Trump Unleashes Tax Increases and Inflation

“Everything that needs to be said has already been said. But since no one was listening, everything must be said again.” – André Gide

Our president just imposed a 25% tariff on imported goods from Mexico and Canada plus an additional 10% on China and unleashed a harmful and useless trade war. Tariffs are a tax on us and will lead to higher costs and shortages.

I’ve written about international trade many times over the past almost 20 years. Even though Americans have benefited greatly from foreign trade, the same fortress America anti-trade myths keep popping up. No one, Trump included, seems to understand how international trade works and why free trade is beneficial to all who engage in it.

Myth No. 1: China, or any trading partner, has stolen American jobs and has ruined American manufacturing.

For years Trump has been saying that we are being “raped” by China. He believes that cheap Chinese goods have destroyed “good” manufacturing jobs. Tariffs, he believes, are needed to protect us and revive American manufacturing.

First of all, manufacturing jobs have declined mostly because of technology, a longtime worldwide trend. Technology makes workers more efficient – thus requiring fewer workers.

Second, we are still the second largest exporter of manufactured goods in the world (after China). Why is that? Because we specialize in high value goods, the things that Americans do very well. Let China continue to make shoes and Christmas ornaments. 

What about those poor American’s who lost jobs because China made the same products cheaper than we do? Yes, some workers are harmed by competition. But that also applies to domestic competition. U.S. companies fail all the time and workers lose jobs because of competition by other more innovative U.S. companies. Motorola was driven out of business by the Apple iPhone, the smart phone device that revolutionized our lives, created jobs, and spread worldwide. Competition constantly creates new jobs. The services sector of our economy has grown to replace the decline on manufacturing jobs (average service wages are about the same as average manufacturing wages). Unemployment is now the lowest in almost 25 years.

Myth No. 2: Tariffs will boost American businesses and create jobs.

Well, that’s not what happened when Trump imposed tariffs during his first term. 

A recent study by economists at the NY Federal Reserve Bank found that Trump’s first term tariffs against Chinese goods did the opposite: tariffs actually harmed U.S. companies. One reason is that U.S. manufacturers rely on foreign supplies to make their products. Instead of helping them, the tariffs resulted in significant financial losses which “translated into future reductions in profits, employment, sales, and labor productivity.” About one-half of U.S. publicly listed firms were negatively impacted by the tariffs.

What protectionists fail to understand is that the world’s supply chain is interconnected by international trade and it benefits everyone connected to it.

Myth No. 3: Countries impacted by our tariffs will just roll over and do whatever Trump wants.

When Trump erected tariffs on Chinese imports in 2018 China retaliated by putting tariffs on U.S. goods imported by China. This is called a trade war. These wars can be disastrous for all parties. Mexico and Canada have announced they will impose tariffs on U.S. goods, tit-for-tat.

During the Great Depression the Smoot-Hawley Tariff Act of 1930 was one cause that kick-started and prolonged the depression. 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. The result was high U.S. unemployment and bankruptcies. Today won’t be any different.

Myth No. 4: American consumers won’t pay the tariffs.

Actually, it is we consumers who will pay. Trump’s huge 25% tariff is not something most foreign manufacturers can absorb and they raise their prices to offset the tariff. The result is like another tax on us because of higher costs of imported products.

We rely on Canada and Mexico and they rely on us. They are our two biggest trading partners. Existing trade agreements have been working really well. For example, U.S. auto manufacturers rely on parts made in Mexico and Canada. Now there will be shortages and more expensive cars. 

Our economy is based on capitalism. The ultimate target of all manufacturing is the consumer and companies fight hard for our dollars. When you have free international trade you have the whole world competing for your consumer dollars with a vast choice of products at the best prices. The more choices we have, the more money we save and the richer we become. 

I have no idea why Trump is doing this to our best trading partners. The Wall Street Journal just called Trump’s trade war “The Dumbest Trade War in History.” He thinks he can get some advantage and he fabricated a “national emergency” to do it. It makes one wonder. One quote I recently saw commented that rather than being a threat to democracy, Trump “is just like every other politician right now: a man way out of his depth with a vague understanding of how things work.”