Business, Politics

The “T” Word – Tariffs In A Global Economy

Chris Morley / August 2, 2018

Trump has called trade wars easy to win and that tariffs are good. He has also said that a trade deficit means we are losing money. He specifically said if we have no trade we’d have more money. He is categorically incorrect.

Tariffs are protectionist measures used by governments to intervene in a free market and choose winners and losers. The first recorded tariffs were imposed by the Roman Empire. That means there is over 2000 years of history to study. They amount to a tax on the consumer as we pay higher prices for goods that have taxed components or are taxed in whole. The companies we pay those higher prices to give the difference to the government. The first tariffs in the US were imposed not long after the founding of this country as a way to fund the government. However, and especially in today’s interconnected global business environment, they increase costs for domestic manufacturers of goods while relieving the primary supplier, who are supposed to benefit from the tariff, of the need to innovate or decrease prices due to lack of domestic competition. So the market vertical suffers as the value chain gets more expensive. The increase in costs leads to a decrease in demand, affecting mainly markets that have a highly elastic demand curve.

At the base of all of this is that tariffs are a big government move and used by centrally-planned economies around the world – you know, like communism. If you are for tariffs you cannot claim to be a small government conservative. You do not fit that definition in this area of discussing the role of government.

People believe that Trump is using tariffs as a tactic. If that is true then he intends for the tariffs to be short term if he imposes them at all. If he thinks tariffs should be short term then he really doesn’t believe they’re good. If everyone thinks he’s bluffing then all you have to do is wait it out.

China has a centrally planned economy. They subsidize all kinds of industries and they have not only the ability to subsidize the population, but their government is headed by a president who has consolidated a massive amount of power and will be president for life. China’s communist party is willing to sacrifice the actual lives of its citizens to win a trade war. They believe in the greater good in a way we do not. America talks a big game about taking one for the team, but that’s BS. We won’t put up with it. Trump is either going to lose in 2020 or term limit out in 2024. China, who has for a long time now had a 5, 10, 25 year plan will absorb this into said plans. 2 to 6 years of tariffs, if at all. Besides, we are granting exceptions left and right to manufacturers of goods. That means we are not applying the tariffs to these companies who import raw material from China. Why would we do that? Because an increase in price in raw materials translates to higher prices in finished goods. This reduces demand and thus supply. They force companies to restructure for that reality and lay off workers. Those exemptions relieve the intended consequences of tariffs. They’re already piling up. Now, what about when other countries retaliate with their own tariffs? Our exports to that country will drop. And then we are forced to decide if we allow those companies and industries to die or we subsidize them as we are contemplating doing right now.

As to American subsidies of farmers and other industries:

If their government welfare runs out and they fight “to the death” then the domestic competition is gone and the exporting country will see a rise in demand from the USA in markets that are less elastic and therefore less sensitive to price. In essence, there is no more war and they have won.

Our capitalist society is not equipped for massive subsidies and government handouts. We can barely meet our obligations today. What do I mean when I state we are not equipped? The spending on subsidies will raise the national debt. However, in many situations, debt can be a good thing. One thing that Paul Manafort said in some throw-away report I read was that operating without debt is for suckers. He was speaking of personal debt, which for most people is not the best way of running one’s life, but in regards to a company or a country, he’s not wrong.

Debt allows for increased investment that delivers ROI if handled correctly. However, debt issuers who worry about our ability to pay our debt may increase interest rates which increases the cost of capital. If we don’t have the money to pay our debt obligations because servicing our debt becomes more expensive, then our monetary policy as shown in the past will react by issuing more currency which devalues the dollar. Now, one can argue that this gives us an edge when it comes to global business as our goods and services are cheaper relative to the strength of the currency of other countries. However, inflation means that OUR buying power has decreased, which can and does have a net negative effect on the economy when people are losing jobs due to the, you guessed it, effects of a trade war.

Now, for the kicker. Trade deficits don’t matter. The last time we had a global trade surplus was in 1975 when the economy was in shambles. The Smoot-Hawley tariff act is considered to be a primary driver for making the Great Depression worse. What helps the global economy, especially in today’s interconnected world, is the total trade amount. It allows for companies and individuals to have *more* money to spend or invest when they have access to goods and supplies that are the cheapest. You have a trade deficit with your local grocery store. You pay them, but they don’t buy anything from you. How much time would you devote to growing your own food if you had no access to a grocery store? What is the opportunity cost of having to do that? Because you wouldn’t be able to do your job and you wouldn’t have as much money. And that affects your buying power and reduces demand for goods and services over all.

Peter Navarro, economic advisor to the president said on national TV earlier this year that no country will retaliate. He was dead wrong. China enacted $34b in tariffs on July 6th of this year. If our strategy was to count on inaction from our trading partners then we’re going to have to reassess that situation. Because we’re already hearing the anecdotal effects of these tariffs with domestic market disruption.

Trade deficits don’t cost us money. They force industries to compete on price and innovate to get ahead. They force us to adapt and use our resources in a way that competes which optimizes our country’s economy which leads to long term economic stability.

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