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Free Minds & Free Markets

How Trump’s Tariffs Hurt American Businesses and Consumers

Trump’s economic ignorance is on display.

President Trump isn't going to be happy. The U.S. trade deficit expanded in June, at its fastest rate since November 2016. Also, $291 billion was added to that gap in the first six months of 2018, compared with $272 billion in the first half of 2017. And wait until he finds out that in spite of the tariffs he imposed on billions of dollars in imports, those imports grew slightly while exports are going down.

The administration's stated objectives for imposing tariffs on foreign imports is to reduce the trade deficit by reducing imports and forcing foreign governments to lower their "unfair" trade barriers so U.S. exporters will have more access to foreign markets.

It's true that if you impose hellish taxes on the goods and services that Americans buy from abroad, over time the higher prices will nudge consumers to shift their demands to the now-relatively cheaper American goods. In fact, this is what happened after the imposition of steel and aluminum tariffs on imports from China and many of our trading partners. The Department of Commerce reports that the steep hike in metal prices has resulted in a seasonally adjusted 19 percent reduction of iron- and steel-mill products imported in June and a 10 percent fall in imports of bauxite and aluminum.

Yet overall, imports have gone up slightly while exports have shrunk a bit, raising the trade deficit along the way. For one thing, contrary to the administration's promise, unilaterally raising tariffs on our trading partners hasn't resulted in better access to foreign markets for U.S. exporters. Instead, foreign tariffs have gone up and threats of retaliation continue.

That's true even for the European Union, which—also contrary to the administration's claim—hasn't yet agreed to stop its real or imaginary "unfair" trade practices against us. The EU has agreed, however, to go back to the negotiation table—one that both sides left back in 2016—in hopes of ironing out their differences to allow better access to each other's markets. Until then, retaliatory tariffs are still up, and so are steel and aluminum taxes against EU producers.

The White House may be surprised by the recent developments, but economists aren't. First, tariffs are a tax on American consumers. Knowing that the price of goods they need to run their business will go up, companies often ramp up imports of targeted goods before the taxes take effect. Unfortunately, imports will decrease once companies are forced by higher costs to look for new suppliers. Higher production costs will hurt Americans the most, contrary to protectionists' claims.

Second, Trump is misinformed when he claims that the U.S. trade deficit is a sign that everyone is taking advantage of us. The reality is much more exciting, as it signals that the country is an attractive destination for foreign investors looking to make a profit. To the president's credit, his tax-reform and deregulatory efforts, and the resulting booming economy, have made the U.S. market even more appealing. These positive developments likely shifted foreign-owned dollars away from buying U.S. exports (especially when their prices have gone up due to retaliatory tariffs and a stronger dollar) and toward investments in the United States. Meanwhile, richer consumers can afford more expensive foreign imports. Et voila. You get more growth but also a larger trade deficit.

Unfortunately, things can sour pretty quickly. Total imports may eventually fall as a result of Trump's tariffs, and foreigners will have fewer dollars to invest in the United States, which hurts both investments and exports. The Tax Foundation estimates that the trade dispute could wipe out all of the previously projected benefits from tax reform. While the final impact on the trade deficit remains unclear, Americans will be worse off than they would have been without this trade.

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  • I am the 0.000000013%||

    Predictabilty is an excellent trait in a leader.

    GOOD ON YOU FOR POINTING THAT OUT!!!!

  • Fred G. Sanford||

    Not when lying is the only predictable trait. But his supporters don't seem to care and don't understand trade anyway.

  • vek||

    "Total imports may eventually fall as a result of Trump's tariffs, and foreigners will have fewer dollars to invest in the United States, which hurts both investments and exports."

    Ugh. I get free trade theory. But this just doesn't even make sense at any level.

    1. Our exports can continue up to and including the point of us running a surplus with any trading partner, if they in fact want to buy our shit. It can continue at a net zero deficit on either of our parts for eternity. So WRONG there.

    2. We won't NEED the foreigners to invest their newly gained American dollars in our economy, because those dollars will have never left the US, and US citizens will have that money to invest. Which is to say US citizens will have a higher net worth, and foreigners lower.

