Trade, Tariffs, and Trump

Why tariffs hurt everybody, including you

My family purchases groceries on a weekly basis. We take great care in spending our hard-earned cash in exchange for goods that fill our bellies and furnish our home. Year after year, we run a trade deficit with our grocery store, yet we don’t think that the grocery store is giving us a terrible deal. Instead, we are thankful for those goods and what they provide us.

The United States is in a similar (yet admittedly more nuanced) position when it comes to tariff policy. Year after year, the United States runs large trade deficits (we give nations more money than we give goods) with the likes of Lesotho, Vietnam, Mexico, and Canada so that we can receive large amounts of goods at a much cheaper price. Are these countries really ripping us off? No, they are not. Instead, they are participating in a global market that (on the whole) provides the United States with a plethora of cheap goods that fuel our economy and increase our quality of life. High tariff policy seeks to punish both the exporting nation and the American consumer, resulting in everyone becoming worse off. In order to fully explain why tariffs are painful, I will list a few arguments some individuals are making in favor of Trump’s tariffs alongside my responses for why these arguments are unfounded.

Argument One: Trade deficits are inherently bad, and tariffs will bring fairness to the international trading system.

Response: A trade deficit does not actually showcase the health of a nation’s economy. Plenty of nations carry high trade deficits and do extremely well. The United Kingdom, Turkey, India, Canada, New Zealand, and Poland carry billions of dollars in trade deficits, yet their individual quality of life is high. In contrast, plenty of nations with trade surpluses are doing quite poorly. Iraq, Russia, and Libya all hold trade surpluses but still are dealing with inflationary spirals and poor standards of living.

Therefore, trade deficits alone are not enough to prove whether or not a nation is fiscally healthy. It is a representation of how much a nation is importing or exporting goods in exchange for currency. Nothing more, nothing less.

Argument Two: Other nations tariff us, so Trump’s actions are simply a fair and equitable balancing of the international system.

Response: This argument holds a lot of merit at first glance. Plenty of nations impose tariffs on American goods. However, many of these countries experience high levels of poverty and economic hardship as a result. The United States experienced a similar burst situation throughout the 1930s and early 1940s. The Smoot-Hawley Tariff Act of 1930 attempted to reverse economic downturns within the United States by imposing tariffs on steel and agricultural products (sound familiar?). However, these tariffs resulted in higher levels of unemployment (8% pre-act to 16% post-act), lower GDP, and decreased trade with other nations. Ultimately, whether or not other nations tariff us is irrelevant to how we should operate within the realm of global trade. This is because (ironically) high tariffs lead to more economic hardship for the individuals living within a high-tariff country, and they limit the ability for economic competition to produce innovation and growth.

Additionally, many of the tariffed countries do not have high tariffs with the United States in the first place. The majority of European countries held tariffs with the US at under 2%. Even nations like Vietnam, Indonesia, and Saudi Arabia keep their tariff rates at under 7%. Trump’s decision to tariff every nation at a baseline rate of 10% goes above and beyond what a majority of nations impose on US goods, and it begs the question… why?

Argument Three: You don’t understand. Thousands of people are furious about losing their jobs to China, Mexico, and Canada because of free trade policy. They are underemployed, unable to move, and frustrated at losing strong manufacturing work. How can you be so callous?

Response: Losing a job is unbelievably difficult and life-changing. It shouldn’t be overlooked, especially when it comes to the hollowing out of middle America. Lost jobs and poor wages destroy family dynamics, limit innovation, and lead to lost opportunities. However, one needs to look at what is truly impacting the shift in manufacturing within the United States. First, the United States still retains a significant industrial base, with manufacturing still accounting for 10% of GDP (higher than retail, healthcare, and wholesale trade). Second, many of US manufacturing jobs are being taken away by automation and not China. In fact, 88% of manufacturing jobs within the United States were taken away by automation, not other countries. This reality is not being expressed by the Trump administration, and bringing manufacturing to the United States through tariffs will not remove the larger conversation Americans should be having around humanity’s relationship to robots within the workplace.

We should call on our government to provide real solutions to issues that impact thousands of Americans, rather than issue tariff threats and platitudes, which raise costs rather than raise people out of poverty. Instead, let’s do the work of finding jobs Americans want to do, educating Americans to improve capacity, and building a strong business culture.

Argument Four: These tariffs are simply a negotiating tactic. Trump really doesn’t want tariffs to be this high, but he is using them as leverage in order to better the lives of everyday Americans.

These tariffs are being implemented poorly if the goal is to bring nations to the negotiating table. Trump threw tariffs on everyone, removed some, kept others, and then placed deadlines on tariff renewal in an arbitrary fashion. He could have instead gone to countries and involved them in backroom dealmaking prior to his tariff announcements. That way, nations that ‘played ball’ would be exempted ahead of time, stock markets would be less volatile, and our trading partners would feel more respected.

I am utterly confused as to how this roughshod tariff policy builds international trust or encourages dealmaking in a positive way. Sure, some nations may make deals out of fear. But is that the way America should be approaching trade policy if our goal is to alienate China (a nation that also imposes its will by fear)? I am baffled at why this argument is getting so much traction when it is looking more and more like American reputation is being tarnished in the name of small, temporary economic gain.

Argument Five: Honestly, tariffs are a poor way to lower prices (I’ll give you that), but there are industries that require tariffs in order to fight China and preserve national security. How can you be against those?

This is probably the best argument in favor of tariffs on China, but they fail to explain the broad-scale tariff policy being imposed on countries from Lesotho to Ireland. It is true that a trade war with China would be detrimental to their economy, but we cannot ignore that trade wars carry casualties on both sides. Ultimately, I want the Trump administration to clearly lay out the costs, objectives, and realities of a trade war with China. Americans will have to pay more and purchase less if Trump is really dedicated to going after China, and we need to be told why this strategy is worth our time and money. Unfortunately, Trump is not laying out a clear strategy, and this incites fear, confusion, and frustration amongst the electorate at a time when inflation is already high and goods are becoming increasingly difficult to procure.

Truthfully, I hate tariffs. They are a crude economic device that seeks to punish other trading powers at the expense of the consumer (which is all of us), while also limiting innovation at home and lowering our competitive edge abroad. Instead of tariffs, the Trump administration should be pursuing policies that seek to encourage industry in areas that Americans excel in and lower barriers to entry for businesses and entrepreneurs by bettering corporate taxation, lowering regulation, increasing high-skill immigration to the United States, and investing in education programs to reskill laid-off workers. Admittedly, Trump is doing many of these things, but he doesn’t need to add tariffs as part of the solution. They will only hinder his agenda and destroy the pocketbooks of hard-working Americans, which is something that creates instability and distrust. Count me out.