Major Political Issue No.1: Trade

I, who get my tirades published every other week, have five articles to write before the November 2 election, starting now. 

These articles will give context to the issues that you will hear from our presidential candidates. Readers who have suffered through my policy critiques understand that I try to explain what works and what doesn’t. 

I’m starting with trade policy.

As an introduction to trade policy, here’s a comment praising President Trump’s tariffs on less expensive Chinese cabinet imports. 

“[T]he tariffs have proved popular with industries that have faced stiff competition from Chinese firms, like makers of kitchen cabinets. Paul Wellborn, the president of Wellborn Cabinet, a manufacturer of kitchen and bath cabinets in Ashland, Ala., credited tariffs with saving his company and the industry.”

Wellborn Cabinet joined with others in its industry to mount an investigation into Chinese trade practices, which resulted in tariffs ranging from 4% to nearly 300% on Chinese cabinets. The industry was further helped as Mr. Trump added first 10% and then an additional 15% of tariffs on top. [NYTimes]

Everyone in Ashland was happy because it saved about 1,300 jobs.

But what about the rest of us who now have to pay more for cabinets made in the USA? There 85,760,000 homeowner households in the USA. According the Census Bureau there are 19,000 cabinet makers.

We, the many consumers of cabinets, are penalized because we are deprived of the choice of buying less expensive Chinese cabinets. We are the many and cabinetmakers are the few. Tariffs are a tax on consumers. We pay them, not Mr. Wellborn. It makes us poorer and U.S. cabinetmakers better off. This is what tariffs are all about.

There are a lot of myths about foreign trade. Let me dispel a few of them.

1. China has caused unemployment in America. Well, where they compete with U.S. manufacturers, yes, some. But right now – despite Chinese competition – the unemployment rate is low, at 4.3%. Many economists say we are almost at full employment. 

2. We need to save American manufacturing from Chinese competition. China has “hollowed out” our manufacturing industry. 

Actually no. As a percentage of GDP, manufacturing has been about the same since 1947 (12% ±). We are the second largest manufacturer in the world (after China).

3. China has wiped out manufacturing jobs. 

Some, yes. But manufacturing jobs have declined worldwide because of investment in modern technology. Fewer workers are required but they are more productive. Employment growth has been in the service sector. In comparing wage averages, manufacturing pays $33.63 per hour vs. $31.06 for services. Not a big difference.

4. We owe China trillions of dollars. 

No, we don’t. We owe ourselves trillions of dollars. When we buy goods from China we pay in dollars. Chinese manufacturers put those dollars in their banks and get yuan in exchange. The banks now hold dollars. What do they do with the dollars? They buy things in the U.S. or buy U.S. gilt-edge government debt. Our huge national debt is the result of our out-of-control government spending.

5. Trump says we need to protect American industry by imposing a 10% (later he said 20%) tariff on all imports.

Assuming he will actually do this if he wins, it is the most dangerous policy proposed by either candidate. Harris’s socialist-welfarism is a slower death. Across the board tariffs would be a quick death. 

The history of these kinds of tariffs produce tariff wars. The last time around was during the Great Depression. The Smoot-Hawley Tariff Act of 1930 was one cause that kick-started and prolonged the depression. A whole range of higher tariffs were imposed on 20,000 imported goods. The blowback was that countries exporting to the U.S. retaliated and put up tariff walls against U.S. goods. World trade decreased by 66% from 1929 to 1934.

Could it happen here? Trump and his advisers do not understand the economics of free trade despite surveys that say 95% of economists think tariffs are a bad idea. The difference between the 1930s and now is that we are much more globally connected. Supply chains work on a worldwide basis. Any attempt to erect a tariff moat around our shores would lead to retaliatory tariffs and the global supply chain would break down. You can imagine what would happen.

Let’s hope this cockamamie idea never gets off the ground.