    Talking about trade efficiency, and the virtues of trade is all fine and well. It's 99% correct. However there are upsides and downsides within certain contexts, and it is not black/white. Trade in the modern world with welfare states, cratering wages in 1st world countries, fiat currencies, etc is a very complicated and very GREY subject. Pretending otherwise is just buying blindly into a dogma.

  • Kivlor||

    Burn the heretic!

  • sarcasmic||

    Why does it matter who owns stuff? This was the big scare back in the 80s. That our trade deficit with Japan meant that Japanese investors would use those dollars to buy everything, and before long we would be owned by Japan. That of course never happened. What did happen was companies like Subaru built factories that employ Americans and allow us to buy cars without paying import taxes. I assume you think that is terrible and would rather we not have those jobs or those cars.

  • creech||

    What, you don't remember when Japanese bought the Pebble Beach Golf Course and moved it to Osaka?

  • Kenneth Kelly||

    All comment threads should have "like" buttons or equivalent.

  • Echospinner||

    It is not good when that happens. I have seen it before. People tend to write what will get them points rather than what they think.

  • vek||

    Japan NEVER had the SCALE anywhere close to what China does. It was never possible back then, and frankly China won't own EVERYTHING either. That's not the point. They do own trillions already. That gives them hundreds of billions in profits every year that goes straight into their pockets, versus an Americans too. I'm not against foreigners owning stuff here, or investing, but if it gets to a certain scale it has implications. Especially when it's a hostile foreign country like China, who clearly wants to become A #1 geopolitically in the 21st century.

    The point is that to ignore asset ownership is retarded. If a single person, say the Queen Of England, owned every asset in the world that wouldn't matter right? Ooooh, it would. Because that would mean other people didn't have those assets. And who owns assets matters.

    As someone who is an American, Americans having a higher net worth directly benefits me. If a sky scraper is owned by a foreigner instead of an American, less of that money stays in the USA. Taxes paid in the USA can also be lower, which means somebody else has to pick up the slack, like me. Also foreigners don't have as much mentally invested in keeping the country on the right track, because WTF do they care if they keep getting the rent money?

  • vek||

    There are a lot of practical reasons it matters, and only autistic libertarians don't understand that. The world is not a single one world government where everybody is tied to everybody. Until that happens the prosperity of ones fellow citizens, whatever country they live in, is practically speaking more important to their own well being than that of foreigners. That is simply reality. My next door neighbor having $10 million more net worth makes my taxes lower, and my neighborhood more prosperous with his spending, and he's likely to want the neighborhood to stay nice. It's as simple as that.

  • Mr. JD||

    The tough thing about Trump's tariffs is that he's pretty plainly using them to extract concessions from foreign governments. Claiming to believe in them is just part of the poker game.

    Besides, the alternative is the socialist party. Don't cut off your nose to spite your face.

  • Oli||

    Didn't work that well for China, now did it?

  • Fred G. Sanford||

    To the contrary, he has advocated for protectionism for a long time. And protectionism is a trademark of socialist countries. Indeed, Trump's tariffs is one of the few things Bernie Sanders has agreed with Trump on.

  • vek||

    Protectionism is a trademark of ALL COUNTRIES. Including America, and every liberal democracy in Europe.

    He wants to see our industries do well, but he has also said about 1000 times that he's willing to go 0% across the board if our partners will. WTF do you call that if not free trade??? I know of NO other politician who has EVER even made an offer like that before Trump. That could arguably make him the most free trade head of state in world history... Who happens to be willing to bludgeon people over the head with tariffs to get what he wants. Nothing wrong with twisting arms IMO.

  • Mr. JD||

    The tough thing about Trump's tariffs is that he's pretty plainly using them to extract concessions from foreign governments. Claiming to believe in them is just part of the poker game.

    Besides, the alternative is the socialist party. Don't cut off your nose to spite your face.

  • Sam Grove||

    Trump is a business socialist, and his comprehension of trade economics is amply displayed with this: 'If We Didn't Trade,' Trump Argues, 'We'd Save a Hell of a Lot of Money'

    If saying stupid things is s sign of cleverness, then Trump is a genius.

    https://goo.gl/8YvfLP

  • HenryC||

    Trump's tariffs have so far been targeted to change the behavior of the target of the tariff. Admittedly they have hurt us, but they have hurt the targets more, and have in a couple of cased brought us better deals. I am will to give him time, at least a couple of years to negotiate.

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