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Tariffs 101

"Slapping tariffs on imports or raising them diminishes the welfare of consumers."

 

When the history of early 21st-century geopolitics is written, the first name that is bound to crop up, when the discussion is the period’s international trade, is bound to be that of the 45th President of the US Donald J. Trump. He has been extremely active in the making and execution of America’s foreign trade policy, and his policy tool of choice has been the tariff.

Tariff policy forms part of the theory and practice of international trade, and tariffs are normal parts of the armory of weapons with which a nation conducts its international trade. A tariff is a potent weapon, and in the distant past, and especially in the late 19th and early 20th centuries wars were fought over the excessive raising of tariffs on the exports of some countries.

 A history of the international trade of the 21st century’s second decade will undoubtedly be highlighted by the patently excessive use of tariff policy by the administration of Donald Trump. If one can speak of weaponizing tariff policy, then tariff weaponization is what the Trump administration has been engaging in since January 2017. As part of his America First and Make America Great Again programs, Mr. Trump has initiated tariff wars against virtually all of America’s most important trade partners. True to one of his electoral campaign promises, Mr. Trump’s first tariff action was a slew of tariff increases on a very large volume of Chinese exports to the US. That was followed by threats of increases in the tariffs on the US’ aluminum and steel imports from the EU. (European Union) countries and Canada. Other traditional US trade partners—including Japan, South Korea and Mexico subsequently found themselves at the receiving end of actual or threatened US tariff increases. Indeed, there is hardly a major US trade partner that has escaped Mr. Trump’s tariff-weaponization frenzy.

But it is the Trump administration’s tariff war with China—the world’s second-largest economy and one of its strongest trading countries—that has involved the largest percentage of total world trade and has been the most unsettling for the international economy. The total value of Chinese exports to the US that has been affected by Mr. Trump’s tariff-raising mania has approximated $500 billion.

The greatest risk of a trade policy that relies heavily on tariff increases—and the greatest danger to the stability and growth of the world economy—is retaliation by the country that is at the receiving end of another country’s tariff. Titting followed by tatting and more titting soon leads to a decline in international trade and loss of production, jobs and incomes in the tariff-warring countries. This is what has been happening to the economies of the US and China and the world economy as a whole in the wake of Donald Trump’s tariff-raising frenzy.

The international financial institutions have been steadily downgrading their world economic growth forecasts, and China’s economic growth rate has declined to its lowest level in many years, as a result of Donald Trump’s China trade war. But the US economy has been a loser also; the American taxpayer has had to make compensatory payments to US farmers who have been hurt by China’s higher tariffs on, and reduced purchases of, American agricultural products.

Everyone has ended up losing eventually. In a tariff war, no one emerges a winner.

All of the foregoing is not intended to suggest that tariff increases have no place in a country’s international trade policy. They do. The instances in which the tariff weapon may legitimately be resorted to come under the heading of UTP (unfair trade practices).

The most blatant­—and arguably the most odious of UTP—is the giving of subsidy of one kind or another by a country to its exporters in order to make them viable. One form of subsidy is the granting of below-market-rates loans to exporters. Subsidies to exporters serve to make the international-trade playing field less even.

Another, more subtle form of UTP is manipulation by a country of its currency—keeping its exchange value low—so as to make its exports more competitive. Currency manipulation is a very serious charge, but is not always easy to prove. Donald Trump has called China a “great currency manipulator”; considering the huge year-after-year surpluses that China has been running in its trade with the US, there is probably some truth to that allegation.

A country’s recurrently running large trade deficits indicates that its exports are being uncompetitively produced. Slapping tariffs on imports is not the right way to bring the prices of its exports into line with the prices of imported products; it should instead address the issue of its own products’ uncompetitiveness in the international marketplace.

Finally, there is the matter of consumer welfare. Lower-price imports are one of the benefits derived by consumers from international trade. Slapping tariffs on imports or raising them, diminishes the welfare of consumers.

Topics: Rudy Romero , Tariffs 101 , US President Donald J. Trump , foreign trade policy , international trade
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