Former Treasury Secretary Larry Summers took aim at President Donald Trump’s tough rhetoric on trade during an interview with Yahoo Finance Friday, contending it could “potentially do enormous damage.”
Asked by Yahoo Finance Editor-in-Chief Andy Serwer whether protectionism could make the US poorer, Summers acknowledged “legitimate issues” with China’s commercial practices and he contended that the US should call out countries that violate trade agreements.
But Summers suggested that Trump’s disparagement of the North American Free Trade Agreement may hurt the US in the long-term even though the president has “yelled at a few companies” and kept some jobs in the US. That’s because Trump’s talk about Mexico and the uncertain fate of NAFTA have helped push the value of the peso down 15%, Summers noted.
“That’s made Mexico have a 15% labor cost advantage that it didn’t have before we started pursuing these policies,” Summers said. “So, I think on net what’s happened has been an unambiguous and clear negative for the industrial heartland.”
Summers does not believe the border adjustment tax, or BAT, will help matters in the heartland or the rest of the world, either. The BAT taxes companies that import products to the US and gives tax breaks to companies that export instead, providing an incentive to do the latter. The goal is to bring jobs back to the US. In the process, the value of the dollar will go up, as well — and a strong dollar will make US exports more expensive.
“I think on balance, the border adjustment tax is a serious mistake. On balance, I think it would do great damage to retailing and other sectors that depend on imports. And it would lead to a substantial increase in the value of the dollar, which would hurt many sectors of the economy, and also I think would cause substantial financial upheaval around the world,” Summers said. “Given that there are many, many dollar debtors who have their assets denominated in local currency. And so, when the dollar went up, they would find themselves upside-down. I think it’s an experiment we don’t want to run.”
More from our interview with Larry Summers:
Larry Summers is worried about ‘enormous damage’ to the economy
Larry Summers warns against drawing conclusions from the stock market
Full Interview: