President Trump has clearly started off his calving season very early. We often decry politicians who abandon their pre-election promises as soon as they get into office, but sometimes I think it would be much better if they did.

The one area I wished Trump had done so was on tariffs.

Trump’s gripe is that too many countries are running trade surpluses with the US and, as he thinks this is a bad thing, he wants to translate these surpluses into deficits.

The questions that arise are whether bilateral trade imbalances are in some sense “bad” and whether the imposition of tariffs can convert surpluses into deficits.

Ireland is in his sights. The US was our single biggest goods exporting partner in 2023, accounting for €54bn of exported goods from Ireland or over 28% of the total.

We’ve a merchandise trade surplus with the US of about €31bn, but an overall trade deficit, when you include services, of €109bn. It’s curious that trade services has been rarely mentioned of late.

Laws of physics

Early in your training as an economist you learn that tariffs are a bad thing.

They’re a flawed legacy from a distant time when economic thinking was in its infancy. But bad economic ideas, unlike the proven laws of physics, have a tendency to be resurrected from time to time. And most of the time when they are, they result in negative consequences.

One of the greatest economists of all time, John Maynard Keynes, once remarked that: “The ideas of economists … are more powerful than is commonly understood … practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.

“Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

Trump’s attachment to tariffs can be traced back to the French mercantilists of the 1500s. The mercantilists thought that the wealth of a nation depended on its ability to accumulate exports at the expense of imports.

This archaic view equated the wealth of nations to their ability to accumulate gold and silver, stored under lock and key in the treasury.

The fundamental flaw in mercantilism, which incidentally was first pointed out over 270 years ago, is that the wealth of a nation has nothing to do with its ability to maintain a permanent trade surplus with its trading partners.

Its wealth lies in its capacity to grow its output by being competitive and innovative.

The pattern of trade reflects the fact that every country is relatively better at producing some goods and services rather than others.

It will export those goods and services where it has a relative competitive advantage and import those that it is relatively less efficient at producing.

It will err grievously, and push down its living standards, if it attempts to produce those goods and services less competitively than its trading partners.

A tariff is nothing more that a discriminatory sales tax. In the importing country, it discriminates by taxing foreign imported goods and services more highly than domestically produced goods and services.

It places exporting countries like ours at a risk of reduced export sales and hence reduced living standards.

The scale of this adjustment will depend on the response of demand for the higher priced goods in the importing country and the ability of the exporting country to find alternative markets.

Resilient

I would hope that the demand for Irish dairy products would be resilient in the face of price increases, as price isn’t the dominant driver of demand.

But it’s not just the consumer market that will be affected by tariff hikes. In the highly integrated inter-country supply chains that exist today, business-to-business transactions will also be affected. A product which production is finalised in the US uses components that are imported from across the world.

The imposition of tariffs on the imported components is a case of the importing country “shooting itself in the foot”.

Tariffs will not only raise the relative prices of final imported goods and the prices of goods produced in the importing country but they are also very likely to lead to inflation, or, persistently rising prices. This impact is the ultimate argument against tariffs. Higher inflation will lead to competitiveness losses in the importing across all of its goods and services. This implies that there’s a self regulating mechanism in the economy that effectively stalls any ultimate improvement in the trade balance.

In the meantime, both the exporting country and the importing country will have suffered in terms of lost jobs, weaker growth and living standards.

I’m afraid if the US sticks to its guns, that’s what the rest of us are facing for the next few years.