government that can act quickly and decisively. And an executive branch in charge of one person can act more quickly and decisively than can a two-house legislature in charge of several hundred persons.
And so among those of its powers that Congress has delegated to the executive branch is the “Power to lay and collect … Duties” (that is, tariffs). (It must be said that Mr. Trump’s on-again, off-again tariff commands prove that, while the actions of the executive can indeed be quick, they aren’t necessarily decisive.) Such delegation of Congressional authority always requires an enabling statute that declares that a delegation is being made and that spells out the terms of that delegation.
The chief enabling statute that Mr. Trump used to justify his “Liberation Day” tariffs is the 1977 International Emergency Economic Powers Act (IEEPA), which, as described by the Congressional Research Service, “provides the President broad authority to regulate a variety of economic transactions following a declaration of national emergency.”
I’m incompetent to discuss whether or not this statute, despite making no mention of tariffs, nevertheless authorizes the president to impose tariffs. Some celebrated legal scholars insist that it does not so authorize; others insist that it does. I want instead to emphasize just how — to describe the matter as clinically as possible — preposterous is the alleged “emergency” that Mr. Trump declared as justification of his “Liberation Day” tariffs. According to the April 2 Executive Order, the emergency that justifies these tariffs are persistent American trade deficits. But not just persistent trade deficits; persistent “goods trade deficits.” But further, not just persistent “goods trade deficits”; persistent “goods trade deficits” with individual countries.
According to Mr. Trump, America now confronts an emergency in the form of bilateral “goods trade deficits” with many of the different individual countries with which it trades. The implication is that this emergency will end only if and when the following outcome is achieved: the value of goods — tangible things — that we Americans export each year to Algeria is at least as great as is the value of goods that we import each year from Algeria, and the value of goods that we Americans export each year to Angola is at least as great as is the value of goods that we import each year from Angola, and the value of goods that we Americans export each year to Bangladesh is at least as great as is the value of goods that we import each year from Bangladesh, and so on for every individual country, down to Zimbabwe, with which we Americans conduct trade.
This allegation of “national emergency” is nonsense, not on mere stilts, but atop a rocket taller than Everest and blasting off at Mach 13,000 for the deepest regions of outer space.
The concept of trade deficits is economically meaningful only when it encompasses trade in both goods and services, and then only for trade with the rest of the world. Neither “goods trade deficits” nor one country’s trade deficit with another country has any economic meaning. And meaning isn’t miraculously imparted to these concepts by pairing them with each other. Instead, this pairing — which Mr. Trump does — only multiplies the nonsense.
US Trade Deficits in Goods and Services With the Rest of the World
At least the concept of trade deficits in goods and services with the rest of the world is economically meaningful. But its meaning is the opposite of what Mr. Trump and other protectionists suppose. American trade deficits arise whenever America is a net recipient of global capital. If foreigners want to invest in America, they cannot spend all of their dollars buying goods and services from America. So as America, relative to other countries, becomes a more attractive place to invest, foreigners spend a smaller portion of their dollars buying American exports, and invest a larger portion of their dollars in American companies. America runs larger trade deficits, but every cent of American trade deficits (more accurately, “current-account deficits”) is a cent of American capital-account surpluses.
Because capital funds the launch of new businesses, the expansion of existing enterprises, and research and development that fuels innovation, the more capital America has, the stronger is our economy. Therefore, US goods and services trade deficits with the rest of the world — that is, US capital-account surpluses with the rest of the world — both evince American economic strength and contribute to it.
(As an aside: Americans continue to benefit from this net inflow of global capital even as the US government becomes more fiscally incontinent. Without the willingness of foreigners to buy US treasuries, the fiscal burden on us Americans of our irresponsible federal government would be even heavier.)
Since America last ran an annual trade surplus, in 1975, industrial production has risen by 154 percent, industrial capacity by 147 percent, inflation-adjusted per-capita GDP by 145 percent, and the average real net worth of an American household by 232 percent. And since 1989 (the earliest year for which I can find reliable data), the real net worth of the average American household in the bottom 50 percent of households has risen by 84 percent.
The above are only a handful of measures by which America’s economy has dramatically improved over the past half-century of persistent annual US trade deficits. Goods and services US trade deficits with the rest of the world, far from being an emergency crying out for government correction, are a blessing for which we Americans should be enormously grateful.
US Goods Trade Deficits…
But what about the “deficits” that so frighten the president: US “goods trade” deficits with individual countries?
Because US goods and services trade deficits with the rest of the world aren’t a problem, logic tells us that the component parts of these deficits aren’t a problem. No more need be said. Yet it’s nevertheless worthwhile to make a few points.
First, there’s nothing economically special about goods production. A dollar’s worth of services such as medical care, software engineering, education, or retailing has the same economic value as does a dollar’s worth of goods such as steel, soybeans, lumber, or automobiles. And because nearly 80 percent of American production today is of services — meaning, most Americans today have a comparative advantage at producing services — it would be bizarre if we Americans did not regularly import more goods than we export.
Put differently, the concept of a “goods trade deficit” makes no more sense than does the concept of a “red-things trade deficit.” A dollar’s worth of roses, beef, merlot, and other red things is the same value as a dollar’s worth of aluminum, maize, chardonnay, and other non-red things. If you understand the absurdity of fretting about a red-things trade deficit, you should understand the equal absurdity of fretting about a tangible-things trade deficit.
… With Individual Countries
What about trade deficits with each individual country? The answer is simple: these ‘deficits’ are irrelevant.
There’s no reason to believe that even in a world of only two countries that trade would necessarily be balanced. (If Country One has a consistently better investment climate than Country Two, Country One could run persistent trade deficits with the rest of the world, namely, Country Two.) But in a world of more than two countries, the notion that trade between any pair of countries will or should be ‘balanced’ is downright ridiculous. This notion makes no more sense than the belief that your dentist will or should buy from you as much as you buy from him.
These two notions — goods trade deficits, and bilateral trade deficits — are each economically absurd. Yet not only does Trump mash together these two absurdities into a single super-absurd concept (goods trade deficits with each individual country), the president asserts that a key expectation of the architects of the post-WWII global trading system was that the US would have balanced trade in goods with every other country. In his Executive order he claims that “the post-war international economic system was based upon three incorrect assumptions,” one of which is that “the United States would not accrue large and persistent goods trade deficits” with individual countries.
This claim is baseless. No person who played any role in designing the General Agreement on Tariffs and Trade (GATT) or its successor, the WTO — and no one who negotiated NAFTA and other pre-Trump trade agreements — ever predicted that as a result of these agreements the US would or should have balanced trade in goods with the rest of the world, and much less that it would or should have balanced trade in goods with each individual country. Indeed, especially because by the mid-twentieth century more than half of US output was of services, had anyone back then dared offer such a prediction, that person would have rightly been dismissed as an economic ignoramus.
No Emergency, No Authority
Whatever the merits of Congressional delegation of tariff-making authority to the president, if that delegation first requires a presidential declaration of an emergency (as the IEEPA does), surely any such emergency declaration must be plausible. Trump’s declaration, alas, is comical, both economically and in its history. Or, rather, his emergency declaration would be comical were it not the basis for actual tariff hikes that will do much damage to America’s and the world’s economy.
