The Truth About Tariffs

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It is ironic that at a time when the US economy is strong, the roller-coaster market volatility is self-inflicted by government policy. We were witness to that in December, when the market lost 9% in one month, sparked by the government shutdown and the trade war between the US and China. Trump initiated trade tensions early in his presidency when he declared, “I am a Tariff Man,” and imposed tariffs and import duties on steel and aluminum products from abroad.

Volatility reared its ugly head again last week, when Trump responded to failing talks with China by raising existing tariffs to 25%, and imposing new ones on an additional $325 billion worth of China’s imports to the US. China retaliated by placing tariffs on nearly all of America’s exports to China, including agricultural products.

Trump declared, “Trade wars are good, and easy to win.” The truth is very different. The negative impact, especially for American farmers, has been crushing. The US Farm Belt was already experiencing the deepest downturn since the 1980s. The stalled trade talks have made this even more painful.¹ The Standard and Poors GSCI Agricultural Commodities index, reflecting sales of soybeans, milk, pork and many other products, hit its lowest level this week in more than 10 years. Bankruptcy filings in the Midwest have hit a 10-year peak.

Although the Trump administration is putting together an aid package for farmers, many farmers feel it is insufficient to compensate them for the economic damage. In addition, farmers have pride, and don’t want bailouts or government money. They just want markets they can depend on.¹

Besides, the aid package is temporary. Even if the trade war is eventually resolved, farmers worry that the damage to agricultural export markets will be permanent. In an industry that is already subject to the uncertainties of weather, pests and global warming, farmers depend on reliable markets where they can sell their crops abroad. Before the talks collapsed, China was ready to make massive purchases of US commodities, as well as initiating major regulatory changes to open China’s market to new US farm exports. This came to an abrupt end, and now Chinese customers have shifted their purchases of American crops to South America, which has long sought a foothold in the world’s largest consumer market.

The Treasury is definitely getting fatter as a result of American tariffs on Chinese goods. Trump crowed that the tariffs would bring in “$100 billion.” From his point of view, this is a welcome source of revenue. When he lowered the corporate tax rate from 35% to 21%, the Treasury’s income fell by 21%, from $75 billion to 60 billion. In effect, the tariffs are helping to pay for the corporate tax cuts.

The tariff hits many consumer products like seafood, luggage, vacuum cleaners and electronics. The cost of an iPhone might go up $160. Consumers may have to pay 24% more for an Apple computer.³ Trump assured the American public that the cost of the tariffs would be “mostly borne by China.” In actuality, economists from Columbia University, Princeton University, and the New York Federal Reserve agree that US consumers are paying all of the bill, to the tune of $17 billion a year. The tariffs represent an additional tax directly on the wallets and purses of Americans. Even worse, the cost to US consumers is greater than the revenue brought in from the new tariffs, making America poorer overall.⁴

The end result of all this turmoil is exactly the opposite of Trump’s stated goal of reducing the US trade deficit. Instead of going down, the US trade deficit with the world has gone up from $375.5 billion in 2017 to $419.2 billion today, as it continues to import more goods and services than it exports.⁵

¹ Wall Street Journal 5/20/2019

² Brookings Institution 3/15/2019

³ Business Insider 5/14/2019

⁴ New York Times 3/3/2019

⁵ Politico 3/6/2019

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