American Consumers Get Great Deals from the Trade Deficit

American Consumers Get Great Deals from the Trade Deficit

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In 2017 investors benefited from an unusually non-volatile market with consistent growth, but 2018 has been notably less euphoric. So what changed? In short, tariffs: these economic and political tools are the only force holding back the U.S. stock market in 2018.

A tariff is a border tax imposed by a country on imported goods. Tariffs are the weapons of trade wars: You tax my products, and I tax yours. Tariffs are taxes on American families that increase the costs of the products they purchase. As pointed out in the 03.28.2018 issue of the Wall Street Journal, tariffs are inflationary and actually kill more jobs than they create. For every job saved by Trump’s steel and aluminum tariffs, five jobs are lost.

The Job Losses

There are many American businesses that have been hurt by these new tariffs. As of now, we can add Mid-Continent Nail in Poplar Bluff, Missouri, which makes 50% of the nails produced in America. The company depends on Mexican steel wire, which is now subject to Trump’s 25% tariffs. The company tried passing on the increased cost to their customers, but most of them fled to cheaper Chinese nails. Mid-Continent Nail has cut 60 employees from its workforce of 500, and it will likely soon lay off 200 more.

The Trade Deficit

Trade deficits occur when countries import more from other countries than they export. The White House would have us believe that trade deficits are bad. I believe trade deficits are a sign that Americans are getting great deals. For example, Americans buy 42% of their clothing and 72% of their shoes from China, and as a result, a shopping cart of clothes purchased in America costs less than it did 20 years ago. American consumers have saved billions of dollars over the past decades by getting great deals from imports. (Wall Street Journal 04.06.2018)

It makes no sense for us to make things at home if it costs less to import them. We raise living standards by sending the Chinese airplanes that we exchange for their clothing. (Harvard economist Robert Lawrence)

Rich economies with trade deficits have grown faster than surplus countries over the past decade. (Economist Megan Greene)

According to James Mackintosh, senior columnist at the Wall Street Journal, economists dismiss trade deficits as meaningless, irrelevant data. The White House focuses on a domestic production policy that aims to boost exports and limit imports, which theoretically would increase jobs in America. But we can already see that costs of consumption go way up. Workers will have work, but they will not be able to buy as much with their earnings. Economists prefer to focus on consumption as a measure of economic strength. If Americans can afford more purchases, that is a net positive for their households –– so a trade deficit is not a concern. Economists understand that free trade leads to a bigger economy and that trade tariffs cause the economy to shrink.

The Political Problem

The lower-cost benefits of free trade are enjoyed by all consumers, while the job losses which result from free trade are concentrated in small groups. However, the unemployed shout louder than the consumers saving money. New tariffs save some manufacturing jobs, but as in the case of Mid-Continent Nail, and others, tariffs lead to the loss of U.S. jobs, and they also decrease the purchasing power of the dollars that all Americans earn. (Wall Street Journal 06.26.2018)

The Tax Foundation predicts that 48,584 jobs will be lost from the tariffs Trump has already implemented on importing washings machines, solar panels, steel and aluminum, and $50 billion in other Chinese products. That figure would soar to over 250,000 job losses if Trump moves forward with tariffs on another $200 billion in Chinese products. (Heather Long, Washington Post 06.25.2018)

The China Problem

In China, steel production bears no relation to market demand. The government subsidizes steel production way beyond what world markets need, so China has been guilty of dumping its excess steel below cost in the world market. This is unfair, of course, because competitors cannot compete with steel sold below cost. This is a problem that would best be confronted by a team of allies led by the White House. Unfortunately, the current administration is better at destroying a team of allies than building one. There is, however, some evidence that Trump’s tariffs might be having his intended impact: it appears the German automakers want the German government to drop all tariffs on American car imports.

There are other unfair trade practices from China which may merit addressing through political action, such as the forced relinquishing of proprietary technology by U.S. companies if they wish to do business in China. This is outright theft of intellectual property, and it is not sustainable for American businesses or our allies.

The Best Deal for the U.S. Economy is Not a Trade Surplus

Trump needs to understand that U.S. business leaders will always go where they can get the best deal, even if it means the U.S. has a trade deficit. Getting the best deal is a business’s fiduciary obligation to its shareholders. If the tariffs persist, we will see more businesses closing up shop, downsizing, and/or moving to keep consumer prices down.

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