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Trump Tariffs and Trade War With China
By: George Noga – May 6, 2018
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US trade with China is patently unfair. They have higher tariffs, use cheap labor, subsidize exports and steal intellectual property. They also manipulate their currency, but that is our topic for next week. Our 2017 trade deficit with China was $340 billion. Americans’ fierce belief in fair play accounts for the popularity of Trump’s tariffs on the Middle Kingdom. Whether or not such tariffs are wise is the topic of this post. Economists are in lockstep that expanding markets to their maximum potential size (global) optimizes specialization, economies of scale and comparative advantage thereby generating more wealth for everyone than tariffs or trade barriers. Imports are the things we want to eat, wear or use like bananas, athletic shoes and iPhones; they make us better off. Exports are merely the price we pay to obtain imports; they do not make us better off because they are eaten, worn or consumed in other nations. As first conceived by Adam Smith and later espoused by Milton Friedman, the objective for any nation is to get the most possible imports with the least possible exports. Trade occurs between people, not countries; it is voluntary and non-coercive. Living Americans eat the bananas, wear the shoes and use the phones, not government. Our households, just as our nation, are better off getting more in and sending less out. Grasping that imports are desirable is the key to understanding international trade. Trump’s rationale for tariffs is that because America imports $525 billion from China while they import only $185 billion from us, they have more to lose in a trade war. Once it is understood that imports are what is truly desirable, living, breathing Americans would lose $525 billion in imports versus only $185 billion for the Chinese. Humans in both countries lose, but American humans lose more. Moreover, the Trump tariffs ultimately are paid by Americans as higher prices for imported goods. Looking beyond China, 138 countries run trade deficits with the US; in half those countries the deficit is 500%. Don’t each of those nations have the same brief against us as we have against China? What if all those countries imposed tariffs on American goods? It is normal for a country to have both trade surpluses and deficits. Similarly, your family runs trade deficits with your grocer and power company but enjoys countervailing surpluses with your employer and your investment company. When China sells us goods, we pay with dollars. They use $185 billion to buy things from us. They also buy goods from other countries – in many cases from the 138 countries that run trade deficits with us. Many of the dollars we send to China thus find their way back to the US. Finally, China uses some of its trade surplus to purchase US assets and to buy Treasury securities ($1.2 trillion) to finance our national debt. What if we imposed huge tariffs on bananas such that it would be profitable to build massive hothouses to grow them in Minnesota? It certainly would create jobs and capital investment. The price of bananas would skyrocket and American consumers would suffer immensely. Would anyone argue that banana tariffs are a wise move? The rise of humanity began and blossomed due to trade and it remains so today. Milton Friedman believed Americans would be better off if we unilaterally abolished all tariffs and trade barriers – even if no other country reciprocated. The United States has run 42 consecutive years with a trade deficit. Where is the harm?
In times of war, countries blockade their enemies to prevent them from trading. Tariffs restrict a nation’s own citizens from trading; hence, countries imposing tariffs harm their own people in the same way they punish enemies in time of war. Next: The final part of our pivot to China – currency manipulation (horrors)
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