The economic idiot who occupies the White House is it again folks. He just imposed tariffs on an additional $200 Billion of imported Chinese products. This is what a real trade war looks like and it was an economically stupid thing to do.
When I was in the process of getting my MBA degree I was inducted into the Economics National Honor Society, so I know a bit about economics. I’m not saying that to blow my own horn, but only to give you some confidence in what I am about to write. I am merely pointing out that, unlike Trump, I did not sleep through my economic classes and/or paid someone else to take my tests.
I can tell you with great certainty that just about every reputable economist in the world believes that no one wins a trade war; that all the participating countries lose and lose badly. Understanding why is not real difficult. Let’s take a simple example:
When one country imposes new a new tariff on the goods imported from another country it is essentially levying a tax on the ultimate consumers of that product, its own people. For example, if the US imposes a 25% tariff on shirts made in China, the government collects that 25% tax on those products at the port of entry, but that tax will almost always passed on to the American consumers who ultimately buy those shirts. It is the consumers of the product who end up paying the tax to the US government. That cause’s inflation in the country that imposed the tariff.
Of course, when American consumers are forced to pay more for products like shirts, they will buy fewer of those shirts and which hurts manufacturers who make shirts back in China. Of course, that is the whole purpose of the tariff in the first place, to put economic pressure on the Chinese government to do the US government’s bidding. Since they are exporting less shirts to the US, the Chinese shirt manufactures will have to cut their production and will often have to lay off some of their workers. Again, it is the everyday Chinese citizens who bear the brunt of the tariff, but the damage to the economies of the two countries involved doesn’t end there.
China, a major economic power in its own right, won’t like being pushed around by the United States, so they will almost always retaliate by imposing a tariff on an American product that their country imports. Since we are keeping it simple let’s say that product is soy beans. Essentially the Chinese government imposes a tax on its own citizens when they buy product made with American soy beans. Those people will naturally buy less soy bean products which hurts the American soybean farmers. Again, it is ordinary American and Chinese citizens who are hurt by the new Chinese tariff.
Now take our simple example and ratchet it a million times and you will understand the magnitude of the trade war that Trump has committed this county to waging against China. Earlier this year he imposed tariffs on $50 Billion dollars of imported Chinese products, essentially imposing taxes which will eventually be paid by US consumers. China retaliated in kind imposing tariffs on US imports, specifically targeting products such as farm goods produced in states which support Trump politically. (These are no economic dummies we are dealing with; they didn’t sleep through their economic classes either.)
Of course, these two sets of tariffs hurt consumers as well as producers and farmers in both countries, but as in most trade wars the economic misery didn’t stop there. Yesterday Trump quadrupled down, implementing tariffs on $200 Billion on imported Chinese goods. The tariffs on those products will initially be 10% but will increase to 25% at the first of next year. (Trump is obviously trying to avoid ticking off American consumers too badly during the Christmas holidays.) The Chinese were expecting this and have already identified new tariffs on American goods which will go into effect at the same time.
However, it probably won’t even end there as Trump has said that he is also considering levying tariffs on an additional $250 Billion of Chinese goods if the Chinese government responds with new tariffs to his current move, which they have already promised to do. If Trump carries out his threat, expect the Chinese government to retaliate yet again.
This what a full-fledged trade war looks like with the economies of both countries in peril. Rising inflation coupled with hundreds of thousands of people thrown out of their jobs has the potential to bring down any economy, even those of the world’s two biggest economic powers. Trump isn’t just betting, he is going “all in” on his belief that in this trade war he has the advantage and that the Chinese will ultimately capitulate. (Remember, he sees himself as the world’s greatest negociator.)
Long before Trump became president he railed against the US-China trade imbalance. Last year U.S. exports to China totaled $130 billion while imports from China amounted to $506 billion. However, in economic terms that is not always a disadvantage for the US. Remember, we import many products from China because they can be made cheaper there. Many US companies send raw materials to China where their finished products are manufactured so they can offer them to American consumers at a much lower price. That means that you and I can spend much less for those products when we buy them from retailers like Walmart. In addition, that Chinese trade imbalance obviously hasn’t been hurting our economy too much because it has been doing quite well lately, at least until Trump started his meddling.
However, Trump believes the large trade imbalance is his “ace in the hole” because he believes that the Chinese have far more to lose in a trade war with the US. That’s true to a certain extent, but situation is much more complicated than that.
For one thing, unlike in the US, information in China does not flow freely; to a large extent the government controls what their people see and hear in the media and over the internet. When American citizens are hurt by this tariff war, the national media will be all over it. That attention will put extreme pressure on politicians, especially Republicans in Congress. (That’s why Congressional Republicans, most of whom are philosophically opposed tariffs anyway, are appealing to Trump to back off.) On the other hand, in China the people will hear only one side to the story. Trump and the United State painted as the evil villains who are causing their economic misery which never the less must be endured to for the sake of their country. Chinese leaders are likely to have fewer political problems with the results of the trade war than their US counterparts.
In addition, no national leaders, not even those in the Chinese government, can afford to look weak in the eyes of its people. Chinese President Xi Jinping cannot afford to appear to be capitulating to Trump’s demands, especially when those demands obviously run counter to the well being of the Chinese people.
If you want to understand how this trade war could develop going forward if neither sides backs down we only need to look back to the 1930’s and the last big trade war. The depression was just getting underway and like today, America was turning inward with protectionist policies, restricting trade with other countries with the objective of saving Americans factories. Congress passed the Tariff Act of 1930 commonly known as the Smoot-Hawley Tariff Act, raising American tariffs to record levels.
Other nations retaliated with tariffs of their own which soon elevated the economic conflict into an all out tit for tat trade war. Instead of saving American jobs the legislation ultimately had the effect of significantly deepening the world-wide depression and causing many more Americans factories to shut down. Also keep in mind that back then the world was not nearly so economically interconnected as it is today.
After World War II the community of nation nations formed the World Trade Organization to regulate international trade and settle trade disputes between countries in order to keep anything like that from happening again. This is the same WTO which Trump constantly criticizes as being unfair to the US despite that the organization has ruled in our favor in 85% of the disputes we have brought before it.
Hopefully, Trump can be forced somehow to stand down before real damage is done. However, given his narcissistic personality and his unshakable belief that he is the world’s greatest negotiator, he will probably have to be removed from office before the damage can be minimized. This is but another way in which Donald J. Trump is an ever-present danger to our nation.
Cajun 9/18/2018
PS: In my next blog article I will explain why Trump is stupidly going about dealing with our trade ssues with China in exactly the wrong way.