Trade, Tariffs and Trump

Never have so many known so little about so much as when the mainstream media and the members of Congress deem to lecture us about international trade in general and tariffs in particular. That is particularly on display as President Donald Trump has been using tariffs as leverage in the foreign policy arena – particularly when it comes to re-balancing trade with China, the European Union, Canada and Mexico and securing our borders with regard to Mexico and Guatemala.

Quite frankly Mr. Trump’s willingness to use the economic strength of our country as a primary diplomatic tool is a breath of fresh air in an era when politicians believed that the only choices were war or bribery (foreign aid). Former President Barack Obama used that Hobson’s choice repeatedly as an excuse to back down in the face of aggression by every tin horn dictator and religious zealot that confronted him. It took the world about a nanosecond to realize that Mr. Obama was a weak and feckless leader and to act shamelessly in that regard.

As a conservative I believe in free trade on a reciprocal basis. We haven’t had that since the end of President Ronald Reagan’s administration. As a free trader I have been and am skeptical of the use of tariffs – particularly if tariffs are used to protect (read subsidize) an inefficient industry as was the case in the Smoot-Hawley era. In such instances – as with virtually every instance of governmental interference – the result is to distort the market and drive consumers towards uneconomic and, therefore, unsustainable choices.

However, we have been in an era where the balance of trade between the United States and its trading partners is greatly out of whack. And that imbalance is caused by a lack of fair trade. In most instances it has been the acts of foreign governments to protect their domestic industries by using tariffs, taxes, bans on ownership, bans on technology, bans on volume, and a host of other protectionist measures. And until Mr. Trump took office those measures were usually unilateral rather than reciprocal.

The United States Census Bureau provides a chart of the Balance of Payments dating back from 1960 to current times. From 1976 to 2016 the trade annual trade deficit as measured by the Balance of Payments (the difference between imports and exports grew from $6.082 Billion to $502.983 Billion. Obviously a percentage of that growth was due to an increase in international trade globally. However, exports grew from $142.716 Billion to $2,215.839 Billion – a growth rate of 1550 percent – while imports grew from $148,798 Billion to $2,718,821 Billion – a growth rate of 1730 percent.

The point being is that the trade deficit is growing not only in terms of actual dollars but also in terms of the ratio between imports and exports. It is an unsustainable model and one that has gone unaddressed for decades by successive administrations. Mr. Trump has chosen to use tariffs as a means of addressing the growing difference. In doing so he has placed selective tariffs designed to encourage the offending trading partner to remove free trade barriers and increase purchases of American goods.

And here we come to the most frequent demonstration of ignorance about tariffs and for that discussion we will zero in on the trade imbalance with China and the effects of tariffs on China. Mr. Trump claims that China is paying the tariffs. Mr. Trump’s opponents and the captains of industry, who have come to rely on foreign production, claim that American consumers are paying the price. Neither of them is right.

A tariff levied on an import raises the cost of the product or service. The buyer of that product or service must make a choice as to whether to purchase it at the new price. If it is product or service that constitutes a basic necessity – like food – the choice is much more difficult than if the product or service is discretionary – like Nike athletic shoes. In the former instance there are relatively few choices and going without has dire consequences while in the latter there are a plethora of alternatives and going without has virtually no consequences. So the American consumer only pays the tariff if they continue to purchase the tariffed item. If the consumers choose not to purchase, then the offending country has to either absorb (pay) the tariff by not raising the price to encourage buyers to continue purchasing or absorb the total loss of the sale. Let us remember that tariffs are levied on the cost of the goods imported and not on the retail price. According to an article by Brendan Dunne in the December 16, 2014 issue of Sole Collector it costs Nike about $28.50 to produce a pair of shoes that sell for $100. The tariff is levied on $28.50 – not $100. The added cost of a twenty-five percent tariff then is about $7.00 or seven percent additional cost. In contrast if consumers stop buying Nike shoes because of the tariff, the entire $28.50 in unrealized revenue to the host country for production – say China – is lost to that country.

If Mr. Trump were seeking to use tariffs as a means of generating revenue for the government, he would have to be careful that the rate of the tariff would not be so great as to diminish the number of units sold and thus incur lost total revenue. This is called regression analysis and is universally applied by businesses in making pricing decisions. But Mr. Trump isn’t trying to maximize tariff revenue; he is trying to change the behavior of those countries maintaining the largest trading deficient with us. And to some degree it appears to be working.

An article in the Wall Street Journal Weekend this past weekend indicated that imports from China have fallen by 12 percent and that exports to China have fallen 19 percent. However, a 12 percent reduction in Imports from China amounts to $64.761 Billion while a 19 percent reduction in exports to China amounts to only $22.878 Billion. In addition a July 14 article in the Wall Street Journal noted:

“Companies that make Crocs shoes, Yeti beer coolers, Roomba vacuums and GoPro cameras are producing goods in other countries to avoid U.S. tariffs of as much as 25% on some $250 billion of imports from China. Apple Inc. also is considering shifting final assembly of some of its devices out of China to avoid U.S. tariffs.

“Furniture-maker Lovesac Co. is making about 60% of its furniture in China, down from 75% at the start of the year. “We have been shifting production to Vietnam very aggressively,” said Shawn Nelson, chief executive of the Stamford, Conn., company. Mr. Nelson said he plans to have no production in China by the end of next year.”

A combination of a reduction in imports from China and a shift in manufacturing from China to other nations is having a dramatic effect on China’s economy. As businesses change their supply chain away from China, there will be a reluctance to return. These are the changes that have long term lasting negative effects. The question is whether such a change is sufficient to cause China to change its behavior on international trade. Let’s not forget that China is a communist nation with a long history of subjecting its citizens to deprivation in furtherance of maintaining the communist regime. But this is a different China – a China that has benefited greatly from the growth in international trade and allowed a significant portion of its citizens to enjoy the amenities of modern living. A return to deprivation may not sit well with the masses.

I’m still not a fan of tariffs but other attempts to address the unfair trade practices of other nations have failed to date. So for the time being we are just going to have to wait and see how this turns out. And that is the watchword – wait and see. And stop listening to the idiots in the mainstream media and Congress because when it comes to trade and the economy they are dumber than a bag of hammers.

Are the tariffs working? It is too soon to tell. After all we have waited over fifty years and spent over $15 Trillion waiting to see if the War on Poverty works.  (It hasn’t, there has been no change in the rate of poverty in the United States.) Maybe we should give the tariffs a year or so to see if they work.