Take this statement: “We are losing billions of dollars through on-going trade deficits and it has to stop.” Is this true or false? It is the mainstay of Trump’s attitude towards foreign trade. It does have a seductive ring to it, and a recent CBS poll says that six in ten of us favor Trump’s efforts. Some recent man-on-the-street interviews give the impression that many of us think showing a little muscle is a good thing. Trump says that trade wars are easy to win. A little short-term pain is all that is happening here and that all will be well soon. After all, isn’t this just part of Making America Great Again?
No, it is not! The facts are that Trump’s entire pitch on foreign trade is total malarkey. Every single word out of Trump’s mouth is wrong. Every word. What he has said demonstrates a stunning failure to grasp even the fundamentals of international trade. He clearly does not understand the consequences of a bilateral trade imbalance and he has not the faintest idea of how tariffs work.
First and most obvious, we are not losing any money as a nation in trade deficits. In a growing economy, an imbalance in trade is merely an indication that there are surplus dollars on one side available for discretionary spending. Since we are by far the largest economy in the world, it is expected that we will have the most in surplus dollars for discretionary spending. The U.S. has operated with a worldwide negative trade balance since 1975 and our economy has grown and continues to grow exponentially. In its simplest form, the outflow of excess U.S. dollars from one year’s imports provides funds to our trading partners for the next year’s increase in exports, and both economies prosper.
Unless political pressures get in the way, or truly illegal or unwarranted government intervention is involved, we do not need to worry about the other country. As long as our own economy is strong and growing, with modest inflation, manageable interest rates, and exchange rates close to par, the market forces alone will keep our interests in a workable position relative to our trading partners.
When one or more of these ratios get out of whack, such as where one side gets unfairly involved in specific markets by way of price fixing, subsidized dumping, or currency manipulation, for example, direct action may be warranted. Adjusting or withholding foreign aid, implementing domestic subsidies, imposing trade embargoes and the use of specific, targeted tariffs are common methods of correcting or countering specific ills in specific trading conditions often found in foreign markets. When needed, these measures are applied deftly, with tweezers and scalpel – not a mean ax or wrecking ball. The objective is to target the precise problem without tipping over the whole table.
One aspect that everyone agrees should not be considered is any notion that trade can be brought into balance by the imposition of general tariffs. One would think that the disastrous consequences of the last attempt to protect the U.S. economy with general tariffs – the Smoot Hawley tariffs of the 1930s – would prevent ever again any serious attempts at trying to force an adjustment to the balance of trade through general tariffs. The Smoot-Hawley tariffs were a disaster; they had no impact on general trade, triggered worldwide retaliation, and worked to worsen and prolong the great depression by years. It took the U.S. decades to rectify the damage done by these tariffs.
And yet, here comes Trump. Against all advice, Trump is using general tariffs to push us into a trade war with China, our second largest trading partner, without cause other than his subjective belief that trading with China is not “fair” and with no defined objective to end his war other than that trade with China has to become “more fair.”
General tariffs are an excise tax upon the U.S. consumer, no matter what Trump and his henchmen try to claim. The objective of a tariff is to artificially increase the price of the item in order to drive the volume of sales or imports down. If the price increases, demand goes down. This is basic economics. The direct impact is on the exporting country because their exports will go down and their revenues will suffer. But the indirect impact is on the consumers in the importing country because their costs are going to go up. Furthermore, general tariffs have the effect of a double whammy because they invariably foster retaliatory tariffs by the other country.
The point is that these tariffs are NOT just being paid by the Chinese exporting companies or the Chinese government. The effects of tariffs are felt by everybody in the market, both sides. After less than three quarters of a year of general tariffs, being since mid-summer 2018, the impact already felt by the U.S. consumer from higher costs and lost jobs is estimated at an average of over $860 per family. This figure will dramatically increase if Trump imposes the next round of tariffs on $300 billion in general trade from China, which he has threatened to do by the end of June.
The imposition of broad tariffs have not produced any results other than to depress markets and cost jobs in both countries and increase the cost of most products involved to consumers in both countries. By the end of May 2019 these tariffs are estimated to have reduced U.S. long-run GDP by 0.2%, reduced wages by 0.13%, and eliminated 156.000 full time equivalent jobs. If Trump imposes the next round of 25% general tariffs on the remaining $300 billion in Chinese imports, which he has threatened to do by the end of June, the hit on our GDP is expected to be at or around -0.45%. (The Tax Foundation, May 31, 2019) In the U.S., each tenth of percentile in reduction of GDP translates to $20 billion, or 79,000 full time equivalent jobs
Trump is ignoring the progress that has been made in trade with China and is making demands that China cannot and will not meet. China is not coming around, we are not well positioned, and no deal with China is imminent. Most experts agree that China is giving every sign of being ready to hunker down and weather out the storm for as long as Trump remains intransigent – or in office. His decision to double down and expands the tariffs broadly across the entire market is about to turn into a complete disaster.
To be sure, is China faring less well than us, with its long-term growth rate slipping from 9% to less than 6%. The turmoil in the market has caused problems with its monetary supply, strengthening the dollar against the yuan (which is going the wrong way if one wants to dampen the volume of imports from China), and wreaking general havoc in its financial markets. But China, culturally and politically, is better positioned to withstand the stress. The Chinese economy is regulated to a degree not possible in the U.S., with targets and objectives broken down into specific five-year strategies. The Chinese are always maneuvering with the long-term effect in mind and the Oriental patience is legendary.
On the other hand, Trump is steadfastly ignoring all the sound economic advice he is being given from all sides – including from well qualified Republicans. Even though the political pressures on Trump from the collapsing export markets and the massive increases in consumer prices throughout the U.S. economy are enormous, and even though China has not flinched or quivered even an eyebrow, Trumps inability to admit error and his penchant for doubling down in the face of impending disaster indicate no relief in sight. Trump seems determined to take the recovering and steadily growing economy he inherited from Barak Obama and, having jerked one of the foundational underpinnings out with an unsupportable trillion-dollar tax cut, he is now determined to wreck international trade. It will only take a few more moves to stall the economy out and turn it all into a nose-dive.
Hang on tight.