Trump has begun raising tariffs on our nation’s largest trading partners. This has caused markets to become incredibly volatile, to the point where markets may fluctuate 700 points (higher or often lower) within a single day. There is a lot of confusion regarding these tariffs; are they good? Are they bad? Ask 5 different people and you may get 5 different answers. Some say these tariffs protect our economy and could bring back American jobs. Others say that they are a detriment to the economy and always hurt everyone.
Wouldn’t you like a professional explanation? Well, here it is.
Trump has decided on these tariffs because he has a very protectionist view of the economy. He abhors our trade deficit, and views any trade imbalances as a “bad deal.” But what does a “trade imbalance” actually mean? A “trade deficit” with a country means that we are importing (buying) more than we are exporting to them (selling). But if US companies and individuals are buying more in bananas from Costa Rica than we are selling them in refined petroleum, is that really a bad thing? Trade is, after all, voluntary. If the citizens of the United States are choosing to buy more from Costa Rica than we are (in aggregate) selling to them, how can this be considered a loss?
The argument is that we should ONLY buy those products made here in the United States, as it will keep the jobs domestic and the cash in OUR economy. This would work to everyone’s advantage… so long as the United States is the best at producing EVERY product in the world. Remarkably, that is simply not the case. Costa Rica is a much better producer of bananas than we are. Therefore, we import bananas from them, at a MUCH lower cost than if we were buying bananas made in the United States. This benefits (almost) everyone, with drastically lower banana prices for citizens, but with a couple fewer banana-farmer jobs here. Extrapolate this out for every product, and you have a complex, competitive, globally-integrated economy. You import the things you can buy the cheapest from overseas, and you produce the things that your businesses can compete with, price or quality-wise. Yes it means fewer overall jobs, but it means every penny of a citizen’s income is MUCH better spent, on lower prices for goods across the board. If citizens can spend $5,000 for a basket of goods that would’ve cost $10,000 to produce domestically, they have effectively become more wealthy.
Does everyone follow me thusfar? I hope so, because the next point is critical: If competition is good for citizens by lowering average costs, then we ought to have as FEW barriers to competition as humanly possible. Nearly all economists myself included agree on this point. Therefore, tariffs must be a bad thing. Why do they continue to happen then?
Remember when we said buying bananas from overseas benefited “almost” everyone? The obvious group we forgot about is US banana farmers. For every product that the US buys (at least a portion of) from overseas, there are US citizens who lose jobs. These people formed a surprising wave that supported Trump’s protectionist economic rhetoric, and tariffs (to “bring back jobs”) were a big part of his platform. And now the Trump tariffs have begun to roll out. A 25% tax on all steel coming into the US was introduced, and a 10% tax on all aluminum.
In response, China placed taxes as high as 25% on 128 American-made products including pork, seamless steel pipes, fruit, wine, and many others. These tariffs seemed to target Trump’s base in the agricultural heartland of the country.
The Trump administration escalated by placing taxes on a whopping 1,300 Chinese-made products, including flatscreen TVs, batteries, airplane parts, advanced medical devices, semiconductors, electric vehicles, and other high-tech components.
China responded AGAIN by announcing higher taxes on 106 US products, including US cars, soy, chemicals, and whiskey.
I don’t think you have to be an economist to see that this is very bad, for nearly everyone. This is a great example of what a wise man (Milton Friedman) once said, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” Trump’s tariffs had phenomenal intent; to bring lost jobs back to the US. What we got is a mutually self-destructive Trade War. Do we REALLY want to pay 25% more in taxes for our TVs, our batteries, our medical devices, our electric cars, our computer parts, etc? Or can we recognize that these taxes in effect make everyone 25% more poor?
But there is a possible respite for free trade advocates. There is hope spreading among financial analysts that these tariff proposals could amount to “tough talk” from Trump, ammunition to be used in trade talks ahead. After all, these tariffs will take weeks or months to implement. It IS possible that he will ask for China to back off of their currency manipulation, and reduce subsidies (basically free cash from the government) for many companies that DO compete unfairly with US companies as a result. This could, ironically, lead to a potential INCREASE in free trade. Whether or not that is what will happen remains a mystery, and until then, US stock markets will be in turmoil. Our fundamentals are strong, and US companies’ earnings continue to be healthier than ever. But escalating taxes of 25% across the board will dampen that enthusiasm sooner or later. We should all hope that an understanding can be reached with China, to drop these tariffs and increase economic freedom for all via good old-fashioned competition.
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– KIERNAN EASTON, PRIVATE WEALTH MANAGER AND PARTNER AT DYNAMIC WEALTH SOLUTIONS
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