Sweeping tariffs announced earlier this month by the Donald Trump administration are grounded in fundamental economic "fallacies" and risk triggering stagflation, financial instability and harm to US households and competitiveness, economists have said.

"The Trump tariff approach is premised on five fallacies and harms the economy in four major ways," said Lawrence Summers, former US treasury secretary and current Harvard University professor.

He spoke during an April 17 event hosted by the Peterson Institute for International Economics, or PIIE, on the macroeconomic impact of new US international policies.

Summers said the policy is marked by protectionism, nationalism, disregard for macroeconomic stability, and uses government tools against perceived adversaries.

"That is what we are seeing in the United States today," Summers said, adding the crucial difference that the US is central to the global economy."This is by far the most dangerous moment since the end of the Cold War."

The first fallacy, he said, is the focus on bilateral trade deficits as a sign of exploitation. "I run a big trade surplus with Harvard; I run a big trade deficit with my golf club. The golf club is not exploiting me," he said, adding that "there is no logic to thinking about bilateral deficits as a measure of exploitation".

Second, Summers disputed that trade deficits are inherently negative, saying they are the arithmetic counterpart to capital inflows. "I would rather live in a country that capital is trying to get into than a country that capital is trying to get out of," he said.

Third, he said tariffs are not a primary driver of overall trade balances, which are more linked to national spending versus income."Look at non-protectionist Switzerland and its vast surplus. Look at heavily protectionist Brazil and its substantial deficit," Summers said.

The fourth fallacy is the belief that manufacturing holds the key to broad future prosperity for US citizens, he said.

Citing research by PIIE's Robert Lawrence, Summers pointed to a global decline in manufacturing's share of employment, driven by technology. He emphasized that only about 4 percent of US employment is in manufacturing production, a "sharply declining" figure.

"The idea that this is somehow going to be transformational for the American economy … is, to be direct, completely delusional," he said.

Finally, Summers said that indiscriminate tariffs often backfire as a manufacturing support strategy because imports are frequently crucial inputs for domestic production and exports.

"Classic example: There are 60 times as many people working in the steel-using industries as there are in the steel industry," he said."So, when we raise the price of steel… we are on net hurting competitiveness rather than increasing competitiveness."

Summers also outlined four major costs stemming from the policies. The first is a "major stagflationary shock", increasing prices while simultaneously reducing income, spending and employment.

The second risk is a financial crisis. Summers said he observed a shift in US markets toward an emerging market pattern where falling stocks coincide with rising bond yields and currency weakness, potentially exacerbated by large-scale selling of US assets, such as Treasuries, by foreign entities.

Third is lost competitiveness due to undermining of gains through international specialization; fourth, are the "epic levels" of uncertainty generated by an erratic policy environment, discouraging investment and economic activity, Summers said.

Chad Bown, a PIIE senior fellow and former State Department chief economist, talked about the confusion surrounding tariff announcements and their real-world effects, at another PIIE event on the same day.

Bown mentioned smartphones, which were largely spared during the first Trump administration but now those from China face potential 20 percent tariffs. "Consumers this time around might say, 'Hey, the stuff that I buy is suddenly being hit with tariffs,'" he said.

Bown said that companies shifted some supply chains out of China during the first Trump administration, often to countries like Vietnam or Mexico. But with broad tariffs now potentially hitting all countries, that "China plus one" strategy becomes less viable.

Facing uncertainty

"When these companies are faced with uncertainty with their supply chains, the natural response for them is to just say, 'We're going to wait. We're not going to make investments anywhere,'" Bown said.

Bown also expressed concern over the world potentially breaking into "distinct trading blocks, each increasingly isolated".

"Unless and until China and the United States, Europe, and the other major economies can get together and start talking to each other, the world, I think, is going to move in that direction," Bown said.

Olivier Blanchard, PIIE senior fellow and former chief economist of the International Monetary Fund, said of Summers' analysis, "I agree with him 100 percent on everything."

Blanchard said the global situation has moved from a rules-based system "to a world of the law of the jungle".

He also spoke of the complexity of the EU-US-China relationship, suggesting that Europe is unlikely to fully align with a confrontational US stance toward China, given how Europe itself has been treated regarding trade policy.

In conclusion, Summers said,"What we are seeing is an unprecedented and massive self-inflicted economic wound", adding any recent market calm reflects hopes that the policies will be reversed, not become permanent.

He said the path forward depends on a "course correction that has never been more necessary in the last half century than in the United States today".

yifanxu@chinadailyusa.com