Tariffs, Trade Wars, and Just Seeking to Understand Before I am Understood
I always focus on my second principle of BALANCE when discussing any issue…..that is “take the time to understand all sides of the issue,” or as St. Francis stated, “Seek to understand before you are understood.” As a result, when I am having a debate with someone, I try to never say, “I don’t understand” because that seems ignorant. I should take the time to understand, and THEN decide if I agree or disagree.
There has been an amazing amount of media coverage on the estimated $60 billion in tariffs that President Trump placed on Chinese imports last week, including steel and aluminum, and the impact that this will have on global trade. Before overreacting, I tried to “seek to understand.” Yes, it is clear that China often ignores intellectual property rights and heavily subsidizes many of their state-owned companies. This makes it difficult for U.S. companies to compete and do business in China. Figuring out a way to reduce these barriers is clearly in the interest of the U.S. I can “understand” why some folks would want to “get even with these guys.” 😉
However, the key question is whether starting a global trade war is a good approach to solving these issues. President Trump thinks so. He summed up his view very clearly by stating in one of his tweets, “Trade wars are good, and easy to win.” Well, let’s take a moment to reflect on this perspective. As a math-economics major at Lawrence University many years ago, I learned from my economics professors (Azzi, Dana, and LaRocque) that you don’t “win” a trade war. In fact, global trade is not a ‘zero sum game,’ where one wins and another loses. They explained that global trade raises the productivity and wealth of the world economy as a whole. Said another way, global trade increases the overall global standard of living.
It is true that imposing a tariff can serve to protect the jobs of people in that specific industry in the short term. However, tariffs impose a significant tax on anyone purchasing those products, and it is usually lower income people that suffer the most. While it is true that a country benefits from focusing on what it does best and “outsource” areas in which it is less productive, this does require the country to retrain people whose jobs are outsourced. Clearly this can be a challenge with an aging workforce.
Another point worth discussing is whether a trade deficit is necessarily a problem in the first place. It appears that President Trump believes the deficit is indeed a problem since he has been tweeting about our “MASSIVE trade deficit” for some time now.
The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!
— Donald J. Trump (@realDonaldTrump) March 3, 2018
However, let’s step back and once again put things in perspective. Trade deficits are a result of several macroeconomic variables. What causes a trade deficit? I was taught that they are a direct result of what a country decides to spend and save. Since the U.S. has a much lower savings rate than other countries, AND we are an attractive place for others to invest, by definition, we will have trade deficits. If we decided to spend less and invest more, we would have a much lower trade deficit (for example, during the Great Recession when American consumption, i.e., spending, was down, the trade deficit narrowed dramatically). Blaming China as the primary cause of our trade deficits raises a lot of questions.
Okay, one more “opinion.” Let’s assume for a minute that “trade wars are good, and easy to win.” Do we really believe that putting a 25% tariff on Chinese steel will solve the problem? Since China accounts for only 2% of U.S. imported steel, it is not obvious how this will have a positive impact. And let’s not forget two points: first, China can impose (and is already starting to impose) tariffs on other goods that will adversely impact U.S. consumers. Second, China holds a significant amount of U.S. debt. If China decided to reduce its treasury purchases (which it IS considering), that could result in higher interest rates and a reduction in U.S. GDP growth. Bottom line, let’s try to keep things in BALANCE, and “take the time to understand ALL sides of the issue” before making quick judgments that can have a multitude of adverse implications.
For those of you celebrating Easter, here’s wishing you a fantastic weekend!
I am always interested in your thoughts, reactions and questions.
Featured photo by Ant Rozetsky on Unsplash